[May 02, 2007] TELUS Reports First Quarter Results Tweet VANCOUVER, May 2 /PRNewswire-FirstCall/ -- TELUS Corporation (TSX: T and T.A/NYSE: TU) today reported its financial results for the first quarter of 2007, including a six per cent increase in revenues to $2.21 billion from a year ago due to continued strong wireless and data growth. Reported earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings per share (EPS) were negatively impacted in the quarter by a previously announced non-recurring and non cash charge of $173.5 million associated with the introduction of a new cash settlement feature for employee share options granted prior to 2005. The benefits of the new feature include reducing share dilution and generating cash tax savings of up to $70 million over three years. Adjusted for this charge, underlying EBITDA and EPS increased 8.7% and 50%, to $938 million and 90 cents, respectively, when compared to the same period a year ago. EBITDA as adjusted increased due to wireless growth and lower restructuring costs. EPS as adjusted increased due to higher EBITDA, lower depreciation and amortization, less financing costs and reduced income taxes. Free Cash Flow this quarter was lower due to higher capital expenditures and the receipt, in the first quarter of 2006, of a large income tax recovery. During the first quarter TELUS successfully issued $1 billion of debt in five and 10 year maturities with an average coupon of 4.8%, the net proceeds of which were to be used for general corporate purposes including the redemption of TELUS' approximately $1.5 billion of 7.5% Notes maturing in June 2007. In addition, the company completed $201 million of share buy backs in the quarter, which brings to 42.9 million shares in total that have been repurchased for $2.0 billion since the first of three share repurchase programs began in December 2004. FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- C$ in millions, 3 months ended except per share amounts March 31 ------------------------------------------------------------------------- (unaudited) 2007 2006 % Change ------------------------------------------------------------------------- Operating revenues 2,205.6 2,080.5 6.0 ------------------------------------------------------------------------- EBITDA(1) 764.3 862.7 (11.4) ------------------------------------------------------------------------- EBITDA (as adjusted)(2) 937.8 862.7 8.7 ------------------------------------------------------------------------- Income before income taxes and non-controlling interest 275.6 328.3 (16.1) ------------------------------------------------------------------------- Net income 194.8 210.1 (7.3) ------------------------------------------------------------------------- Earnings per share (EPS), basic 0.58 0.60 (3.3) ------------------------------------------------------------------------- EPS (as adjusted)(3) 0.90 0.60 50.0 ------------------------------------------------------------------------- Cash provided by operating activities 460.6 673.1 (31.6) ------------------------------------------------------------------------- Capital expenditures 381.9 320.5 19.2 ------------------------------------------------------------------------- Free cash flow(4) 480.8 635.6 (24.4) ------------------------------------------------------------------------- (1) Earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as Operating revenues less Operations expense less Restructuring costs. See Section 11.1 of Management's discussion and analysis. (2) Excludes a non-cash charge of $173.5 million to Operations expense in 2007 for introducing a net cash settlement feature for share option awards granted prior to 2005. (3) Excludes approximately $0.32 after tax charge in 2007 for introducing a net cash settlement feature for share option awards granted prior to 2005. (4) See Section 11.2 of Management's discussion and analysis. Darren Entwistle, president and CEO, said "the momentum from our winning strategy since its inception in 2000 has continued in 2007 and we have started the year strongly with good first quarter financial results underpinned by wireless revenue growth of 13% and underlying wireline data revenue growth of almost 11%. The focused execution of our national growth strategy is producing a superior asset mix for TELUS such that 46% of our consolidated revenue is generated by wireless and 19% from wireline data." "The continued resilience of TELUS' traditional wireline business is also encouraging," Mr. Entwistle added. "Particularly important was the recent landmark federal government decision to set reasonable local forbearance rules that will allow TELUS to compete fairly. Accordingly we have made applications for deregulation in six cities that cover almost one million consumers in our incumbent territories." Mr. Entwistle added, "TELUS in the quarter continued to build on its track record of investing and returning cash to investors for ongoing share value creation. This three pronged approach includes capital investments in our core businesses, on an annual basis successively higher dividends under our dividend growth model, and substantial normal course share repurchase programs that are followed through upon." Robert McFarlane, executive vice president and CFO, noted "TELUS completed a very successful debt issuance in the quarter of $1 billion comprised of $300 million of 4.50% five year Notes and $700 million of 4.95% ten year Notes. By applying the proceeds of this issuance combined with a potential new commercial paper program to our forthcoming June repayment of our 7.5% Notes, we would generate approximately $33 million in reduced annualized financing costs." Mr. McFarlane added, "The combination of our strong financial position and excellent operating performance record is translating to an earnings expansion, which provides a position of strength to observe the notable competitive developments in the Canadian telecom industry." ------------------------------------------------------------------------- This news release contains statements about expected future events and financial and operating results of TELUS that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward- looking statements as a number of factors could cause actual future results and events to differ materially from that expressed in the forward-looking statements. Accordingly this news release is subject to the disclaimer and qualified by the assumptions (including assumptions for 2007 guidance and share purchases), qualifications and risk factors referred to in the Management's discussion and analysis - May 1, 2007. ------------------------------------------------------------------------- OPERATING HIGHLIGHTS TELUS wireless Profitable subscriber growth continues - Revenues increased by $118 million or 13% to $1.0 billion in the first quarter of 2007, when compared with the same period in 2006 - ARPU (average revenue per subscriber unit per month) improved by 2.9% to $62.03. The data component increased by 69% to $6.27, which more than offset the decline in voice ARPU - EBITDA (as adjusted) increased by $68 million over the first quarter of 2006 representing 17% growth - Cost of acquisition per gross addition of $438 increased slightly at 2% year over year. - Net subscriber additions were 90,500, down slightly by 2%. Postpaid additions totaled 60,800 while prepaid loading was 29,700 - Blended monthly churn was stable at 1.35% compared to 1.33% a year ago, while postpaid churn remained low at 0.97% - Cash flow (EBITDA less capital expenditures) based on EBITDA as adjusted increased $18 million or 5.4% to $353 million in the quarter due to higher EBITDA partially offset by increased capital expenditures, which included implementation of wireless number portability. TELUS wireline Strong data growth supports revenue growth - Revenues increased slightly by $7 million or 0.6% to $1.21 billion in the first quarter of 2007, when compared with the same period in 2006 due to data growth, offsetting declines in local and long distance revenues - Data revenues increased by $31 million or 8% due to strong high-speed Internet and enhanced data service growth. Excluding the impact of two retroactive mandated competitor price reductions the actual underlying growth rate was 10.8% - Long-distance revenue declined $20 million or 10% due primarily to lower average per-minute rates partly offset by increased retail and wholesale minute volumes - EBITDA (as adjusted) increased by $7 million or 1.5%, due to a modest increase in revenues and lower restructuring charges - High-speed Internet net additions were 32,100, taking TELUS' high- speed base to 949,000, an 18% increase from a year ago. The total Internet subscriber base topped 1.13 million - Network access lines declined by 22,000 in the quarter, with total NALs down 2.9% from a year ago reflecting continued residential line losses from ongoing competitive activity and wireless substitution partially mitigated by an increase in business access lines - Cash flow (EBITDA less capital expenditures) based on EBITDA as adjusted declined 2% to $203 million, due to increased capital expenditures reflecting increased spending to support new enterprise customers in Central Canada as well as on broadband infrastructure. TELUS applies for local phone service deregulation TELUS has applied to the Canadian Radio-television and Telecommunications Commission (CRTC) for local phone service deregulation in five cities following the Federal Government's April 4, 2007 Order-In-Council that set new conditions for the deregulation of local phone markets - a process called forbearance in regulatory terminology. The new rules, which came into effect on April 18, allow incumbent telecommunications carriers to apply to the CRTC for deregulation in any community where customers can choose between service providers, and where they meet specific Quality of Service measures for six months on average. The new rules state that local business services will be deregulated where there is a choice of at least two phone providers with their own network infrastructure. Deregulation for consumer services will occur where there is a choice of at least three service providers with their own network infrastructure, one of which can be a wireless provider. TELUS' forbearance applications in mid-April cover almost one million customers in Victoria, Vancouver, Calgary, Edmonton and Rimouski who by the end of a 120 day processing period should for the first time enjoy the benefits of full competition in local phone service. TELUS intends to apply for forbearance in many more communities in the near future. TELUS issues $1 billion in debt In March, TELUS successfully issued five and 10 year Canadian dollar notes raising gross proceeds of $1.0 billion. TELUS sold $300 million of 4.50% Series CC notes due March 15, 2012, and $700 million of 4.95% Series CD notes due March 15, 2017. Net proceeds of the offering, combined with a possible issuance of commercial paper, and increased accounts receivable securitization proceeds, are expected to be used for the repayment of approximately $1.5 billion 7.50% (U.S. $1.17 billion) Notes maturing in June 2007. TELUS closes enhanced $2 billion bank facility In February, TELUS closed a new five year, $2 billion credit facility with a syndicate of 18 financial institutions. The new facility replaces $1.6 billion of existing facilities. Reflecting TELUS' strong financial position and favourable market conditions, the new facility brings TELUS reduced interest cost and an extended term. It may be used for general corporate purposes including the backstop of a commercial paper program. TELUS continues share repurchases During the first quarter, TELUS continued to purchase shares under its Normal Course Issuer Bid (NCIB). Repurchases totaled approximately 3.5 million shares for a total outlay of $201 million. Since commencement in December 2004, TELUS has repurchased a total of 42.9 million shares for $1.97 billion under three NCIB programs. TELUS successfully implements wireless number portability On March 14, as part of a nation-wide industry initiative, the Company successfully implemented wireless number portability (WNP), such that customer telephone numbers are now fully portable between competing carriers whether wireless-to-wireless, wireless-to-wireline and wireline-to-wireless. TELUS awarded major proportion of Government of Canada wireless contract In February 2007, following a competitive bid process the Federal Government awarded TELUS the largest proportion (over 60 per cent) of a contract for the provision of federal government wireless phones. This is expected to result in approximately 30,000 net wireless subscriber additions to TELUS over the coming 12 months. This enterprise contract win is associated with the March implementation of WNP in Canada as government employees will be able to retain and port their existing phone numbers. Amp'd Mobile now available in Canada Amp'd Mobile, a leading provider of next generation mobile entertainment service in the United States, officially launched service in Canada through an exclusive partnership with TELUS in March. This partnership offers Canadian mobile clients access to Amp'd Live, a unique user interface designed specifically for 3G technology where users can access personalized content, such as their favourite songs, video clips, images and games. Powered by TELUS' wireless high speed EVDO service, Amp'd Mobile is focused on content and marketing targeted to the 18 to 35 year old demographic. TELUS supports sales and distribution, billing, client support and network operations. TELUS invests $23 million to expand Quebec wireless network TELUS announced that it is investing $23 million in 2007 to extend and enhance coverage of its 1X digital wireless network in Quebec. By this fall, almost 30 communities are expected to have access to TELUS' enhanced digital features and wireless business services for the first time. Havre-Saint-Pierre in the Cote-Nord region; St-Ubalde in Mauricie; Matapedia, Ste-Irene, Val-Brillant et Sayabec in the Gaspe Peninsula; and Pont-Rouge in central Quebec have already been connected to the service and are enjoying assured call security, improved sound quality, extended battery life, and web-based features. TELUS extends wireless high-speed services TELUS expanded wireless high speed (EVDO) service to several communities in Atlantic Canada. This service is now available in Bathurst, Florenceville, Fredericton, Moncton, Saint John, Coldbrook, Kentville, Halifax, Truro, New Glasgow, Stellarton, Sydney, North Sydney, Wolfville, Charlottetown and St. John's. With typical download speeds of approximately 400 to 700 kilobits per second, and maximum possible speeds of more than 2 megabits per second, TELUS wireless high speed service offers clients the speed they need for powerful mobile computing and exciting SPARK(TM) mobile entertainment applications like TELUS Mobile TV(TM), TELUS Mobile Radio(TM), and TELUS Mobile Music(R). TELUS delivers Canada's first EVDO Rev A network card TELUS introduced the Sierra Wireless AirCard 595 in the first quarter. The network card for portable PCs and laptops is the first in Canada to operate on TELUS' next generation wireless high speed Rev A network being deployed later this year. EVDO Rev A technology offers typical upload speeds of approximately 300 to 400 kilobits per second with a maximum possible upload speed of 1.8 megabits per second, and typical download speeds of approximately 450 to 800 kilobits per second with a maximum possible download speed of 3.1 megabits per second. TELUS plans to introduce EVDO Rev A service in selected markets across Canada later this year. The AirCard 595 offers forward compatibility with TELUS' EVDO Rev A network through a simple software upgrade. Cool new phones TELUS continued to expand its suite of cool wireless services with the introduction of six new handsets. TELUS and High Tech Computer Corporation (HTC) teamed up to offer TELUS customers two HTC smartphones - the HTC P4000 and HTC S720. The Windows Mobile-based handsets are compatible with the next generation TELUS EVDO Rev A wireless high-speed service to be introduced later this year. The P4000 is now available to clients while the HTC S720 is expected to be available in the second quarter. The new Samsung u510 mobile entertainment device is also exclusive to TELUS in Canada, giving customers stylish access to a robust array of SPARK(TM) mobile entertainment, information, and messaging services. Also in the quarter, TELUS was the first to offer Canadians the LG Chocolate Flip, a clamshell phone loaded with TELUS Mobile TV(TM), TELUS Mobile Music(R), TELUS Mobile Radio(TM), TELUS Navigator, My Email, downloadable video clips and games, Bluetooth capabilities, as well as a camera. Finally, TELUS introduced the affordable, feature-rich Pantech PN-8200. The smartphone is a powerful business tool that looks like a traditional wireless flip phone. TELUS brings banks and credit unions wireless banking toolkit TELUS Mobile Customer Self Service supplies Canadian banks the technology to allow their customers to pay bills, check balances and transfer funds from their wireless phones and handsets. The technology is unique in Canada, utilizing existing messaging capabilities built into phones for secure transactions rather than requiring customers to download new software onto their wireless devices. TELUS Mobile Customer Self Service allows banks to bring the service to all customers regardless of their wireless carrier, brand of cellphone, operating system, or wireless transmission standard. The service can be customized to bring bank and credit union customers features including alerts of questionable account activity, on-demand account information, and no-hold service allowing customers to enter a call centre queue via text message rather than waiting on hold. TELUS part of team to implement e.health record system in British Columbia TELUS is part of a consortium led by Sun Microsystems chosen by the Government of British Columbia to develop and implement the Provincial Laboratory Information Solution (PLIS) and the interoperable Electronic Health Record (iEHR) system. Under the terms of the $148 million contract, the consortium will jointly create a system giving health care practitioners across the province access to any patient's information, test results and scans. By providing faster access to patient information, the system will reduce wait times for procedures and save healthcare costs by reducing re-testing. As part of the consortium, TELUS is leading managed operations services and is responsible for the hosting of patient laboratory data in its secure data centres. TELUS Fleet Tracking Bundle TELUS launched the TELUS Fleet Tracking Bundle, a package of Global Positioning System (GPS) services designed for small and medium businesses. Rather than purchasing components to track their fleet in real time separately, the bundle allows businesses to obtain TELUS wireless data services, Fleet Complete GPS software from Complete Innovations, a GPS modem and installation in one package. The service gives businesses the cost effective tools they need to optimize route scheduling, reduce fuel consumption, and enhance customer service. Second annual Women's Leadership Forum More than 2,000 women expanded their professional networks, broadened their knowledge base and honed their leadership skills at the two-day annual Women's Leadership Forum held in Calgary. Karen Radford, executive vice-president and president of TELUS Quebec and TELUS Partner Solutions, was the keynote speaker at this year's forum held in March. More than 20 speakers representing the most accomplished business women in Canada presented their business acumen and personal leadership smarts at the event where TELUS was a platinum sponsor. Karen Radford named Woman of the Year by Canadian Women in Communications Karen Radford, president of TELUS Quebec and Partner Solutions, was named Woman of the Year by Canadian Women in Communications (CWC) in February. Ms. Radford was among four women recognized for their leadership, support of the advancement of women and contribution to the Canadian communications industry at the CWC Awards Gala in February. She is the second TELUS executive to hold this prestigious title - Janet Yale was named Woman of the Year in 2001. TELUS Skins Game Ontario bound The TELUS Skins Game is set to return this year to Ontario for the first time since 2003. The annual event will be held at the new Raven Golf Club at Lora Bay June 17 to 19. This year's event will celebrate a world theme, with each player representing a different home country. TELUS has selected the Juvenile Diabetes Research Foundation as this year's TELUS Skins Game charity of choice. TELUS Spell It gets home viewers involved in spelling bee TELUS partnered with CanWest to invite viewers of the CanWest CanSpell National Spelling Bee held April 14 to get involved through text messaging. Viewers who sent text messages with the correct spelling of words showing on their TV screens were entered to win one of five, $4,000 Registered Education Savings Plan (RESP) contributions. Dividend Declaration The Board of Directors declared a quarterly dividend of thirty-seven and a half cents ($0.375) per share on outstanding Common and Non-Voting Shares payable on July 1, 2007 to shareholders of record on the close of business on June 8, 2007. This represents a 36% increase form the twenty-seven and a half cent quarterly dividend paid in 2006. Certain products and services named in this release are trade-marks. The symbols (TM) and (R) indicate those owned by TELUS Corporation or its subsidiaries. All other trade-marks are the property of their respective owners. About TELUS TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $8.8 billion of annual revenue and 10.8 million customer connections including 5.1 million wireless subscribers, 4.5 million wireline network access lines and 1.1 million Internet subscribers. TELUS provides a wide range of communications products and services including data, Internet protocol (IP), voice, entertainment and video. Committed to being Canada's premier corporate citizen, we give where we live. Since 2000, TELUS and our team members have contributed more than $91 million to charitable and non-profit organizations and volunteered more than 1.7 million hours of service to local communities. Eight TELUS Community Boards across Canada lead our local philanthropic initiatives. For more information about TELUS, please visit telus.com. TELUS Corporation interim consolidated statements of income (unaudited) Periods ended March 31 Three months (millions except per share amounts) 2007 2006 ------------------------------------------------------------------------- (restated) OPERATING REVENUES $ 2,205.6 $ 2,080.5 ------------------------------------------------------------------------- OPERATING EXPENSES Operations 1,436.6 1,201.1 Restructuring costs 4.7 16.7 Depreciation 317.7 339.2 Amortization of intangible assets 49.6 63.9 ------------------------------------------------------------------------- 1,808.6 1,620.9 ------------------------------------------------------------------------- OPERATING INCOME 397.0 459.6 Other expense, net 3.8 4.3 Financing costs 117.6 127.0 ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 275.6 328.3 Income taxes 79.3 116.1 Non-controlling interests 1.5 2.1 ------------------------------------------------------------------------- NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME 194.8 210.1 OTHER COMPREHENSIVE INCOME Change in unrealized fair value of derivatives designated as cash flow hedges 27.9 - Change in unrealized gains and losses on translating financial statements of self-sustaining foreign operations 2.4 0.7 ------------------------------------------------------------------------- 30.3 0.7 ------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 225.1 $ 210.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET INCOME PER COMMON SHARE AND NON-VOTING SHARE - Basic $ 0.58 $ 0.60 - Diluted $ 0.57 $ 0.60 DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 0.375 $ 0.275 TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING - Basic 337.1 349.3 - Diluted 340.5 352.9 TELUS Corporation interim consolidated balance sheets (unaudited) March 31, December 31, As at (millions) 2007 2006 ------------------------------------------------------------------------- (adjusted) ASSETS Current Assets Cash and temporary investments, net $ 534.0 $ - Short-term investments 110.7 110.2 Accounts receivable 959.3 707.2 Income and other taxes receivable 94.2 95.4 Inventories 159.4 196.4 Prepaid expenses and other 255.8 195.3 Derivative assets 62.6 40.4 ------------------------------------------------------------------------- 2,176.0 1,344.9 ------------------------------------------------------------------------- Capital Assets, Net Property, plant, equipment and other 7,195.7 7,466.5 Intangible assets subject to amortization 832.1 549.2 Intangible assets with indefinite lives 2,966.5 2,966.4 ------------------------------------------------------------------------- 10,994.3 10,982.1 ------------------------------------------------------------------------- Other Assets Deferred charges 1,022.0 956.6 Investments 41.5 35.2 Goodwill 3,169.6 3,169.5 ------------------------------------------------------------------------- 4,233.1 4,161.3 ------------------------------------------------------------------------- $ 17,403.4 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Cash and temporary investments, net $ - $ 11.5 Accounts payable and accrued liabilities 1,585.1 1,363.6 Income and other taxes payable 8.9 10.3 Restructuring accounts payable and accrued liabilities 36.1 53.1 Advance billings and customer deposits 609.7 606.3 Current maturities of long-term debt 1,351.6 1,433.5 Current portion of derivative liabilities 172.4 165.8 Current portion of future income taxes 238.7 250.9 ------------------------------------------------------------------------- 4,002.5 3,895.0 ------------------------------------------------------------------------- Long-Term Debt 4,312.5 3,474.7 ------------------------------------------------------------------------- Other Long-Term Liabilities 1,498.4 1,257.3 ------------------------------------------------------------------------- Future Income Taxes 934.5 909.6 ------------------------------------------------------------------------- Non-Controlling Interests 25.1 23.6 ------------------------------------------------------------------------- Shareholders' Equity 6,630.4 6,928.1 ------------------------------------------------------------------------- $ 17,403.4 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation interim consolidated statements of cash flows (unaudited) Three months Periods ended March 31 (millions) 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 194.8 $ 210.1 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 367.3 403.1 Future income taxes 78.2 113.1 Share-based compensation 138.6 8.4 Net employee defined benefit plans expense (24.0) (1.6) Employer contributions to employee defined benefit plans (33.9) (30.5) Restructuring costs, net of cash payments (17.0) (15.6) Amortization of deferred gains on sale-leaseback of buildings, amortization of deferred charges and other, net (9.1) 15.9 Net change in non-cash working capital (234.3) (29.8) ------------------------------------------------------------------------- Cash provided by operating activities 460.6 673.1 ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (381.9) (320.5) Proceeds from the sale of property and other assets - 7.4 Change in non-current materials and supplies, purchase of investments and other (10.4) (3.0) ------------------------------------------------------------------------- Cash used by investing activities (392.3) (316.1) ------------------------------------------------------------------------- FINANCING ACTIVITIES Common Shares and Non-Voting Shares issued 0.4 33.2 Dividends to shareholders (125.9) (95.9) Purchase of Common Shares and Non-Voting Shares for cancellation (200.7) (231.6) Long-term debt issued 1,097.8 180.6 Redemptions and repayment of long-term debt (293.5) (253.0) Other (0.9) - ------------------------------------------------------------------------- Cash provided (used) by financing activities 477.2 (366.7) ------------------------------------------------------------------------- CASH POSITION Increase (decrease) in cash and temporary investments, net 545.5 (9.7) Cash and temporary investments, net, beginning of period (11.5) 8.6 ------------------------------------------------------------------------- Cash and temporary investments, net, end of period $ 534.0 $ (1.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Interest (paid) $ (23.6) $ (13.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest received $ 1.9 $ 22.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes (inclusive of Investment Tax Credits) received, net $ 6.2 $ 95.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation segmented information (unaudited) Three month periods ended March 31 Wireline Wireless (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ 1,205.6 $ 1,198.6 $ 1,000.0 $ 881.9 Intersegment revenue 25.1 23.5 6.3 5.9 ------------------------------------------------------------------------- 1,230.7 1,222.1 1,006.3 887.8 ------------------------------------------------------------------------- Operating expenses Operations expense 905.4 740.4 562.6 490.1 Restructuring costs 4.4 14.9 0.3 1.8 ------------------------------------------------------------------------- 909.8 755.3 562.9 491.9 ------------------------------------------------------------------------- EBITDA(1) $ 320.9 $ 466.8 $ 443.4 $ 395.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 270.7 $ 259.0 $ 111.2 $ 61.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ 50.2 $ 207.8 $ 332.2 $ 334.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) 752.3 740.4 542.2 490.1 Restructuring costs 4.4 14.9 0.3 1.8 ------------------------------------------------------------------------- 756.7 755.3 542.5 491.9 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ 474.0 $ 466.8 $ 463.8 $ 395.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 270.7 $ 259.0 $ 111.2 $ 61.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ 203.3 $ 207.8 $ 352.6 $ 334.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three month periods ended March 31 Eliminations Consolidated (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ - $ - $ 2,205.6 $ 2,080.5 Intersegment revenue (31.4) (29.4) - - ------------------------------------------------------------------------- (31.4) (29.4) 2,205.6 2,080.5 ------------------------------------------------------------------------- Operating expenses Operations expense (31.4) (29.4) 1,436.6 1,201.1 Restructuring costs - - 4.7 16.7 ------------------------------------------------------------------------- (31.4) (29.4) 1,441.3 1,217.8 ------------------------------------------------------------------------- EBITDA(1) $ - $ - $ 764.3 $ 862.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 381.9 $ 320.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ - $ - $ 382.4 $ 542.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) (31.4) (29.4) 1,263.1 1,201.1 Restructuring costs - - 4.7 16.7 ------------------------------------------------------------------------- (31.4) (29.4) 1,267.8 1,217.8 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ - $ - $ 937.8 $ 862.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 381.9 $ 320.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ - $ - $ 555.9 $ 542.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) (from above) $ 937.8 $ 862.7 Incremental charge(3) 173.5 - ------------------------------------------------------------------------- EBITDA (from above) 764.3 862.7 Depreciation 317.7 339.2 Amortization 49.6 63.9 ------------------------------------------------------------------------- Operating income 397.0 459.6 Other expense, net 3.8 4.3 Financing costs 117.6 127.0 ------------------------------------------------------------------------- Income before income taxes and non-controlling interests 275.6 328.3 Income taxes 79.3 116.1 Non-controlling interests 1.5 2.1 ------------------------------------------------------------------------- Net income $ 194.8 $ 210.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is a measure that does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers; EBITDA is defined by the Company as operating revenues less operations expense and restructuring costs. The Company has issued guidance on, and reports, EBITDA because it is a key measure used by management to evaluate performance of its business segments and is utilized in measuring compliance with certain debt covenants. (2) Total capital expenditures ("CAPEX"). (3) Substantially all of the Company's share option awards that were granted prior to January 1, 2005, and which were outstanding on January 1, 2007, were amended by adding a net-cash settlement feature; such amendment resulted in an incremental charge to operations of $173.5 and did not result in an immediate cash outflow. In respect of 2007 results provided to the Company's chief operating decision maker, operations expense and EBITDA are being presented both with, and without, the impact of such amendment. Forward-looking statements ------------------------------------------------------------------------- This report and Management's discussion and analysis contain statements about expected future events and financial and operating results of TELUS Corporation (TELUS or the Company) that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, assumptions (see below) and other forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from financial and operating targets, expectations, estimates or intentions expressed in the forward-looking statements. Assumptions for 2007 guidance purposes include: economic growth consistent with recent provincial and national estimates by the Conference Board of Canada, including 2007 real GDP (gross domestic product) growth of approximately 2.8% in Canada; increased wireline competition in both business and consumer markets, particularly from cable-TV and voice over Internet Protocol (VoIP) companies; forbearance for local retail wireline services in major urban incumbent markets by the second half of 2007; no further price cap mandated consumer price reductions; a wireless industry market penetration gain of 4.5 to five percentage points; restructuring expenses not to exceed $50 million; statutory tax rate of 33 to 34%; a discount rate of 5.0% and an expected long-term average return of 7.25% for pension accounting, unchanged from 2006; average shares outstanding of 330 to 335 million; and no prospective significant acquisitions or divestitures. Earnings per share (EPS), cash balances, net debt and common equity may be affected by the potential purchases of up to 24 million TELUS shares over a 12-month period under the normal course issuer bid that commenced December 20, 2006. Factors that could cause actual results to differ materially include but are not limited to: competition; economic growth and fluctuations (including pension performance, funding and expenses); capital expenditure levels (including possible spectrum asset purchases); financing and debt requirements (including share repurchases, debt redemptions and potential issuance of commercial paper); tax matters (including acceleration or deferral of required payments of significant amounts of cash taxes); human resource developments (including possible labour disruptions); technology (including reliance on systems and information technology); regulatory developments (including possible local price cap reductions, local forbearance, wireless number portability, the timing, rules, process and cost of future spectrum auctions, and possible changes to foreign ownership restrictions); process risks (including internal reorganizations, conversion of legacy systems and billing system integrations); health, safety and environmental developments; litigation and legal matters; business continuity events (including manmade and natural threats); and other risk factors discussed herein and listed from time to time in TELUS' public disclosure documents including its annual report, annual information form, and other filings with securities commissions in Canada (at http://www.sedar.com/) and filings in the United States including Form 40-F (on EDGAR at http://www.sec.gov/). For further information, see Section 10: Risks and risk management of TELUS' 2006 Management's discussion and analysis, as well as updates reported in Section 10 of this document. ------------------------------------------------------------------------- Management's discussion and analysis May 1, 2007 The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month periods ended March 31, 2007 and 2006, and should be read together with TELUS' Consolidated financial statements. This discussion contains forward-looking information that is qualified by reference to, and should be read together with, the discussion regarding forward-looking statements above. TELUS' Consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), which differ in certain respects from U.S. GAAP. See Note 19 to the interim Consolidated financial statements for a summary of the principal differences between Canadian and U.S. GAAP as they relate to TELUS. The Consolidated financial statements and Management's discussion and analysis were reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors. All amounts are in Canadian dollars unless otherwise specified. TELUS has issued guidance on and reports on certain non-GAAP measures that are used by management to evaluate performance of business units, segments and the Company. In addition, non-GAAP measures are used in measuring compliance with debt covenants and are used to manage the capital structure. Because non-GAAP measures do not have a standardized meaning, securities regulations require that non-GAAP measures be clearly defined and qualified, and reconciled with their nearest GAAP measure. For the readers' reference, the definition, calculation and reconciliation of consolidated non-GAAP measures is provided in Section 11: Reconciliation of non-GAAP measures and definition of key operating indicators. Management's discussion and analysis contents ------------------------------------------------------------------------- Section Description ------------------------------------------------------------------------- 1. Introduction and A summary of TELUS' consolidated results for performance summary the first quarter of 2007 ------------------------------------------------------------------------- 2. Core business, vision Examples of TELUS' activities in support of and strategy its six strategic imperatives ------------------------------------------------------------------------- 3. Key performance drivers TELUS' 2007 priorities ------------------------------------------------------------------------- 4. Capability to deliver An update on TELUS' capability to deliver results results ------------------------------------------------------------------------- 5. Results from operations A detailed discussion of operating results for the first quarter of 2007 ------------------------------------------------------------------------- 6. Financial condition A discussion of changes in the balance sheet for the three-months ended March 31, 2007 ------------------------------------------------------------------------- 7. Liquidity and capital A discussion of cash flow, liquidity, resources credit facilities and other disclosures ------------------------------------------------------------------------- 8. Critical accounting A description of accounting estimates and estimates and changes to accounting policies accounting policy developments ------------------------------------------------------------------------- 9. Annual guidance TELUS' confirmed annual guidance for 2007 for 2007 ------------------------------------------------------------------------- 10. Risks and risk An update of risks and uncertainties facing management TELUS and how it manages these risks ------------------------------------------------------------------------- 11. Reconciliation of A description, calculation and non-GAAP measures and reconciliation of certain measures used by definition of key management operating indicators ------------------------------------------------------------------------- 1. Introduction and performance summary 1.1 Materiality for disclosures Management determines whether or not information is material based on whether it believes a reasonable investor's decision to buy, sell or hold securities in the Company would likely be influenced or changed if the information were omitted or misstated. 1.2 Consolidated highlights ------------------------------------------------------------------------- ($ millions, except shares, per share Quarters ended March 31 amounts, subscribers and ratios) 2007 2006 Change ------------------------------------------------------------------------- Consolidated statements of income ------------------------------------------------------------------------- Operating revenues 2,205.6 2,080.5 6.0 % Operating income 397.0 459.6 (13.6)% Net-cash settlement feature expense 173.5 - - ---------- ---------- ---------- Operating income (as adjusted) 570.5 459.6 24.1 % Income before income taxes 275.6 328.3 (16.1)% Net-cash settlement feature expense 173.5 - - ---------- ---------- ---------- Income before income taxes (as adjusted) 449.1 328.3 36.8 % Net income 194.8 210.1 (7.3)% Net-cash settlement feature expense, after tax 107.7 - - ---------- ---------- ---------- Net income (as adjusted) 302.5 210.1 44.0 % Earnings per share, basic ($) 0.58 0.60 (3.3)% Net-cash settlement feature per share 0.32 - - ---------- ---------- ---------- Earnings per share, basic (as adjusted)(1)($) 0.90 0.60 50.0 % Earnings per share, diluted ($) 0.57 0.60 (5.0)% Cash dividends declared per share ($) 0.375 0.275 36.4 % ------------------------------------------------------------------------- Consolidated statements of cash flows ------------------------------------------------------------------------- Cash provided by operating activities 460.6 673.1 (31.6)% Cash used by investing activities 392.3 316.1 24.1 % Capital expenditures 381.9 320.5 19.2 % Cash provided (used) by financing activities 477.2 (366.7) n.m. ------------------------------------------------------------------------- Subscribers and other measures ------------------------------------------------------------------------- Subscriber connections(2) (thousands) at Mar. 31 10,800 10,306 4.8 % EBITDA(3) 764.3 862.7 (11.4)% Net-cash settlement feature expense 173.5 - - ---------- ---------- ---------- EBITDA (as adjusted)(3) 937.8 862.7 8.7 % Free cash flow(4) 480.8 635.6 (24.4)% ------------------------------------------------------------------------- Debt and payout ratios ------------------------------------------------------------------------- Net debt to total capitalization ratio (%)(5) 47.6 47.3 0.3 Net debt to EBITDA - excluding restructuring(5) 1.7 1.8 (0.1) Dividend payout ratio (%)(6) 46 59 (13)pts ------------------------------------------------------------------------- n.m. - not meaningful; pts - percentage point(s) (1) An after-tax charge of approximately $0.32 per share was recorded in 2007 for introducing a net-cash settlement feature for share option awards granted prior to 2005. Earnings per share - basic (as adjusted) is regularly reported to the chief operating decision-maker and corresponds to the definition used in setting TELUS' 2007 basic earnings per share targets and revised guidance. (2) The sum of wireless subscribers, network access lines and Internet subscribers measured at the end of the respective periods. (3) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA (as adjusted) is regularly reported to the chief operating decision-maker and corresponds to the definition used in setting TELUS' 2007 EBITDA targets and revised guidance. (4) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash flow. (5) See Section 11.4 Definition of liquidity and capital resource measures. (6) The current annualized rate of dividend declared per share divided by basic earnings per share for the 12-month trailing period. ------------------------------------------------------------------------- As previously communicated, the Company expected to record a non-cash charge of $150 to $200 million in Operations expense (30 to 40 cents per share on an after-tax basis) for introducing a net-cash settlement feature for share option awards granted prior to 2005. In the first quarter of 2007, $173.5 million in respect of this charge was recorded in Operations expense ($107.7 million after-tax impact in Net income or approximately 32 cents per share), representing a large portion of the estimated charge for the full year. Highlights for the first quarter of 2007, as discussed in Section 5: Results from operations, include the following: - Subscriber connections increased by 494,000 during the 12-month period ended March 31, 2007. The number of wireless subscribers grew by 11.5% to 5.14 million, the number of Internet subscribers grew by 9.8% to 1.13 million and the number of network access lines decreased by 2.9% to 4.53 million. - Operating revenues increased by $125.1 million when compared to the same period in 2006 due primarily to growth in wireless revenues and wireline data revenues. - Operating income decreased by $62.6 million, when compared with the same period in 2006, primarily due to the non-cash charge of $173.5 million described above. Operating income adjusted to exclude this charge increased by $110.9 million due primarily to improved wireless revenues and EBITDA (as adjusted). - Net income decreased by $15.3 million and EPS decreased by two cents, when compared to the same period in 2006. However, after removing the charge for the net-cash settlement feature, Net income (as adjusted) and EPS-basic (as adjusted) increased by $92.4 million or approximately 30 cents per share, respectively. - The average number of shares outstanding in the first quarter of 2007 was approximately 3.5% lower than in the same period in 2006 due to share repurchase programs, contributing favourably to earnings per share in 2007. Highlights for the first quarter of 2007 as discussed in Section 7: Liquidity and capital resources include the following: - Cash provided by operating activities decreased by $212.5 million when compared to the same period in 2006 mainly due to a $350 million reduction in the balance of securitized receivables during the first quarter of 2007, as compared to a $100 million reduction in the same period in 2006. - Cash used by investing activities increased by $76.2 million when compared to the same period in 2006 due primarily to increased capital expenditures for up-front capital investment to support new enterprise customers as well as increased expenditures for wireless capacity and coverage and enablement of wireless number portability. - Cash provided by financing activities in the first quarter of 2007 resulted primarily from a $1 billion debt issue with two different maturities, net of dividend payments, repurchases of shares, and repayment of amounts drawn on the Company's bank facility. - Free cash flow decreased by $154.8 million when compared to the same period in 2006 mainly because of the receipt in the first quarter of 2006 of income tax recoveries and related interest and higher capital expenditures in 2007. - Net debt to total capitalization at March 31, 2007 continued to be in the target range of 45 to 50%. - Net debt to EBITDA continued to be in the target range of 1.5 to 2.0 times. - The dividend payout ratio, measured as the annualized dividend declared in the first quarter divided by earnings per share for the 12-month trailing period, was within guideline of 45 to 55% of sustainable net earnings. 2. Core business, vision and strategy The following discussion is qualified in its entirety by the Forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2006 Management's discussion and analysis, as well as updates reported in Section 10 of this document. TELUS' core business, vision and strategy were detailed in its 2006 Management's discussion and analysis. Activities that supported the Company's six strategic imperatives during 2007 include the following: Building national capabilities across data, IP, voice and wireless On March 14, 2007 as part of a nation-wide initiative, the Company successfully implemented the first phase of wireless telephone number portability (WNP), such that local telephone numbers are portable: wireless-to-wireless, wireless-to-wireline and wireline-to-wireless. The Company does not believe that there was a significant effect on wireless churn rates over the two week period that WNP was available. Focusing relentlessly on the growth markets of data, IP and wireless In February 2007, the Federal Government, after a competitive bid process, awarded approximately 60 per cent of its wireless business to TELUS. This minimum two-year contract is expected to result in approximately 30,000 net additions to TELUS over the next 12 months. A significant factor in this enterprise contract win was the March implementation of WNP in Canada as government employees will be able to retain and port their existing phone numbers. Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business In March 2007, Amp'd Mobile launched its interactive and customized mobile entertainment, information and messaging services that targets the high value young adult (ages 18 to 35) market segment in Canada and operates on TELUS' wireless higher-speed EVDO (evolution data optimized) network. Amp'd Mobile is responsible for bringing entertainment content to TELUS' subscribers as well as providing optimized handsets with fast download speeds. TELUS manages sales and distribution, billing, client care, network operations and pricing. TELUS also has exclusive rights in Canada to Amp'd trademarks, premium data services, handsets and content delivery platforms. 3. Key performance drivers The following discussion is qualified in its entirety by the Forward-looking statements at the beginning of Management's discussion and analysis. It is also qualified by Section 10: Risks and risk management of TELUS' 2006 Management's discussion and analysis and updates reported in Section 10 of this document. ------------------------------------------------------------------------- 2007 corporate priorities across wireline and wireless ------------------------------------------------------------------------- Advancing TELUS' leadership position in the consumer market - Combining TELUS' suite of data applications with deregulated heritage services - Attaining best-in-class customer loyalty and growth through unparalleled customer experiences - Achieving customer addition targets by expanding distribution channels and addressing key market segments with new service offerings. Advancing TELUS' leadership position in the business market - Progressing further in key industry verticals with specific applications that provide non-price-based differentiation - Leveraging wireless number portability to expand TELUS' business market share in Central Canada - Focusing on small business customer loyalty and growth with innovative solutions. Advancing TELUS' leadership position in the wholesale market - Growing in domestic and international markets through recognition that TELUS is Canada's IP leader - Achieving excellence in customer service to support local forbearance in key incumbent markets - Expanding the Company's markets, channels and products by focusing on strategic relationships with TELUS' partners. Driving TELUS' technology evolution and improvements in productivity and service excellence - Implementing technology roadmaps for Future Friendly Home and wireless service offerings that simplify TELUS' product portfolio and improve service development and execution - Rolling out consolidated customer care systems to replace multiple legacy systems in Alberta and B.C. - Accelerating customer service delivery dates. Strengthening the spirit of the TELUS team and brand, and developing the best talent in the global communications industry - Growing TELUS' business ownership culture with a team philosophy of our business, our customers, our team, my responsibility thereby attracting, developing and retaining great talent - Leading the way in corporate social responsibility as TELUS strives to be Canada's premier corporate citizen. ------------------------------------------------------------------------- 4. Capability to deliver results The following discussion is qualified in its entirety by the Forward-looking statements at the beginning of Management's discussion and analysis. 4.1 Principal markets addressed and competitors The principal markets addressed and competitors have not changed significantly from those described in TELUS' annual 2006 Management's discussion and analysis. 4.2 Operational capabilities Regulation On April 4, 2007, the Federal Government issued an Order-in-Council that varied the conditions for forbearance from regulation of local services. The Company has filed forbearance applications for Victoria, Vancouver, Calgary, Edmonton and Rimouski, and expects to do so for other communities in the near future. In addition, the Company had previously received a forbearance decision for Ft. McMurray that was contingent on meeting competitor quality of service measures. For further discussion, see Section 10.1 Regulatory. Development of a new billing system in the wireline segment In late-March 2007, the Company converted more than one million wireline customers in Alberta to a new billing and client care system. The expected customer service and cost benefits of this project include streamlined and standardized processes and the elimination over time of multiple legacy information systems. See Section 10.3 Process risks. 4.3 Liquidity and capital resources Capital structure financial policies (Note 3 of the interim Consolidated financial statements) The Company monitors capital on a number of bases, including: net debt to total capitalization; net debt to EBITDA - excluding restructuring costs; and dividend payout ratio of sustainable net earnings. For further discussion and specific guidelines, see Section 7.4 Liquidity and capital resource measures. The TELUS' 2007 financing plan was described in Section 9.3 of its 2006 Management's discussion and analysis. Progress against the financing plan is outlined below. ------------------------------------------------------------------------- TELUS' 2007 financing plan and results ------------------------------------------------------------------------- - Repurchase TELUS Common Shares and TELUS Non-Voting Shares under the normal course issuer bid (NCIB) During the first quarter of 2007, approximately 2.0 million Common Shares and 1.5 million Non-Voting Shares were repurchased for cancellation for a total outlay of approximately $201 million. From December 20, 2004 to March 31, 2007, TELUS has repurchased approximately 18.4 million Common Shares and 24.5 million Non-Voting Shares for $1.97 billion under three NCIB programs. - Pay dividends The dividend declared in the first quarter of 2007, payable on April 1, was 37.5 cents per share, an increase of 36.4% from the dividend declared in the first quarter of 2006. - Use proceeds from securitized receivables and bank facilities, as needed, to supplement free cash flow and meet other cash requirements The balance of securitized accounts receivable was reduced by $350 million to $150 million at March 31, 2007 from $500 million at December 31, 2006. No amounts were outstanding under the five-year credit facility and other bank facilities at March 31, 2007 as compared to approximately $121 million from December 31, 2006. - Maintain a minimum $1 billion in unutilized liquidity TELUS had approximately $2 billion of available liquidity from unutilized credit facilities as well as $534 million Cash and temporary investments at March 31, 2007. On March 2, 2007, the Company closed a new five-year $2 billion credit facility that has a May 2012 maturity date. The new facility replaced $1.6 billion of credit facilities, of which $800 million would have expired in 2008 and $800 million would have expired in 2010. The new facility may be used for general corporate purposes including the backstop of a potential commercial paper program. - Maintain position of fully hedging foreign exchange exposure for indebtedness Maintained. - Give consideration to refinancing all or a portion of U.S. dollar Notes in advance of its June 1, 2007 scheduled maturity In March 2007, the Company publicly issued $300 million 4.50%, Series CC, 2012 Canadian dollar Notes and $700 million 4.95%, Series CD, 2017 Canadian dollar Notes. Proceeds from these debt issues, combined with a potential issue of commercial paper and a possible increase in securitized accounts receivable, are expected to be used for general corporate purposes, including repayment of U.S. $1,166.5 million 7.50% Notes due on June 1 (approximately $1,500 million). - Preserve access to the capital markets at a reasonable cost by maintaining investment grade credit ratings and targeting improved credit ratings in the range of BBB+ to A-, or the equivalent, in the future At May 1, 2007, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. On February 26, 2007, Moody's Investors Services upgraded its rating for TELUS by one level to Baa1 (equivalent to BBB+) and assigned an outlook of stable. On March 5, 2007, Dominion Bond Rating Service (DBRS) upgraded the rating of TELUS Notes to A (low) from BBB (high) and confirmed its A (low) ratings for TCI and R-1 (low) rating for TELUS' commercial paper, all with a stable trend. ------------------------------------------------------------------------- 4.4 Changes in internal control over financial reporting There were no changes in internal control over financial reporting in the three-month period ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 5. Results from operations 5.1 General The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information is regularly reported to the Company's Chief Executive Officer (the chief operating decision-maker). See Note 5 of the interim Consolidated financial statements. 5.2 Quarterly results summary ------------------------------------------------------------------------- ($ in millions, except per share amounts) 2007 Q1 2006 Q4 2006 Q3 2006 Q2 ------------------------------------------------------------------------- Segmented revenue (external) Wireline segment 1,205.6 1,234.3 1,200.3 1,189.9 Wireless segment 1,000.0 1,020.3 1,010.4 945.3 ------------------------------------------------------------------------- Operating revenues (consolidated) 2,205.6 2,254.6 2,210.7 2,135.2 Operations expense 1,436.6 1,368.6 1,245.8 1,207.4 Restructuring costs 4.7 7.9 12.5 30.7 ------------------------------------------------------------------------- EBITDA(1) 764.3 878.1 952.4 897.1 Depreciation 317.7 353.2 325.8 335.2 Amortization of intangible assets 49.6 53.9 57.5 46.9 ------------------------------------------------------------------------- Operating income 397.0 471.0 569.1 515.0 Other expense (income) 3.8 10.1 4.0 9.6 Financing costs 117.6 133.6 116.6 127.5 ------------------------------------------------------------------------- Income before income taxes and non-controlling interest 275.6 327.3 448.5 377.9 Income taxes 79.3 89.7 126.5 18.7 Non-controlling interests 1.5 1.4 2.4 2.6 ------------------------------------------------------------------------- Net income 194.8 236.2 319.6 356.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income per Common Share and Non-Voting Share - basic 0.58 0.70 0.94 1.03 - diluted 0.57 0.69 0.92 1.02 Dividends declared per Common Share and Non-Voting Share 0.375 0.375 0.275 0.275 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ in millions, except per share amounts) 2006 Q1 2005 Q4 2005 Q3 2005 Q2 ------------------------------------------------------------------------- Segmented revenue (external) Wireline segment 1,198.6 1,209.9 1,198.6 1,216.5 Wireless segment 881.9 876.8 864.2 802.0 ------------------------------------------------------------------------- Operating revenues (consolidated) 2,080.5 2,086.7 2,062.8 2,018.5 Operations expense 1,201.1 1,316.8 1,221.5 1,146.1 Restructuring costs 16.7 35.5 1.6 7.4 ------------------------------------------------------------------------- EBITDA(1) 862.7 734.4 839.7 865.0 Depreciation 339.2 346.2 335.6 330.9 Amortization of intangible assets 63.9 67.0 73.6 68.2 ------------------------------------------------------------------------- Operating income 459.6 321.2 430.5 465.9 Other expense (income) 4.3 9.3 7.1 0.5 Financing costs 127.0 171.7 144.8 168.2 ------------------------------------------------------------------------- Income before income taxes and non-controlling interest 328.3 140.2 278.6 297.2 Income taxes 116.1 58.8 86.9 106.0 Non-controlling interests 2.1 2.9 1.6 1.7 ------------------------------------------------------------------------- Net income 210.1 78.5 190.1 189.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income per Common Share and Non-Voting Share - basic 0.60 0.22 0.53 0.53 - diluted 0.60 0.22 0.53 0.52 Dividends declared per Common Share and Non-Voting Share 0.275 0.275 0.20 0.20 ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA). ------------------------------------------------------------------------- The trend in consolidated Operating revenues continued to reflect strong growth in wireless revenue due to a growing subscriber base and increasing ARPU. The increase in ARPU was due to increasing provision and adoption of wireless data services, which more than offset the declining voice component of ARPU. The trend also reflected growth in wireline segment data revenue, while wireline voice local and long distance revenues continue to decrease. In addition to continued substitution to wireless services, the impact from increased competition from VoIP competitors and resellers on wireline revenues became apparent in 2006. Decreases in wireline long distance revenues are consistent with industry-wide trends of strong price competition and technological substitution (to Internet and wireless). Wireline revenues continue to be impacted by generally negative regulatory price cap decisions including retroactive rate adjustments. Historically, there is significant fourth quarter seasonality with higher wireless subscriber additions and related acquisition costs and equipment sales, resulting in lower wireless EBITDA. The seasonality affects, to a lesser extent, the wireline high-speed Internet subscriber additions and related costs. Operations expense in the first quarter of 2007 included a $173.5 million non-cash charge for introducing a net-cash settlement feature for share option awards granted prior to 2005, as described earlier. Operations expense in 2005 was also affected by temporary net expenses leading up to and resulting from an extended labour disruption; such temporary expenses were estimated to be approximately $16 million, $65 million and $52 million, respectively, for the second, third and fourth quarters of 2005. Restructuring costs varied by quarter, depending on the progress of ongoing initiatives underway. Depreciation expense in the fourth quarter of 2006 included a provision of approximately $17 million to align estimated useful lives for TELUS Quebec assets, resulting from integration of financial systems. Amortization of intangible assets continued to decrease as several software assets have been fully amortized. Amortization expenses in the second quarter and fourth quarter of 2006 as well as the first quarter of 2007 were reduced by approximately $12 million, $5 million and $5 million, respectively, for investment tax credits relating to assets capitalized in prior years that are now fully amortized, following a determination of eligibility by a government revenue authority. Within Financing costs, interest expenses trended lower except for the following items: (i) interest expense in respect of a court decision in a lawsuit related to a 1997 BC TEL bond redemption (including $17.5 million in the second quarter of 2005 and $7.8 million in the fourth quarter of 2006); and (ii) a charge of $33.5 million in the fourth quarter of 2005 for early redemption of $1.578 billion of Notes. The early redemption of Notes on December 1, 2005, contributed to lower financing costs in the first half of 2006. Financing costs are net of varying amounts of interest income. The trend in Net income and earnings per share reflect the items noted above as well as adjustments arising from income tax changes and tax adjustments and related interest for prior periods. ------------------------------------------------------------------------- Income tax-related adjustments ($ in millions, except EPS amounts) 2007 Q1 2006 Q4 2006 Q3 2006 Q2 ------------------------------------------------------------------------- Approximate Net income impact 4 20 30 115 Approximate EPS impact 0.01 0.06 0.09 0.33 Approximate basic EPS excluding tax-related impacts 0.57 0.64 0.85 0.70 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income tax-related adjustments ($ in millions, except EPS amounts) 2006 Q1 2005 Q4 2005 Q3 2005 Q2 ------------------------------------------------------------------------- Approximate Net income impact - (3) 17 2 Approximate EPS impact - (0.01) 0.05 0.01 Approximate basic EPS excluding tax-related impacts 0.60 0.23 0.48 0.52 ------------------------------------------------------------------------- 5.3 Consolidated results from operations ------------------------------------------------------------------------- ($ in millions except EBITDA margin Quarters ended March 31 in % and Employees) 2007 2006 Change ------------------------------------------------------------------------- Operating revenues 2,205.6 2,080.5 6.0 % Operations expense 1,436.6 1,201.1 19.6 % Restructuring costs 4.7 16.7 (71.9)% ------------------------------------------------------------------------- EBITDA(1) 764.3 862.7 (11.4)% Depreciation 317.7 339.2 (6.3)% Amortization of intangible assets 49.6 63.9 (22.4)% ------------------------------------------------------------------------- Operating income 397.0 459.6 (13.6)% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations expense (as adjusted)(2) 1,263.1 1,201.1 5.2 % EBITDA (as adjusted)(2) 937.8 862.7 8.7 % EBITDA margin(3) 34.7 41.5 (6.8)pts EBITDA margin (as adjusted)(4) 42.5 41.5 1.0 pt Full-time equivalent employees at end of period 31,304 28,261 10.8 % ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. See Section 11.1 Earnings before interest, taxes, depreciation and amortization (EBITDA). (2) Excludes a non-cash charge of $173.5 million in 2007 for introducing a net-cash settlement feature for share option awards granted prior to 2005. Operations expense (as adjusted) and EBITDA (as adjusted) are both regularly reported to the chief operating decision-maker. EBITDA (as adjusted) corresponds to the definition used in setting TELUS' 2007 EBITDA target and revised guidance. (3) EBITDA divided by Operating revenues. (4) EBITDA (as adjusted) divided by Operating revenues. ------------------------------------------------------------------------- The following discussion is for the consolidated results of TELUS. Further detail by segment is provided for Operating revenues, Operations expense, Restructuring costs, EBITDA and Capital expenditures in Section 5.4 Wireline segment results, Section 5.5 Wireless segment results and Section 7.2 Cash used by investing activities - capital expenditures. Operating revenues Consolidated Operating revenues increased by $125.1 million in the first quarter of 2007, when compared with the same period in 2006. The increase was due primarily to growth in wireless revenues and wireline data revenues, which exceeded erosion in wireline voice local and long distance revenues. Operations expense and Operations expense (as adjusted) Consolidated Operations expense increased by $235.5 million in the first quarter of 2007, when compared with the same period in 2006. The increase includes the $173.5 million non-cash charge recorded in the first quarter of 2007 for introducing a net-cash settlement feature for share option awards granted before 2005. Operations expense adjusted to exclude this non-cash charge increased by $62.0 million primarily due to increased expenses in the wireless segment to support an 11.5% growth in the subscriber base. The net defined benefit pension plan expense decreased by approximately $22 million due primarily to favourable returns on plan assets in 2006. The number of employees increased to support the wireline segment's provision of outsourcing services to TELUS' customers, including human resources outsourcing services and international call centre services, and to support the growing wireless segment subscriber base. The number of full-time equivalent employees providing outsourcing services to the Company's customers increased by 1,835 at March 31, 2007 as compared to March 31, 2006. In the wireless segment, the number of full-time equivalent employees increased by 826 over the same period. Restructuring costs Restructuring costs decreased by $12.0 million in the first quarter of 2007, when compared to the same period in 2006. The $4.7 million restructuring expense in 2007 was in respect of several smaller efficiency initiatives. The Company's estimate of restructuring costs for the full year of 2007, which arises from its competitive efficiency program, are not expected to exceed $50 million. EBITDA and EBITDA (as adjusted) EBITDA decreased by $98.4 million in the first quarter 2007 when compared with the same period in 2006. The decrease includes the $173.5 million non-cash charge recorded in the first quarter of 2007 for introducing a net-cash settlement feature for share option awards. EBITDA adjusted to exclude this charge increased by $75.1 million in the first quarter of 2007 when compared with the same period in 2006. The increase was primarily in the wireless segment due to strong revenue growth partially offset by the 2.1% COA per gross subscriber addition, increased retention spend and higher operations costs to support an 11.5% growth in total wireless subscribers. Depreciation and amortization expenses Depreciation decreased by $21.5 million in the first quarter of 2007 when compared to the same period in 2006 primarily due to an increase in fully-depreciated assets as well as an adjustment in the 2006 period. The depreciation expense adjustment in 2006 reflected a reduction in the estimated useful service lives for computer servers and furniture. Amortization of intangible assets decreased by $14.3 million in the first quarter of 2007, when compared to the same period in 2006, due primarily to several software assets becoming fully amortized, as well as recognition of approximately $5 million of investment tax credits relating to assets capitalized in prior years that are now fully amortized. Operating income Operating income decreased by $62.6 million in the first quarter of 2007, when compared to the same period in 2006. The decrease included the $173.5 million non-cash charge recorded in the first quarter of 2007 for introducing a net-cash settlement feature for share option awards. This charge more than offset underlying growth in EBITDA and reduced depreciation and amortization expenses, as described above. Operating income as adjusted to exclude this charge increased by $110.9 million or 24.1%. Other income statement items ------------------------------------------------------------------------- Other expense, net Quarters ended March 31 ($ millions) 2007 2006 Change ------------------------------------------------------------------------- 3.8 4.3 (11.6)% ------------------------------------------------------------------------- Other expense was not significantly changed in the first quarter of 2007, when compared to the same period in 2006. The accounts receivable securitization expense was $3.2 million in the first quarter of 2007, did not change significantly from the same period in 2006. At March 31, 2007, the balance of proceeds of securitized receivables was $150 million (see Section 7.6 Accounts receivable sale). ------------------------------------------------------------------------- Financing costs Quarters ended March 31 ($ millions) 2007 2006 Change ------------------------------------------------------------------------- Interest on long-term debt, short-term obligations and other 119.3 127.0 (6.1)% Foreign exchange losses (gains) 1.9 1.1 72.7 % Interest income (3.6) (1.1) n.m. ------------------------------------------------------------------------- 117.6 127.0 (7.4)% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest expenses decreased by $7.7 million in the first quarter of 2007 when compared with same period in 2006 due primarily to an adjustment for application of the effective rate method for issue costs as required under CICA Handbook Section 3855 (recognition and measurement of financial instruments). In March 2007, the Company publicly issued $300 million of five-year notes and $700 million of 10-year notes (see Section 7.3). Also in March, forward starting interest rate swaps were terminated, resulting in a net loss of approximately $10 million that was deferred and will be amortized over 10 years, which is the term of the new debt. The Company's debt, as calculated in Section 11.4, was $6,563 million at March 31, 2007, as compared to $5,732 million at March 31, 2006. Net debt was $6,179 million and $6,133 million, respectively, with the March 31, 2007 figure reflecting a large cash and temporary investments balance and reduced securitized receivables. Interest income increased by $2.5 million in the first quarter of 2007 when compared with the same period in 2006, due primarily to interest earned on cash and temporary investments in 2007. ------------------------------------------------------------------------- Income taxes Quarters ended March 31 ($ millions) 2007 2006 Change ------------------------------------------------------------------------- Blended federal and provincial statutory income tax based on net income before tax 92.3 111.5 (17.2)% Revaluation of future income tax liability (3.7) - - Share option award expense (7.7) 1.5 - Other (1.6) 3.1 - ------------------------------------------------------------------------- 79.3 116.1 (31.7)% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Blended federal and provincial statutory tax rates (%) 33.5 34.0 (0.5)pts Effective tax rates (%) 28.8 35.4 (6.6)pts ------------------------------------------------------------------------- The decrease in the blended federal and provincial statutory income tax expense in the first quarter of 2007, when compared with the same period in 2006, relates primarily to the 16.1% decrease in income before taxes as well as a lower blended statutory tax rate. The blended federal and provincial tax rate for the first quarter of 2007 decreased from the same period in 2006 due primarily to a reduction to general corporate income tax rates on income taxed in Alberta effective April 1, 2006. The decrease in the effective tax rate was mainly due to revaluation of the future income tax liability as well as a future income tax recovery associated with introducing the net-cash settlement feature for share option awards. Based on the assumption of the continuation of the rate of TELUS earnings, the existing legal entity structure, and no substantive changes to tax regulations, the Company expects to be able to substantially utilize its non-capital losses before the end of 2007. The Company's assessment is that the risk of expiry of such non-capital losses is remote. Under the existing legal entity structure, TELUS currently expects cash tax payments to be minimal in 2007, increasing in 2008, with substantial cash tax payments in 2009. The blended federal and provincial statutory tax rate for 2007 is expected to be approximately 33 to 34%. ------------------------------------------------------------------------- Non-controlling interests Quarters ended March 31 ($ millions) 2007 2006 Change ------------------------------------------------------------------------- 1.5 2.1 (28.6)% ------------------------------------------------------------------------- Non-controlling interests represents minority shareholders' interests in several small subsidiaries. Comprehensive income As discussed in more detail in Section 8.2 Accounting policy developments, commencing with the 2007 fiscal year, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants (CICA) for accounting for comprehensive income (CICA Handbook Section 1530). Currently, the concept of comprehensive income for purposes of Canadian GAAP, in the Company's specific instance, is primarily to include changes in shareholders' equity arising from unrealized changes in the fair values of financial instruments (see Section 7.8). The calculation of earnings per share is based on Net income and Common Share and Non-Voting Share income, as required by GAAP. TELUS Corporation CONTACT: Media relations: Allison Vale, (416) 629-6425,[email protected]; Investor relations: Robert Mitchell, (416) 279-3219,[email protected] [ Back To TMCnet.com's Homepage ]