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Q2 2006 investor conference call - Robert McFarlane presentation
Great. Thanks, Darren, and let me begin my comments with a recap of our excellent wireless results shown on slide 19.
Wireless revenues, EBITDA and cash flow continues to deliver strong double-digit growth. Revenue increased an impressive 18% in the second quarter, driven by strong subscriber growth and higher ARPU.
EBITDA increased 20% despite higher gross additions, which caused higher cost of acquisition. This led to a 100-basis point improvement in industry-leading wireless EBITDA margins to 46.4%, which was a second quarter record for TELUS.
Capital expenditures of $209 million for the first six months of 2006 is
consistent with annual guidance of approximately $450 million. Simple cash
flow also set a second quarter record, increasing 17% to $293 million.
As shown on slide 20, although our customer growth declined slightly year-over-year, our post-paid subscriber growth was steady at 103,000, while prepaid additions of 21,000 was somewhat lower than last year.
Interestingly, we know TELUS was the only one of the three national carriers to have positive prepaid additions this quarter. TELUS' prepaid continues to be distinctly superior in subscriber economics, with higher ARPU, relatively lower churn and a growing total base. The net additions subscriber mix improved from79% post-paid one year ago to 83% this quarter.
Overall subscribers increased 14% to 4.7 million and our overall subscriber mix remained at an industry-leading 81% post-paid.
As shown on slide 21, ARPU continues to increase, up $2 year-over-year, driven by significant growth in wireless data, stable voice ARPU and increased customer usage. Consistent with our disclosure of wireless data ARPU, data revenue accounted for $4.45 or 7% of ARPU this quarter, up a notable 94% and $2.30 or 4% a year ago. Wireless data revenue as a whole increased 121% when compared to the same quarter last year.
Continuing a multi-year positive trend, ARPU's a bit up across Canadian industry, as shown on slide 22. As you can see, TELUS maintains a 13% premium to our closest competitor. The $2 improvement in wireless ARPU for TELUS in Q2 represents the 14th consecutive quarter of increased ARPU for our firm.
TELUS' profitable growth strategy is evident on slide 23. Our low blended churn rate declined again this quarter, decreasing seven- basis points to 1.30%. Our post-paid churn also continues to decline and reached a record low for TELUS at 0.9% this quarter.
Coupled with higher ARPU, the average lifetime revenue for TELUS subscriber has again increased, up 9% to $4,860. COA recovered this quarter on a sequential basis from Q1, although it increased 15% from last year. In spite of this, we were able to keep our marketing efficiency metric, i.e., COA over lifetime revenue, stable at 8% as indicated outed last line of the slide.
And as you can see in the next slide, this is a best-in-class result. We compare very favorably with our peers in this metric. TELUS' wireless marketing efficiency is shown by COA at 8.1% of lifetime revenue remains very attractive, both on an absolute and a relative basis, demonstrating TELUS' continued profitable growth focus.
TELUS' $394 COA per gross addition decreased $35 from the first quarter ,and represents the lowest reported COA of the three national carriers in the second quarter. This is quite encouraging, when you consider TELUS led the industry in net additions and increased our ARPU, decreased our churn and decreased our COA for gross adds.
To conclude the wireless segment on slide 25, today TELUS is updating our full-year 2006 guidance. I'm pleased that today we're raising wireless revenue guidance range by $25 to $50 million. This reflects the strong ARPU growth experienced to-date as well as expectations for higher subscriber growth in the range of 560,000 to 590,000.
EBITDA guidance remains unchanged, reflecting new higher net addition guidance and the associated variable COA. Clearly the outlook for wireless remains strong.
Now let me turn to our wireline operations on slide 26. Wireline revenue declined 2%, reflecting industry-wide trends that Darren mentioned. Wireline EBITDA decreased 8.5% as a result of lower revenue, higher costs associated with increased high-speed internet additions, and the increase in restructuring charges.
Normalized for the $22 million increase in restructuring costs, EBITDA declined a more moderate 4%. Capital expenditures were 6% higher this quarter due to increased spending, primarily for network access growth to serve housing growth in western Canada, our broadband build in our incumbent territories, and billing system and service development.
Slide 27 provides TELUS' wireline revenue break down by product. Reflecting industry-wide pressure, TELUS experienced erosion in local and long distance. Local decreased 3.6%, primarily due to network access line erosion, while LD revenues declined primarily due to increased competitive pressures and technology substitution in the residential market.
The decrease in other revenues was primarily the result of lower customer premise equipment sales, as well as a retroactive rate reduction from a CRTC decision.
One highlight for the wireline segment in the second quarter was in data. We're encouraged by our data results. Data revenue grew 6% due to increased internet revenue and growth in high-speed subscribers as shown on the next slide.
High-speed internet net adds increased strong growth, increasing 71% to 29,000, due to higher gross additions from successful promotions and lower customer deactivations. Our high-speed internet subscriber base now totaled 831,000, up 14% from a year ago, which represents 79% of our total internet subs now at approximately 1.05 million. This is a key element of our data growth strategy and our future friendly home initiative.
Slide 29 highlights our network access line performance, while challenged in this area industry-wide, our 2.6% decline was actually an improvement from last quarter. TELUS experienced increased residential line losses at negative 4.6% reflecting increased competitive activity from resellers and VoIP competitors and, of course, some ongoing wireless substitution.
However, business lines improved, both sequentially and year-over-year, increasing 0.6%, as growth in non-incumbent business lines offset the decrease in incumbent business lines.
To conclude in wireline, you can see on slide 30 we're making minor revisions to 2006 guidance to reflect year-to-date results and our expectations for the rest of the year. We're reducing the top end of our ranges for both total wireline and non-incumbent revenue by $25 million and tightening the range for non-ILEC EBITDA to $25 to $30 million.
Reflecting significant investments in local access, broadband deployment and new system and service development we're increasing our Capex estimate slightly to approximately $1.15 billion.
Turning now to look at TELUS on a consolidated basis, here in slide 31 revenue growth in the second quarter was 6%. EBITDA increased 4%, which includes a $24 million incremental increase in restructuring charges.
Excluding this impact EBITDA on a consolidated basis grew faster than revenue at 6.4%, which means underlying consolidated operating margins have improved. EBIT improved an impressive 27%, which is much higher than our EBITDA growth, even excluding restructuring, due to reduced depreciation and amortization costs as a result of investment tax credits recorded this quarter and an increase in fully-amortized assets.
And reported EPS increased by 94%, which includes certain nonrecurring items as I'll explain on the next slide.
EPS this quarter was impacted positively by the revaluation of net future income tax liabilities, following the lowering of federal and Alberta tax rates and the elimination of federal large corporation taxes. The total impact of these decisions was a favorable $0.32.
In addition, there was another $0.02 positive impact for recognition of investment tax credits as mentioned earlier for assets capitalized from prior years. When normalizing for these tax related adjustments, as well as taking into consideration the $0.03 negative impact last year related to booking the accrual for the BCTel bond litigation, underlying EPS was still up an impressive 23%.
Slide 33 gives analysts a further break down of the 94% increase in EPS. In addition to the $0.32 tax adjustment impact mentioned on -- just on the prior slide, EBITDA growth contributed $0.06 of the EPS improvement, while lower financing costs contributed $0.05 to the results.
The reduced financing costs are primarily due to the early redemption of the $1.6 billion of debt in December of 2005. As already mentioned, the BCTel bond litigation expense accrual recorded in Q2 '05 and the lower depreciation expense explained another $0.03 each.
Finally, the 4.5% decrease in outstanding shares, as a result of NCIB repurchases, contributed about $0.02 to reported EPS.
Turning to slide 34, in the next quarter we continued to be active in the market, purchasing 5.6 million TELUS shares for $249 million. By the end of this quarter TELUS had repurchased for cancellation a total of 11.9 million shares since December 2005, representing 50% of our updated NCIB, a run rate that so far is consistent with a full annual program.
Clearly we're continuing to deliver on our commitment to return a significant amount of capital to investors.
Turning to the next slide, our EBITDA growth and debt repayment has put us well within our debt policy targets. In fact, this quarter Moody's changed its outlook to positive from stable, while reiterating its BAA2 rating on TELUS' debt.
TELUS is also well on its way to refinancing the 2007 debt coming due. In May TELUS closed a $300 million debt offering of 5% notes maturing in 2013, where the proceeds were used to early terminate cross currency swaps associated with our U.S. notes maturing in 2007.
The swaps were then reset at lower rates, lowering our total outstanding liability while maintaining our fully-hedged position. We also locked in interest rates in the first quarter of 2006 for a further $300 million to be refinanced in the future from yet to be issued debt.
Turning to the next slide, let me conclude. Today we're making changes to our consolidated guidance to reflect revisions to our outlook for both wireless and wireline guidance previously mentioned.
Consolidated revenue guidance has been adjusted upwards by $25 million, and our EPS guidance range has increased $0.50 which, in large part, reflects the positive tax impacts explained earlier and an improved earnings before tax outlook. Note at $1.55 to $1.65 billion, our free cash flow guidance has not changed, despite the increase in capex guidance.
With that, Darren and I would be pleased to answer your questions. I will turn the call back over to John Wheeler.
Q2 2006 investor conference call - presentationsJohn Wheeler, vice-president, investor relations
Darren Entwistle, president and chief executive officer
Robert McFarlane, executive vice-president and chief financial officer
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