VANCOUVER, BRITISH COLUMBIA — (Marketwired) — 02/11/16 — (TSX: T)(NYSE: TU) – TELUS Corporation–s consolidated operating revenue grew 2.8 per cent to $3.2 billion in the fourth quarter of 2015, from a year earlier, as a result of higher data revenue in both wireless and wireline operations. Wireless data revenue increased 9.9 per cent from a year ago, leading to overall network revenue growth of 3.0 per cent, while wireline data revenue increased 8.8 per cent to generate 4.4 per cent growth in external wireline revenue. Earnings before interest, income taxes, depreciation and amortization (EBITDA) was impacted by significant restructuring and other costs of $99 million. When excluding restructuring and other costs from both periods, EBITDA was higher by 4.9 per cent, increasing to $1.1 billion. EBITDA including restructuring and other costs was lower by 2.2 per cent from a year ago.
“TELUS delivered solid fourth quarter revenue, EBITDA, and subscriber growth in both its wireless and wireline businesses despite economic challenges impacting some of our customers in Alberta,” said Darren Entwistle, President and CEO. “Our continued strong performance was the result of our unwavering focus on putting customers first and the ongoing execution and success of a winning strategy that focuses on long-term capital investment to drive sustainable growth.”
Mr. Entwistle added “We have established 2016 targets that reflect the diversity and strength of TELUS– multiple growth assets in both our wireless and wireline operating segments. These targets continue to support our dividend growth model and share repurchase initiatives while also demonstrating our confidence in our ability to successfully manage our efficiency programmes and growth-focussed investments in a highly competitive industry.”
Mr. Entwistle further commented “TELUS has a successful track record for consistent and transparent investing for the long-term benefit of our customers and shareholders despite complicating exogenous factors and short-term economic volatility that will inevitably occur. We embrace the leadership role TELUS plays in Canada–s domestic economy and will continue to invest prudently in our network technology and bandwidth to ensure Canadians maintains their global digital leadership position.”
John Gossling, TELUS Executive Vice-President and CFO said, “I am very pleased with the TELUS team–s balanced approach to effectively implementing efficiency investments without compromising our customer focus, strategic investments, or our strong shareholder friendly initiatives. Despite a more challenging environment, both our wireless and wireline results continued to deliver growth and facilitated the return of $1.6 billion to shareholders in dividend growth and share purchases in 2016.”
Mr. Gossling added “We remain committed to the critical network investments that are essential to driving customer satisfaction, delivering balanced growth, and supporting our transparent shareholder initiatives. TELUS has effectively navigated this key investment period and maintained a strong financial position to ensure it can continue to make disciplined long-term investments in its core assets during the lowest cost of capital environment we have seen in our lifetime. Throughout this unique investment cycle, we have increased our wireless and wireline customer connections, consistently grown revenue and EBITDA, delivered the strongest lifetime revenue per customer and further enhanced the industry–s already best customer loyalty. Importantly, during this elevated period of investing, we have extended our average term to maturity of TELUS– long-term debt to 11.1 years, as compared to 5.5 years in 2012, and reduced TELUS– weighted average cost of long-term debt to 4.32 per cent, as compared to 5.44 per cent at the end of 2012.”
Net income and basic earnings per share (EPS) were affected by significant restructuring and other costs, as well as an increase in depreciation and amortization expense reflecting, in part, TELUS– higher asset base from ongoing investments in its fibre optic and 4G LTE networks. Adjusted net income decreased 1.2 per cent to $324 million, while adjusted EPS of $0.54 was up 1.9 per cent from the prior year. On a reported basis, net income decreased 16 per cent to $261 million, while basic earnings per share (EPS) decreased 14 per cent to $0.44 due to higher restructuring and other costs.
CONSOLIDATED FINANCIAL HIGHLIGHTS
In wireless, data revenue was driven by subscriber growth, an increased but moderating proportion of higher-rate two-year plans in the revenue mix, a more favourable postpaid subscriber mix, and increased data usage, partially offset by the effects of an economic slowdown, particularly in Alberta, and ongoing decline in voice revenue. Wireline data revenue growth was generated by an increase in Internet and enhanced data service revenue from continued high-speed Internet subscriber growth and higher revenue per customer, growth in TELUS International–s business process outsourcing services, TELUS TV subscriber growth and higher TELUS Health revenues.
In the quarter, TELUS attracted 109,000 net wireless postpaid, high-speed Internet and TV customers. This included 62,000 wireless postpaid customers, 25,000 TELUS TV customers and 22,000 high-speed Internet subscribers. These gains were partially offset by the ongoing loss of traditional telephone network access lines. TELUS– total wireless subscriber base is up 2.1 per cent from a year ago to 8.5 million, high-speed Internet connections have increased 6.2 per cent to 1.6 million, and TELUS TV subscribers are higher by 9.7 per cent to 1 million.
Free cash flow of $197 million in the fourth quarter was lower by $140 million from a year ago, primarily due to higher share-based compensation, higher capital expenditures and lower EBITDA reflecting significant restructuring and other costs. For 2015, free cash flow of $1.1 billion was higher by $21 million or 2.0 per cent compared to 2014, primarily due to lower income tax payments, lower restructuring disbursements and EBITDA growth, partially offset by higher capital expenditures and share-based compensation.
In the fourth quarter of 2015, TELUS returned $486 million to shareholders including $252 million in dividends paid and $234 million in share purchases under the 2016 normal course issuer bid (NCIB) program. For 2015, TELUS returned more than $1.6 billion to shareholders, including $992 million in dividends paid and the purchase for cancellation of 15.6 million common shares for $635 million under its multi-year share purchase program.
This news release contains statements about financial and operating performance of TELUS (the Company) and future events, including with respect to future dividend increases and normal course issuer bids through 2016 and the 2016 annual targets and guidance that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and predictions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future performance and events to differ materially from those expressed in the forward-looking statements. Accordingly, this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for the 2016 annual targets and guidance, semi-annual dividend increases through 2016 and our ability to sustain and complete our multi-year share purchase program through 2016), qualifications and risk factors referred to in the accompanying fourth quarter Management–s review of operations and in the 2015 annual Management–s discussion and analysis, and in other TELUS public disclosure documents and filings with securities commissions in Canada (on SEDAR at sedar.com) and in the United States (on EDGAR at sec.gov). Except as required by law, TELUS disclaims any intention or obligation to update or revise forward-looking statements, and reserves the right to change, at any time at its sole discretion, its current practice of updating annual targets and guidance.
Fourth Quarter 2015 Operating Highlights
TELUS wireless
TELUS wireline
2015 Corporate Highlights
TELUS makes significant contributions and investments in the communities where team members live, work and serve and to the Canadian economy on behalf of customers, shareholders and team members by:
TELUS sets 2016 financial targets
TELUS today announced its 2016 financial targets that reflect the benefits of the Company–s ongoing strategic investments related to advanced broadband infrastructure, a focus on client service excellence and continued focus on cost efficiency. TELUS– long-standing growth strategy has consistently delivered profitable growth as well as strong free cash flow generation enabling TELUS to return significant amounts of capital to shareholders through its dividend growth and share purchase programs.
In 2016, TELUS plans to generate growth through modest subscriber expansion in wireless, high-speed Internet and TELUS TV. Wireless and Internet are expected to benefit from growing data usage and demand for higher speeds. TELUS also expects to benefit from continued growth in business process outsourcing services and increased TELUS Health revenues. This growth is expected to be underpinned by the significant investments TELUS continues to make in wireless and wireline broadband, including building out of fibre connecting directly to more homes and businesses as well as continued investments in cost efficiency.
For 2016, TELUS is targeting consolidated year-over-year revenue growth of between 2 and 3 per cent, while EBITDA excluding restructuring and other costs is targeted to be higher by 3 to 6 per cent. Revenue and EBITDA excluding restructuring and other costs are expected to continue benefitting from ongoing growth in both wireless and wireline data services, and savings from cost efficiency initiatives. Basic earnings per share (EPS) is targeted to be higher by 5 to 12 per cent, due to EBITDA growth combined with lower shares outstanding due to our share purchase program.
Wireless network revenue is targeted to increase between 2 and 3 per cent in 2016 reflecting modest growth in both subscribers and blended ARPU. We also expect growth in data and roaming revenues will offset lower voice revenue. Wireless EBITDA excluding restructuring and other costs is targeted to be higher by between 3 and 6 per cent, as a result of anticipated growth in wireless network revenue, savings from cost efficiency initiatives and stable retention costs.
In wireline, revenue is targeted to increase between 2 and 3 per cent in 2016, as we anticipate continued data revenue growth from high-speed Internet, Optik TV services, business process outsourcing and TELUS Health services, partially offset by continued decreases in legacy voice revenues and continued effects of the economic slowdown. Wireline EBITDA excluding restructuring and other costs is targeted to increase by between 3 and 6 per cent. We anticipate margin improvements from our high-speed Internet and Optik TV services, business outsourcing and TELUS Health services, as well as our ongoing efficiency initiatives, partially offset by the ongoing industry trend of revenue losses from higher-margin legacy voice services.
Consolidated capital expenditures, excluding the purchase of spectrum licences and non-monetary transactions, in 2016 are targeted to be approximately $2.65 billion. TELUS plans to continue broadband infrastructure expansion and upgrades, including bringing fibre-optic cable deeper into the network and connecting more homes and businesses to the fibre-optic network, to support high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. We intend to continue investing in our wireless network for 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
TELUS– cash income tax payments are estimated to be between $570 million and $630 million (2015 – $256 million). Cash tax payments are increasing in 2016 primarily as a result of the impact of the use of the Public Mobile losses in 2014 which has the effect of: i) deferring a portion of our 2015 current taxes payable to February 2016 and ii) increasing, relative to 2015, the 2016 instalments payable, which ultimately is expected to reduce the 2017 cash income tax payments by approximately $150 million.
The preceding disclosure respecting TELUS– 2016 financial targets contains forward-looking information and is fully qualified by the –Caution regarding forward-looking statements– at the beginning of the accompanying Management–s review of operations for the fourth quarter of 2015 and in the full year 2015 Management–s discussion and analysis filed on the date hereof on SEDAR, especially Section 10 entitled –Risks and Risk Management– thereof which is hereby incorporated by reference, and is based on management–s expectations and assumptions as set out in Section 1.7 entitled –Financial and operating targets for 2016– in the accompanying Management–s review of operations for the fourth quarter of 2015.
Dividend Declaration
The TELUS Board of Directors has declared a quarterly dividend of 44 cents ($0.44) Canadian per share on the issued and outstanding Common Shares of the Company payable on April 1, 2016 to holders of record at the close of business on March 11, 2016.
About TELUS
TELUS (TSX: T)(NYSE: TU) is Canada–s fastest-growing national telecommunications company, with $12.5 billion of annual revenue and 12.5 million customer connections, including 8.5 million wireless subscribers, 1.5 million residential network access lines, 1.6 million high-speed Internet subscribers and 1.0 million TELUS TV customers. TELUS provides a wide range of communications products and services, including wireless, data, Internet protocol (IP), voice, television, entertainment and video, and is Canada–s largest healthcare IT provider.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed $440 million to charitable and not-for-profit organizations and volunteered more than 6.8 million hours of service to local communities since 2000. Created in 2005 by President and CEO Darren Entwistle, TELUS– 11 Canadian community boards and 4 International boards have led the Company–s support of grassroots charities and have contributed more than $54 million in support of over 4,900 local charitable projects, enriching the lives of more than 2 million children and youth, annually. TELUS was honoured to be named the most outstanding philanthropic corporation globally for 2010 by the Association of Fundraising Professionals, becoming the first Canadian company to receive this prestigious international recognition.
For more information about TELUS, please visit telus.com.
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings news release, management–s discussion and analysis, quarterly results slides, audio and transcript of the investor webcast call, supplementary financial information, the 2015 annual Management–s discussion and analysis and financial statements, and our full 2014 annual report at telus.com/investors.
TELUS– fourth quarter 2015 and 2016 targets conference call is scheduled for February 11, 2016 at 11:00am ET (8:00am PT) and will feature a presentation followed by a question and answer period with investment analysts. Interested parties can access the webcast at telus.com/investors. A telephone playback will be available on February 11 until March 15, 2016 at 1-855-201-2300. Please use reference number 1191995# and access code 77377#. An archive of the webcast will also be available at telus.com/investors and a transcript will be posted on the website within a few business days.
TELUS CORPORATION
Management–s review of operations
2015 Q4
Caution regarding forward-looking statements
This document contains forward-looking statements about expected events and the financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us and our refer to TELUS Corporation and where the context of the narrative permits or requires, its subsidiaries. Forward-looking statements include statements relating to annual targets, outlook, guidance and updates, our multi-year dividend growth program, our multi-year share purchase program, and trends. Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, predict, could, expect, intend, may, plan, seek, should, strive and will. By their nature, forward-looking statements do not refer to historical facts, are subject to inherent risks and require us to make assumptions. There is significant risk that forward-looking statements will not prove to be accurate. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements. Annual targets for 2016 and related assumptions are described in Sections 1.6 and 1.7.
Factors that could cause actual performance to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following:
Management–s review of operations
February 11, 2016
1. Discussion of operations
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the Management–s review of operations.
1.1 Preparation of Management–s review of operations
The following sections are a discussion of the consolidated financial position and financial performance of TELUS for the three-month period and year ended December 31, 2015, and should be read together with the accompanying summary financial information. Our operating and reportable segments are wireless and wireline. Segmented information is regularly reported to our Chief Executive Officer (the chief operating decision-maker).
The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our use of the term IFRS in this Management–s review of operations is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures, such as earnings before interest, income taxes, depreciation and amortization (EBITDA), to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 4.1. All currency amounts are in Canadian dollars, unless otherwise specified.
Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This document was reviewed by TELUS– Audit Committee and approved by our Board of Directors for issuance on February 11, 2016.
1.2 Consolidated operations
The following is a discussion of our consolidated financial performance. Segmented discussion is provided in Section 1.3 Wireless segment,Section 1.4 Wireline segment and in Section 3.3 Cash used by investing activities – capital expenditures.
Operating income decreased year over year by $73 million in the fourth quarter of 2015, reflecting relatively flat wireless EBITDA for the quarter (see Section 1.3), a decline in wireline EBITDA of $22 million (see Section 1.4) and increases in depreciation and amortization expenses of $50 million discussed above. In the full year of 2015, Operating income decreased year over year by $29 million from a decline in wireline EBITDA of $33 million and increases in total depreciation and amortization expenses of $75 million discussed above, partly offset by growth in wireless EBITDA of $79 million. Year-over-year wireless EBITDA growth for the quarter and full year was restricted primarily due to higher retention spend and restructuring and other costs, when compared to similar periods in 2014 (see Section 1.3).The year over year decline in wireline EBITDA for the quarter and full year was driven by higher restructuring and other costs (see Section 1.4).
The total income tax expense decreased year over year by $21 million in the fourth quarter of 2015, primarily due to a decline in income before income taxes arising from higher restructuring and other costs and higher retention spend. In the full year of 2015, income tax expense increased year over year by $23 million, mainly due to a $48 million non-cash adjustment in the second quarter of 2015 to revalue deferred income tax liabilities for an increase to the Alberta provincial corporate tax rate from 10% to 12% effective July 1, 2015, partly offset by higher recoveries from the settlement of prior years– income tax-related matters and lower income before income taxes.
Net income decreased year over year by $51 million or 16% in the fourth quarter of 2015 mainly from increased depreciation and amortization expenses and a decline in EBITDA, partially offset by lower income tax expense. In the full year of 2015, Net income decreased year over year by $43 million or 3.0% as a result of increased depreciation and amortization expenses and higher income tax expenses, partly offset by growth in EBITDA and lower Financing costs. Excluding the effects of restructuring and other costs, long-term debt prepayment premiums, income tax-related adjustments and asset retirement from the closure of Black–s Photography stores, Net income decreased year over year by $4 million or 1.2% in the fourth quarter of 2015 and increased by $70 million or 4.7% in the full year of 2015.
Basic EPS decreased year over year by $0.07 or 14% in the fourth quarter of 2015 and by $0.02 or 0.9% in the full year of 2015. The reduction in the number of shares that resulted from our completed 2015 and advanced 2016 normal course issuer bid (NCIB) programs, net of share option exercises, contributed approximately $0.01 and $0.05 year over year in basic EPS in the fourth quarter and in the full year of 2015, respectively. Excluding the effects of restructuring and other costs, long-term debt prepayment premium, income tax-related adjustments and asset retirement from the closure of Black–s Photography stores, basic EPS increased year over year by $0.01 or 1.9% in the fourth quarter of 2015 and by $0.17 or 6.8% in the full year of 2015.
Comprehensive income increased by $1.1 billion in the fourth quarter and $861 million in the full year of 2015, when compared to the same periods in 2014. This was primarily due to positive increases in employee defined benefit plan re-measurements from changes to estimates regarding actuarial assumptions, including an increased discount rate and adjustments in the cost of living allowance indexing assumption, partly offset by declines in Net income. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.
Other operating highlights
1.3 Wireless segment
Network revenues from external customers increased year over year by $46 million or 3.0% in the fourth quarter of 2015 and $290 million or 4.8% in the full year of 2015. Data network revenue increased year over year by 9.9% in the fourth quarter of 2015 and 15% in the full year of 2015, reflecting growth in the subscriber base, a larger proportion of higher-rate two-year plans in the revenue mix, a favourable postpaid subscriber mix, increased data roaming and the full year period also included higher chargeable data usage, all of which was partly offset by the impacts of the economic slowdown, particularly in Alberta. Voice network revenue decreased year over year by 4.6% in the fourth quarter of 2015 and 4.9% in the full year of 2015 due to the increased adoption of unlimited nationwide voice plans, and continued substitution to data services and features.
Equipment and other revenues decreased year over year by $18 million in the fourth quarter of 2015, mainly due to lower gross additions and lower Black–s Photography equipment revenues from the closure of stores in August 2015, partly offset by higher retention volumes and non-recurring gains on the sale of certain real estate assets. In the full year of 2015, equipment and other revenues increased year over year by $56 million, mainly due to higher retention volumes in part from the simultaneous expiration of two-year and three-year contracts, as well as higher-priced smartphones in the sales mix, partly offset by lower gross additions and lower Black–s Photography revenue from the closure of stores in August 2015.
Intersegment revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated expenses.
Equipment sales expenses increased year over year by $28 million in the fourth quarter of 2015 and by $200 million in the full year of 2015, reflecting increased retention volumes and higher-value smartphones in the sales mix, partly offset by lower gross additions and lower costs of sales from the closure of Black–s Photography stores in August 2015.
Network operating expenses decreased year over year by $4 million in the fourth quarter of 2015 and by $17 million in the full year of 2015 due to lower network maintenance and support costs, including turning down the Public Mobile CDMA network in the fourth quarter of 2014, partly offset by higher roaming costs driven by volume increases.
Marketing expenses decreased year over year by $9 million in the fourth quarter of 2015 mainly from lower advertising and promotional expenses, partly offset by higher commission expenses associated with higher retention volumes. For the full year of 2015, marketing expenses increased year over year by $10 million, primarily due to higher commission expenses driven by higher retention volumes, partly offset by reduced advertising and promotional expenses in the fourth quarter.
Other goods and services purchased was flat year over year in the fourth quarter as higher bad debt provisions were offset by lower administrative costs. For the full year of 2015, other goods and services purchase increased year over year by $50 million, primarily from higher non-labour restructuring and other costs mainly due to real estate rationalization, higher bad debt provisions to support the growing subscriber base, the expansion of our distribution channels and increases in external labour costs.
Employee benefits expense increased year over year by $16 million in the fourth quarter and by $31 million in the full year of 2015, reflecting higher labour restructuring costs from efficiency initiatives, lower capitalized labour costs and the full year period also included higher share-based compensation expenses.
Wireless EBITDA was relatively flat year over year in the fourth quarter of 2015 and increased by $79 million or 2.9% in the full year of 2015. Wireless EBITDA – excluding restructuring and other costs increased year over year by $18 million or 2.8% in the fourth quarter and by $130 million or 4.7% in the full year of 2015, reflecting network revenue growth driven by a larger customer base and ARPU growth, partly offset by higher retention spend, higher bad debt provisions, and increased customer service and distribution channel expenses.
1.4 Wireline segment
Total wireline operating revenues increased year over year by $61 million or 4.3% in the fourth quarter of 2015 and by $153 million or 2.7% in the full year of 2015, driven by continued growth in Internet and enhanced data services revenue resulting from a larger subscriber base and higher revenue per customer, increased business process outsourcing services revenue, growth in TELUS TV services revenue from a larger subscriber base, and increased TELUS Health services revenue. These increases were partly offset by ongoing declines in legacy voice services, continued competitive pressures, product substitution, the impacts of the economic slowdown, particularly in Alberta, and the full year also included a decline in other services revenue.
Revenues arising from contracts with customers increased year over year by $50 million or 3.6% in the fourth quarter of 2015 and by $164 million or 3.1% in the full year of 2015.
Other operating income increased year over year by $11 million in the fourth quarter of 2015, primarily from non-recurring gains on the sale of certain real estate assets. In the full year of 2015, Other operating income decreased year over year by $10 million as a result of a decline in the current period amortization of deferred revenue in respect of the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities, as well as lower investment income, partly offset by higher gains from the sale of certain real estate assets.
Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated expenses.
Goods and services purchased decreased by $7 million year over year in the fourth quarter of 2015 and by $4 million in the full year of 2015. The decreases were primarily due to a decline in business equipment cost of sales associated with lower equipment revenues, reduced advertising and promotions costs, and the full year period also included a retroactive assessment of additional TV revenue contribution expensed in the third quarter of 2014 for approximately $15 million towards our Canadian programming funding requirements, all of which were partly offset by higher non-labour restructuring and other costs from real estate rationalization, and increased network operating costs and administrative costs to support our growing subscriber base.
Employee benefits expense increased year over year by $90 million in the fourth quarter and by $190 million in the full year of 2015. The increases were primarily due to higher labour restructuring costs from efficiency initiatives, higher compensation and benefit costs mainly to support increased business process outsourcing revenue, and higher employee defined benefit pension plan expense, partly offset by increases in capitalized labour costs associated with increased capital expenditures and the fourth quarter also included lower share-based compensation.
Wireline EBITDA decreased year over year by $22 million or 5.9% in the fourth quarter of 2015 and by $33 million or 2.2% in the full year of 2015, primarily from increased restructuring and other costs, higher wages and salaries, and continued declines in legacy voice services, partly offset by growth in data service and equipment revenues and non-recurring gains on the sale of certain real estate assets. EBITDA – excluding restructuring and other costs increased year over year by 8.2% in the fourth quarter of 2015 and 4.4% in the full year of 2015, as compared to year-over-year revenue increases of 4.3% for the quarter and 2.7% for the full year, reflecting improving margins in data services, including Internet, TELUS TV, business process outsourcing and TELUS Health services. The year over year growth in EBITDA – excluding restructuring and other costs also benefited from non-recurring gains on the sale of certain real estate assets.
1.5 Summary of consolidated quarterly results and trends
Trends
The consolidated revenue trend continues to reflect year-over-year increases in: (i) wireless network revenues generated from a moderating growth in the subscriber base due to the impacts of the economic slowdown, particularly in Alberta, slower growth in wireless postpaid market penetration, increased competitive intensity and higher handset prices, as well as a moderating growth in ARPU driven by a larger proportion of higher-rate two-year plans, a more favourable postpaid subscriber mix, and increases in data roaming and chargeable data usage, partly offset by a decline in voice revenue; (ii) wireless equipment revenue that has generally increased due to higher retention volumes, especially in 2015 as two-year and three-year customer contracts began to expire coterminously, and an increase in the sales mix of higher-priced smartphones; and (iii) growth in wireline data revenues, driven by Internet, enhanced data services, business process outsourcing, TELUS TV and TELUS Health services. This growth was partially offset by the continued declines in wireless voice revenues, as well as wireline voice service and other wireline services and equipment revenues.
The wireless data revenue growth trend is moderating as it is impacted by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, and unlimited messaging rate plans, as well as customer reactions to increased frequency of real-time data usage notifications and offloading of data traffic from our wireless network to increasingly available Wi-Fi hotspots. We introduced two-year wireless rate plans in July 2013, which have impacted acquisition and retention trends, as well as data usage, as subscribers optimize unlimited talk and text and shared data plans, and which we expect will increase the frequency of subscribers updating their devices and services. ARPU is expected to continue to increase over time, though at lower growth rates, as a result of the declining proportion of customers on legacy three-year plans renewing to higher-rate two-year plans, continued but moderating growth in chargeable data usage, and the ongoing shift in our subscriber base towards higher-value postpaid customers. However, the level of ARPU is highly dependent on competition, the economic situation, consumer behaviour, government decisions, device selection and other factors, and, as a consequence, there cannot be any assurance that ARPU growth will continue to materialize. In the third and fourth quarters of 2015, for instance, ARPU growth was tempered by the impact of the economic slowdown, particularly in Alberta, and also by the ongoing decline in voice revenue. This factor is expected to continue to impact growth through 2016.
Retention spending as a percentage of network revenue has increased year over year from 11.8% in 2014 to 13.9% in 2015, mainly from the coterminous expiration of two-year and three-year contracts beginning on June 3, 2015 and an increase in the sales mix of higher-subsidy smartphones. We may continue to experience a higher volume of contract renewals than previously experienced prior to June 3, 2015. We may also experience continuing pressure on our postpaid subscriber churn if some of our remaining clients on three-year contracts choose to terminate their contracts early or if increased competitive intensity continues in 2016. Accordingly, our wireless segment historical operating results and trends prior to the coterminous expiration of two-year and three-year contracts may not be reflective of results and trends for future periods.
Historically, there has been significant third and fourth quarter seasonality due to higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals. Typically, these impacts can also be more pronounced around popular device launches. Wireless EBITDA usually decreases sequentially from the third to the fourth quarter, due to seasonal loading volumes. Subscriber additions have typically been lowest in the first quarter. Historically, monthly wireless ARPU has experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by seasonal sequential declines in the fourth and first quarters. This seasonal effect on ARPU is expected to diminish in the future, as unlimited nationwide voice plans become more prevalent and chargeable usage and long distance spikes become less pronounced.
The trend of increasing wireline data revenue reflects growth in high-speed Internet and enhanced data services, including increases in usage and adoption of higher-speed services, growth in business process outsourcing, the continuing but moderating expansion of our TELUS TV subscriber base (up 9.7% in 2015), growth in TELUS Health solutions and certain rate increases. Higher Internet service revenues are due to a larger high-speed Internet subscriber base (up 6.2% in 2015), bundling of offers with Optik TV service, the introduction of usage-based billing and certain rate increases. A general trend of declining wireline voice revenues is due to competition from voice over IP (VoIP) service providers (including cable-TV competitors), resellers and facilities-based competitors, as well as technological substitution to wireless and IP-based services and applications, increased competition in the small and medium-sized business market, and the impact of the economic slowdown and associated customers– re-sizing of services.
The trend in Goods and services purchased expense reflects increasing wireless equipment expenses associated with higher-value smartphones in the sales mix and higher retention volumes, increasing content costs due to a growing wireline TELUS TV subscriber base, growing wireless customer service and distribution channel expenses, and increasing non-labour restructuring and other costs, partly offset by lower wireless network operating expenses from operational efficiency initiatives.
The trend in Employee benefits expense reflects increases in compensation and employee-related restructuring costs, as well as more FTE employees supporting business process outsourcing revenue growth, partly offset by lower domestic FTE employees in part due to the reduction of full-time positions announced in November 2015 and higher capitalized labour costs associated with increased capital expenditures, as described in Section 3.3.
The general trend in depreciation and amortization reflects increases due to growth in capital assets in support of the expansion of our broadband footprint and enhanced LTE network coverage, as well as adjustments related to our continuing program of asset life studies.
The general trend in Financing costs reflects an increase in long-term debt outstanding associated with significant investments in wireless spectrum licences acquired in the Department of Innovation, Science and Economic Development–s auctions in 2014 and 2015. Financing costs also include the Employee defined benefit net interest expense that has increased for 2015, primarily due to the increase in the defined benefit plan deficit at December 31, 2014, as compared to the defined benefit plan surplus at December 31, 2013. Employee defined benefit plans net interest expense is expected to decrease in 2016 as a result of the decrease in net deficit, partially offset by the application of a higher discount rate at December 31, 2015 (see Note 14 of our 2015 Consolidated financial statements). Moreover, Financing costs are net of capitalized interest related to spectrum licences acquired during the spectrum auctions held by the Department of Innovation, Science and Economic Development, which we expect to deploy into our existing network in future periods (capitalized long-term debt interest is $45 million since commencement in the second quarter of 2015). Financing costs for the eight periods shown include varying amounts of foreign exchange gains or losses and varying amounts of interest income, including $20 million of interest income in the second quarter of 2015 resulting from the settlement of prior years– income tax-related matters. In addition, Financing costs in the third quarter of 2014 included long-term debt prepayment premiums of approximately $13 million.
The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from legislated income tax changes and adjustments recognized in the current period for income tax of prior periods, including any related after-tax interest on reassessments. The trend in basic EPS also reflects the impact of share purchases under our NCIB program.
The trend in cash provided by operating activities reflects growth in consolidated EBITDA and lower income tax payments in 2015, net of higher interest expenses related to our financing activities. The trend in free cash flow reflects the factors affecting cash provided by operating activities, as well as increases in capital expenditures (excluding spectrum licences), but excludes the effects of certain changes in working capital, such as trade accounts receivable and trade accounts payable.
1.6 Performance scorecard (key performance measures)
In 2015, we achieved three of four original consolidated targets and all four of our original segmented targets, which were announced on February 12, 2015. We achieved our consolidated revenue targets, primarily due to growth in wireless network revenues and wireline data revenues. Wireless network revenues were close to the high end of our target range, reflecting growth in our subscriber base and higher ARPU. Wireline revenues were near the midpoint of our target range, as growth in wireline data revenues was partly offset by declines in legacy voice services and lower business spending.
We met our target for consolidated EBITDA – excluding restructuring and other costs. Our target for wireless EBITDA – excluding restructuring and other costs was met due to an increase in network revenues partially offset by higher retention spending. Our target for wireline EBITDA – excluding restructuring and other costs was met due to growth in wireline data revenues, as well as improving margins in enhanced data services, TELUS TV services, business process outsourcing services and TELUS Health services.
Our basic EPS excluding restructuring and other costs and income tax-related adjustments met our target range, primarily due to growth in our wireless and wireline EBITDA – excluding restructuring and other costs noted above, as well as a reduction in the number of shares outstanding resulting from our NCIB program.
Our capital expenditures in 2015 exceeded both our original target and revised guidance as we continued to focus on investments in wireless and wireline broadband infrastructure, including the expansion of our LTE and fibre-optic networks and the continued deployment of 700 MHz spectrum, as well as in network and system resiliency and reliability in support of our ongoing customers first initiatives, and readying our network and systems for the future retirement of legacy assets.
We met all but one of our long-term financial objectives, policies and guidelines, including generally maintaining a minimum of $1.0 billion of unutilized liquidity, adhering to our dividend payout ratio guideline of 65 to 75% of sustainable earnings on a prospective basis and maintaining long-term investment grade credit ratings in the range of BBB+ or the equivalent. As at December 31, 2015, our Net debt to EBITDA – excluding restructuring and other costs was outside of the long-term objective range of 2.00 to 2.50 times, primarily due to our purchases of spectrum licences during the atypical concentration of wireless spectrum auctions in 2014 and 2015. We will endeavour to return this ratio to within the objective range in the medium term, as we believe that this range is supportive of our long-term strategy. (For additional details, see Section 7.5 of the 2015 annual MD&A.)
We also completed 10 semi-annual dividend increases from 2011 to 2015, consistent with our intention to target ongoing semi-annual dividend increases, with an annual increase of circa 10% through to the end of 2016, subject to the assessment and determination by our Board of Directors of our financial position and outlook, as well as our long-term dividend payout ratio guideline of 65 to 75% of prospective sustainable earnings. There can be no assurance that we will maintain this dividend growth program. See Caution regarding forward-looking statements – Ability to sustain dividend growth program of circa 10% per annum through 2016
The following scorecard compares TELUS– performance to our original or revised 2015 targets and also presents our 2016 targets. Our 2016 targets, plans and assumptions are fully qualified by the Caution regarding forward-looking statements at the beginning of Management–s review of operations. (See also Section 10 – Risks and risk management in the 2015 annual MD&A.)
We made the following key assumptions when we announced the 2015 targets in February 2015.
1.7 Financial and operating targets for 2016
For 2016, we have targeted consolidated revenues in the range of $12.750 to $12.875 billion, or growth of approximately 2.0 to 3.0%. Consolidated EBITDA – excluding restructuring and other costs is targeted in the range of $4.625 to $4.755 billion, or growth of approximately 3.0 to 6.0%. Revenue and EBITDA excluding restructuring and other costs growth is expected to result from increases in wireless and wireline data services, and savings from cost efficiency initiatives. Basic EPS is expected to be in the range of $2.40 to $2.56, or an increase of approximately 5.0% to 12.0% due to EBITDA growth, combined with a reduction in shares outstanding as a result of our NCIB program.
Wireless network revenue is targeted to be in the range of $6.425 to $6.490 billion in 2016, or an increase of approximately 2.0 to 3.0% due to modest growth in both subscribers and blended ARPU. We also expect growth in data and roaming revenues will offset lower voice revenue. Wireless EBITDA – excluding restructuring and other costs is targeted to be $2.975 to $3.060 billion, or an increase of approximately 3.0 to 6.0%, as a result of anticipated growth in wireless network revenue, savings from cost efficiency initiatives and stable retention costs.
Wireline revenue is targeted to be in the range of $5.680 to $5.735 billion in 2016, or an increase of approximately 2.0 to 3.0%, reflecting continued data revenue growth from high-speed Internet and Optik TV services, as well as from business process outsourcing and TELUS Health services, partially offset by continued decreases in legacy voice revenues and continued effects of the economic slowdown. Wireline EBITDA – excluding restructuring and other costs is targeted to be in the range of $1.650 to $1.695 billion in 2016, or an increase of approximately 3.0 to 6.0%. We anticipate margin improvements from our high-speed Internet and Optik TV services, business outsourcing and TELUS Health services, as well as our ongoing efficiency initiatives, partially offset by the continuing industry trend of revenue losses from higher-margin legacy voice services.
Consolidated capital expenditures, excluding the purchase of spectrum licences and non-monetary transactions, in 2016 are targeted to be approximately $2.65 billion. We plan to continue broadband infrastructure expansion and upgrades, including bringing fibre-optic cable deeper into the network and connecting more homes and businesses to the fibre-optic network, to support high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. We intend to continue investing in our wireless network for 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
Our long-term financial objectives, policies and guidelines are described in Section 4.3 of our 2015 annual MD&A. Achievement of our 2016 targets is subject to risks and uncertainties, including, but not limited to competition, regulatory matters, financing and debt requirements, taxation matters, economic conditions, litigation and other factors noted in our Caution regarding forward-looking statements and in our 2015 annual MD&A filed on February 11, 2016. The 2016 targets are based on many assumptions including:
Assumptions for 2016 targets
2. Changes in financial position
Refer to the annual 2015 Management–s discussion and analysis (MD&A) for information regarding changes in the financial position.
3. Discussion of cash flow results
Our discussion in this section is qualified in its entirety by the Caution regarding forward-looking statements at the beginning of the Management–s review of operations.
For detailed information on the following topics, refer to the 2015 annual Management–s discussion and analysis (MD&A): i) liquidity and capital resource measures; ii) credit facilities; iii) sale of trade receivables; iv) credit ratings; v) financial instruments, commitments and contingent liabilities; vi) outstanding share information; and vii) transactions between related parties.
3.1 Overview of cash flow results
In 2015, we paid $1.5 billion for wireless spectrum licences acquired in the first quarter AWS-3 spectrum auction, $479 million for the licences acquired in the second quarter 2500 MHz spectrum auction and $58 million for the licences acquired in the third quarter residual spectrum auction (700 MHz and AWS-3 bands). In March 2015, we publicly issued $1.75 billion of senior unsecured notes in three series with the proceeds mainly used to fund the spectrum licences purchased in the AWS-3 spectrum auction, repay approximately $110 million of indebtedness drawn from the 2014 Credit Facility and repay approximately $135 million of outstanding commercial paper. We utilized existing Short-term borrowings and long-term credit facilities to fund the spectrum licences purchased in the 2500 MHz and residual spectrum licence auctions. In December 2015, we publicly issued $1.0 billion of senior unsecured notes in two series with the proceeds mainly used to repay outstanding commercial paper and to fund the repayment, on maturity, of a portion of the $600 million principal amount outstanding on our Series CI Notes due May 2016.
In 2015, we paid dividends of $992 million to the holders of Common Shares and returned $628 million of cash to shareholders through share purchases under our completed 2015 and advanced 2016 normal course issuer bid (NCIB). During the month ended January 31, 2016, 1.0 million of our Common Shares were purchased by way of the automatic share purchase plan (ASPP) at a cost of $39 million. Subsequent to December 31, 2015, we paid dividends of $263 million to the holders of Common Shares in January 2016. Our capital structure financial policies, financing plan and report on financing and capital structure management plans are described in Section 4.3 of the 2015 annual MD&A.
3.2 Cash provided by operating activities
Cash provided by operating activities decreased by $54 million in the fourth quarter of 2015 and increased by $135 million in the full year of 2015, when compared to the same periods in 2014.
3.3 Cash used by investing activities
Cash used by investing activities decreased year over year by $88 million in the fourth quarter of 2015 and increased year over year by $809 million in the full year of 2015. The changes included the following:
Wireless segment capital expenditures increased year over year by $21 million in the fourth quarter of 2015 and by $61 million in the full year of 2015. The increases were due to the continued investment in wireless broadband infrastructure to enhance our network coverage, speed and capacity, including the deployment of 700 MHz spectrum, as well as the continued investment in system resiliency and reliability in support of our ongoing customers first initiatives, and to ready the network and systems for future retirement of legacy assets.
Wireline segment capital expenditures increased year over year by $64 million in the fourth quarter of 2015 and by $157 million in the full year of 2015. We continued to invest in our wireline broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers– demand for faster Internet speeds, and extends the reach and functionality of our healthcare solutions. We also continued to make investments in system and network resiliency and reliability.
3.4 Cash provided (used) by financing activities
Net cash used by financing activities decreased year over year by $214 million in the fourth quarter of 2015. Net cash provided by financing activities increased year over year by $1.1 billion in the full year of 2015. Financing activities included the following:
Dividends paid to the holders of Common Shares
Dividends paid to the holders of Common Shares totalled $252 million in the fourth quarter of 2015 and $992 million in the full year of 2015, or year-over-year increases of $19 million in the fourth quarter and $79 million in the full year. This reflected increased dividend rates under our dividend growth program, offset by lower outstanding shares resulting from shares purchased and cancelled under our NCIB program.
Purchase of Common Shares for cancellation
In the fourth quarter of 2015, we purchased approximately six million shares under our 2016 NCIB for $226 million. For the full year of 2015, we purchased approximately 16 million shares under our completed 2015 and advanced 2016 NCIB for $628 million. In 2014, we purchased approximately 2.9 million shares in the fourth quarter and approximately 16 million shares in the full year under our NCIB program, for $112 million in the quarter and $612 million for the year.
In January 2016, we purchased, by way of the ASPP, 1,043,300 Common Shares for cancellation under our 2016 NCIB.
Short-term borrowings
Short-term borrowings are composed primarily of amounts advanced to us from an arm–s-length securitization trust pursuant to the transfer of receivables securitization transactions (see Section 7.7 Sale of trade receivables in the 2015 annual MD&A). Such proceeds were $100 million throughout the first quarter of 2015, increased to $500 million during the second quarter of 2015, decreased to $100 million during the third quarter of 2015 and remained at $100 million in the fourth quarter of 2015.
Long-term debt issues and repayments
Long-term debt issues, net of repayments, were $329 million in the fourth quarter of 2015 and $2.7 billion in the full year of 2015, which were primarily composed of:
All of our debt transactions contributed to an increase in our average term to maturity of long-term debt (excluding commercial paper) to approximately 11.1 years at December 31, 2015, compared to approximately 10.9 years at the end of 2014. Additionally, our weighted average cost of long-term debt was 4.32% at December 31, 2015, compared to 4.72% at the end of 2014.
In comparison, repayments of long-term debt, net of debt issues, were $25 million in the fourth quarter of 2014, while long-term debt issues, net of repayments, were $1.8 billion in the full year of 2014, which were primarily composed of:
4. Definitions and reconciliations
4.1 Non-GAAP and other financial measures
We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS and its segments, as well as to determine compliance with debt covenants and to manage the capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure.
Adjusted basic earnings per share: This measure is used to evaluate performance at a consolidated level and excludes items that may distort the underlying trends in business performance. This measure should not be considered an alternative to basic earnings per share in measuring TELUS– performance. Items that may, in management–s view, obfuscate the underlying trends in business performance include significant gains or losses on real estate redevelopment partnerships, restructuring and other costs, long-term debt prepayment premiums, income-tax related adjustments and asset retirements related to restructuring activities (see Section 1.2).
Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences and non-monetary transactions) divided by total operating revenues. This measure provides a basis for comparing the level of capital expenditures to those of other companies of varying size within the same industry.
Dividend payout ratio: This is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the Consolidated financial statements, 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). Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings on a prospective basis.
Dividend payout ratio of adjusted 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, long-term debt prepayment premiums and items adjusted for in EBITDA. Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings on a prospective basis.
EBITDA (earnings before interest, income taxes, depreciation and amortization): We have issued guidance on and report EBITDA because it is a key measure used to evaluate performance at a consolidated level and the contribution of our two segments. EBITDA is 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. EBITDA should not be considered an alternative to Net income in measuring TELUS– performance, nor should it be used as an exclusive measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues less the total of Goods and services purchased expense and Employee benefits expense.
We may also calculate an adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a valuation metric, or should not be included in an assessment of our ability to service or incur debt. In respect of the TELUS Garden residential real estate partnership, which is included in the wireless and wireline segments, we do not anticipate retaining an ownership interest in the TELUS Garden residential condominium following completion of construction. For the TELUS Garden residential real estate partnership, gains net of equity losses were $NIL in the fourth quarter and full year of both 2015 and 2014.
EBITDA – excluding restructuring and other costs: We report this measure as a supplementary indicator of our operating performance.
Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the Consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the Consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.
The following reconciles our definition of free cash flow with cash provided by operating activities.
Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of Long-term debt. Net debt is a component of the Net debt to EBITDA – excluding restructuring and other costs ratio.
Net debt to EBITDA – excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA – excluding restructuring and other costs. Our long-term policy guideline for this ratio is from 2.00 to 2.50 times. This measure is similar to the leverage ratio covenant in our credit facilities.
Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges when undertaking major or transformational changes to our business or operating models. We include incremental external costs incurred in connection with business acquisition or disposition activity, as well as litigation costs, in the context of significant losses and settlements, in other costs.
4.2 Operating indicators
The following measures are industry metrics that are useful in assessing the operating performance of a wireless telecommunications entity, but do not have a standardized meaning under IFRS-IASB.
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 is expressed as a rate per month.
Churn per month is calculated as the number of subscriber units deactivated 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 TELUS, Koodo, or Public Mobile brand prepaid subscriber is deactivated when the subscriber has no usage for 90 days following expiry of the prepaid credits.
Cost of acquisition (COA) consists of the total of the device subsidy (the device cost to TELUS less the initial charge to the customer), 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 as
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