[August 03, 2007] TELUS Reports Second Quarter Results Tweet VANCOUVER, Aug. 3 /PRNewswire-FirstCall/ -- TELUS Corporation today reported its financial results for the second quarter of 2007. Revenue increased four per cent to $2.23 billion from a year ago due to continued wireless and data growth. Reported earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by $12.5 million in the second quarter when compared to the same period in 2006. EBITDA was negatively impacted by increased wireless expenses in the first full quarter of wireless number portability (WNP) in Canada as well as increased wireline expenses from the implementation of a new billing and client care system in Alberta. Wireless customer acquisition and retention costs increased by an estimated $47 million largely from the introduction of WNP, while the implementation of the new system resulted in a negative revenue adjustment and increased operating costs totaling $29 million. Excluding tax related adjustments, net income was up $4.5 million and earnings per share (EPS) increased by four cents per share. Including tax related adjustments, net income decreased by $103.5 million in the quarter, while EPS declined 27 cents when compared to the same period a year ago. Second quarter net income and EPS included favourable tax related adjustments of $10 million or 3 cents per share, compared to $118 million or 34 cents a year ago. EPS was also negatively impacted by four cents due to TELUS' venture investment and business with AMP'd Mobile, Inc., which recently entered into bankruptcy proceedings in the U.S. Free cash flow this quarter was $162 million, down 15 per cent due to higher wireless capital expenditures and lower operating profit. During the second quarter TELUS continued to repurchase shares under its normal course issuer bid (NCIB) program, completing $170 million of share buy backs - shares outstanding are three per cent lower from a year ago. Since the repurchase program began in December 2004, a total of 45.6 million shares have been repurchased for $2.14 billion resulting in a 7.5% reduction in shares outstanding. FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- 3 months ended C$ in millions, except June 30 per share amounts % (unaudited) 2007 2006 Change ------------------------------------------------------------------------- Operating revenues 2,228.1 2,135.2 4.4 EBITDA(1) 884.6 897.1 (1.4) EBITDA (as adjusted)(2) 886.4 897.1 (1.2) Income before income taxes and non-controlling interest 348.1 377.9 (7.9) Net income(3) 253.1 356.6 (29.0) Earnings per share (EPS), basic(3) 0.76 1.03 (26.2) Cash provided by operating activities 1,061.9 813.0 30.6 Capital expenditures 481.8 458.8 5.0 Free cash flow(4) 161.7 191.0 (15.3) (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 $1.8 million to Operations expense in 2007 for introducing a net cash settlement feature for share option awards granted prior to 2005. (3) Net income and EPS for the three month period in 2007 includes favourable tax related adjustments of $10 million or 3 cents per share, compared to $118 million or 34 cents for the same period in 2006. (4) See Section 11.2 of Management's discussion and analysis. Darren Entwistle, TELUS president and CEO, said "I am less than satisfied with these quarterly results. While wireless revenue and subscriber growth of 11 per cent and wireline data revenue growth of eight per cent remained robust, earnings did not meet expectations. This was largely caused by excess costs associated with the implementation of the new wireline billing and client care system as well as from the introduction of wireless number portability and the commercial failure of the launch of AMP'd Mobile. We are dedicated to much better performance in coming quarters, as evidenced by the reiteration of our public guidance for 2007." "Despite the challenging quarter, there were notable positive developments." Mr. Entwistle added, "In particular, the $200 million Department of National Defence contract awarded to TELUS this quarter illustrates the continued strength of our national growth strategy focused on data services. The DND deal validates our leadership in IP networking and we look forward to yet another major and successful implementation of managed telecommunications services at their national and international locations." "On a different note, there has been much continued speculation and uncertainty in the market about the potential for TELUS to pursue an offer to acquire BCE," noted Mr. Entwistle. "After a thorough assessment of the opportunity and based on multiple factors, we are confirming today that TELUS does not intend to submit a competing offer to acquire BCE. We believe that TELUS on a stand-alone basis with its strong growth oriented asset mix and investment grade financial strength will continue to create significant future value for investors." Robert McFarlane, executive vice president and CFO, noted, "TELUS demonstrated our considerable financial strength with the successful launch of an up to $800 million commercial paper program and refinancing of the $1.5 billion 7.5% notes due in June 2007. With the attractive 4.8% blended rate on the $1 billion raised in March and lower cost of commercial paper, we expect to enjoy lower interest costs going forward. Given recent capital market and industry developments, TELUS' considerable investment grade financial strength should provide competitive advantage in the future." Mr. McFarlane added, "TELUS' commitment to return excess cash to shareholders was again evident this quarter with 2.7 million of share repurchases. Due to the new net-cash settlement feature for options in 2007, we have accelerated the reduction in shares outstanding." ------------------------------------------------------------------------- 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 - August 1, 2007. ------------------------------------------------------------------------- OPERATING HIGHLIGHTS TELUS wireless - Net subscriber additions increased by 3.5% to 128,200, a strong second quarter result despite increased competition. Postpaid additions were 99,200 while prepaid loading was 29,000 - Revenues increased by $103 million or 11% to $1.05 billion in the second quarter of 2007, when compared with the same period in 2006 - ARPU (average revenue per subscriber unit per month) improved by 0.7% to $63.65. The data component increased by 48% to $6.58, which more than offset the ongoing decline in voice ARPU - EBITDA (as adjusted) increased by $12 million over the second quarter of 2006, representing 3% growth - Cost of acquisition per gross addition increased 8% year over year to $425 due to higher subsidies on certain popular handsets and higher advertising and promotion spending related to the commencement of industry-wide wireless number portability (WNP) - Two thirds of the $30 million increase in cost of acquisition expense is related to higher gross loading, and cost of retention increased by $27 million, both of which are largely attributable to WNP. - Blended monthly subscriber churn increased to 1.45% from 1.30% a year ago, reflecting the first full quarter since the implementation of WNP. Postpaid churn remained low at 1.07% - Cash flow (EBITDA less capital expenditures) based on EBITDA (as adjusted) decreased $14 million or 5% to $279 million in the quarter due to increased capital expenditures, including continued investments in higher speed wireless networks. TELUS wireline - Revenues decreased by $10 million or 0.8% to $1.2 billion in the second quarter of 2007, when compared with the same period in 2006, due to data growth partially offsetting declines in local and long distance revenues - Data revenues increased by $32 million or 8% due to strong year-over- year high-speed Internet growth and enhanced data service growth. - Long-distance revenue declined $38 million or 19% due to lower average per-minute rates and wholesale minute volumes, partly offset by increased retail minutes. In addition, revenues were impacted by a one-time reduction of $13 million as a result of the billing system implementation - EBITDA (as adjusted) decreased by $22 million or 5%, due to higher expenses including non-recurring expenses for new billing and client care system support and development. If normalized for the system implementation costs, EBITDA would have increased by 1.5% - TELUS added 13,900 net high-speed Internet subscribers, taking TELUS' high-speed base to 962,700, a 16% increase from a year ago. High-speed Internet net additions were lower due to provisioning constraints from the new billing and client care system implemented in Alberta. - Network access lines (NALs) declined by 48,000 in the quarter. Total NALs were down 3.1% 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 14% to $125 million, due to decreased EBITDA as a result of impact of a new integrated billing system implementation in Alberta. Canadian telecommunications industry developments BCE strategic review process - TELUS not making competing offer to acquire BCE In mid-April 2007, Canada's largest telecommunications service provider BCE announced, under investor pressure, a strategic review process to enhance its shareholder value. Three consortia that included Canadian pension funds and U.S. private equity investors signed non-disclosure and standstill agreements to gain access to a BCE data room allowing them to potentially prepare an offer to BCE shareholders under a competitive auction process. On June 21, 2007, TELUS confirmed that it had entered into a mutual non-disclosure and standstill agreement and was pursuing non-exclusive discussions to acquire BCE based on a financial approach that would retain investment grade credit ratings. On June 26, the three consortia submitted bids to acquire BCE, while TELUS announced that inadequacies of BCE's bid process did not make it possible for TELUS to submit an offer as part of the strategic review process announced by BCE. On June 30, BCE announced that it had entered into a definitive agreement for BCE to be acquired by a consortium led by Teachers Private Capital, a division of the Ontario Teachers Pension Plan. The BCE Board recommended that their common shareholders accept the offer at an all-cash price of $42.75 per common share. Other consortium members include Providence Equity Partners, Madison Dearborn Partners and the Toronto-Dominion Bank. This offer, if successful, is expected to entail high leverage at BCE with large amounts of non-investment grade debt being issued to finance the transaction. TELUS in July continued its assessment of whether it should potentially make a competing offer for BCE. TELUS has concluded this assessment and it does not intend to submit a competing offer to acquire BCE. TELUS a founding member of new independent complaints commission for consumers On July 23, a new independent telecommunications complaints commission, known as the Commissioner for Complaints for Telecommunications Services (CCTS), was launched to help consumers and small businesses handle un-resolved service concerns. The CCTS was created in response to a request from the Minister of Industry to telecommunications companies to work together to establish and fund this independent agency. Founding members TELUS, Bell Aliant, Bell Canada, SaskTel, MTS Allstream, Rogers, Virgin Mobile, Cogeco, Videotron, and Vonage filed a joint proposal on the structure and mandate of the new organization with the CRTC (Canadian Radio-television and Telecommunications Commission) for its consideration. The CCTS is intended to assist customers where the normal complaint resolution process of member companies do not resolve their concerns. Fort McMurray among one of first markets where residential phone service deregulated On July 25, 2007, the CRTC announced that it had accepted TELUS' application for deregulation of local residential phone services in Fort McMurray, Alberta. TELUS has also applied for deregulation of local residential phone services in Greater Vancouver, Victoria, Edmonton, Calgary and Rimouski following the April 4, 2007 announcement by Industry Canada that telecommunications companies can apply for deregulation in communities where significant competition exists. TELUS later applied for deregulation of regulated business phone services in phone exchanges covering 78 per cent of business lines in B.C. and Alberta, and 52 per cent in eastern Quebec. The new rules allow incumbent telecommunications carriers to apply to the CRTC for deregulation in any community where customers have a choice between service providers and where they meet specific quality of service measures for six months. 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. Corporate developments TELUS wins $200 million contract for Department of National Defence Following a competitive bid process, the Department of Public Works and Government Services Canada selected TELUS to provide and manage telecommunications services for the Department of National Defence (DND). The five-year Global Defence Network Services contract is valued at an estimated $200 million. TELUS will provide the DND managed telecommunications services including voice, data, video and IP solutions, at national and international locations. Debt refinancing completed for $1.5 billion In May 2007, TELUS entered into an unsecured commercial paper program, which is backstopped by a portion of its credit facility, enabling TELUS to issue commercial paper up to a maximum of $800 million (or U.S. dollar equivalent), to be used for general corporate purposes. Using the proceeds generated by TELUS' $1 billion debt issue in March 2007 with a blended interest cost of approximately 4.8%, the commercial paper program and accounts receivable securitization, TELUS redeemed its publicly issued $1.5 billion (U.S. $1.17 billion) 7.5% Notes on June 1, 2007. TELUS continues share repurchases During the second quarter, TELUS continued to purchase shares under its Normal Course Issuer Bid (NCIB). These repurchases totaled approximately 2.7 million shares for a total outlay of $170 million. Since commencement in December 2004, TELUS has repurchased a total of 45.6 million shares for $2.14 billion under three NCIB programs, resulting in a 7.5% reduction in shares outstanding. Contract with Closing the Gap Healthcare Group TELUS signed a contract with Ontario's Closing the Gap Healthcare Group to implement the TELUS Community Care Management Solution (CCMS). The CCMS will allow the group's mobile care-givers to access patient records and test results over a secure connection to a laptop or PDA, and to instantly share critical information with other healthcare providers over the same connection. TELUS has an exclusive partnership agreement with Healthphone, a New Zealand based software company, to implement and host their software solutions in Canada. CCMS is powered by Healthphone, Microsoft's global lead solution partner for long-term condition management. Through this agreement, TELUS will implement the CCMS solution, host and manage the application, provide network connectivity and security support, provide 24x7 customer service and required hardware such as PDAs and mobile phones, as well as all infrastructure and servers. TELUS garners award for Emergency Management Operating System CATAAliance honoured the TELUS Emergency Management Operating System (EMOS) with its award for Outstanding Product Development in July, recognizing the system for excellence in technological engineering, innovation and leadership. EMOS is a secure web-based system that supports the mitigation, preparation for, response and recovery from emergencies. It gives governments and first responders access to real-time information on an online mapping system, allowing them to share critical information instantly. Part of the TELUS SafetyNet suite of products and services, EMOS has been used by the governments of British Columbia, Alberta and Saskatchewan. TELUS speeds wireless up TELUS implemented even faster speeds to its EVDO service with upgrades to EVDO Rev A. Now available in regions containing 60 per cent of the Canadian population, the upgrade enables upload speeds up to seven times faster than previous EVDO services, with typical upload speeds of 300 to 400 kilobits per second and maximum upload speeds of 1.8 megabits per second. TELUS has invested more than $100 million to bring customers the latest technology for Canada's fastest coast-to-coast wireless network. International Blackberry In June, TELUS introduced the BlackBerry 8830 World Edition smartphone, expanding the suite of TELUS wireless devices for the global traveler. The high speed wireless BlackBerry works on both the CDMA and GSM networks, keeping jet-setting clients connected to email and voice services. The 8830 is also the first BlackBerry from TELUS to support a music and video player as well as TELUS Navigator. TELUS steps up music focus with sponsorship of Canadian Idol and launch of hot new music device TELUS is returning as Canadian Idol's wireless sponsor for the second year. Through the sponsorship, TELUS customers get exclusive Idol content including downloads of songs performed by contestants using TELUS Mobile Music, ringtones, and videos of weekly performances. In the quarter TELUS also made available the Samsung m620 mobile phone and music player. Featuring a slim dual faced form, one side is a mobile phone and the other is a stylish multimedia player with access to TELUS Mobile Music and TELUS Mobile Radio. To help Canadian Idol contestants communicate with friends and family and satisfy their craving for music, a Samsung m620 was given to each of the top 10 finalists. AMP'd Mobile In March 2007, AMP'd Mobile Canada Inc. launched its interactive and customized mobile entertainment, information and messaging services targeting the high value, young adult market segment in Canada. In early June, the U.S. based parent company AMP'd Mobile, Inc. entered bankruptcy proceedings. Certain costs related to the Canadian launch impacted our operating results. In addition a write down of our venture investment in the U.S. parent and other adjustments were incurred in the second quarter which are detailed in Section 4.2 of management's discussion and analysis. AMP'd Mobile sales have been discontinued in Canada. However, TELUS is reaffirming our commitment to AMP'd clients by ensuring that all voice and basic messaging services continue to function until we are able to contact subscribers to offer them a comparable or better package of voice and Spark multimedia services. TELUS World Skins Game caddie auction TELUS raised $220,000 for the Juvenile Diabetes Research Foundation with a charity caddie auction, long drive challenge, par 3 challenge and other activities at the June TELUS World Skins Game at Ontario's Raven Golf Club at Lora Bay. Five Canadian golf fans won the golfer's dream of caddying for a PGA star playing in the Skins game through the TELUS World Skins Game Charity Auction on eBay. Canadian fan favourite Stephen Ames upped the value of his charity caddie package by adding two practice round passes for the 2008 Masters golf tournament in Augusta, Georgia. TELUS Victoria Community Board TELUS launched an eighth community board in Victoria during the quarter. Part of a national program, the boards consist of community leaders and TELUS team members who are charged with building relationships with grassroots charities in their community and inviting them to apply for donations up to $20,000 in support of projects giving children a boost in life. The TELUS Victoria Community Board is chaired by Mel Cooper - a long-time B.C. broadcasting executive and recipient of the Order of Canada, Order of British Columbia, Lifetime Achievement Award and Entrepreneur of the Year honour. TELUS recognized for corporate citizenry This quarter, TELUS was recognized as a respected corporate citizen by two groups. Nationally, TELUS was named one of the Best 50 Corporate Citizens in Canada by Corporate Knights, a Canadian-based organization specializing in corporate social responsibility. Corporate Knights compiles this list based on environment, social and governance indicators. TELUS was also honoured as one of Alberta's Most Respected Corporations by Alberta Venture magazine as readers voted TELUS first in the 'Business Services' category. They were asked to rate organizations in Alberta they deemed most respectable based on the following criteria: corporate performance, culture of innovation, corporate brand, human resources practices, environmental stewardship and community involvement. 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 October 1, 2007 to shareholders of record on the close of business on September 10, 2007. This represents a 36% increase from the twenty-seven and a half cent quarterly dividend paid in 2006. About TELUS TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $8.9 billion of annual revenue and 10.9 million customer connections including 5.3 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 June 30 Three months Six months (millions except per share amounts) 2007 2006 2007 2006 ------------------------------------------------------------------------- (restated) (restated) ---------- ---------- OPERATING REVENUES $ 2,228.1 $ 2,135.2 $ 4,433.7 $ 4,215.7 ------------------------------------------------------------------------- OPERATING EXPENSES Operations 1,340.3 1,207.4 2,776.9 2,408.5 Restructuring costs 3.2 30.7 7.9 47.4 Depreciation 318.3 335.2 636.0 674.4 Amortization of intangible assets 72.5 46.9 122.1 110.8 1,734.3 1,620.2 3,542.9 3,241.1 ------------------------------------------------------------------------- OPERATING INCOME 493.8 515.0 890.8 974.6 Other expense, net 18.5 9.6 22.3 13.9 Financing costs 127.2 127.5 244.8 254.5 ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 348.1 377.9 623.7 706.2 Income taxes 93.7 18.7 173.0 134.8 Non-controlling interests 1.3 2.6 2.8 4.7 ------------------------------------------------------------------------- NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME 253.1 356.6 447.9 566.7 OTHER COMPREHENSIVE INCOME Change in unrealized fair value of derivatives designated as cash flow hedges 27.9 - 55.8 - Foreign currency translation adjustment arising from translating financial statements of self-sustaining foreign operations (6.2) 0.1 (3.8) 0.8 Change in unrealized fair value of available- for-sale financial assets (0.1) - (0.1) - 21.6 0.1 51.9 0.8 COMPREHENSIVE INCOME $ 274.7 $ 356.7 $ 499.8 $ 567.5 ------------------------------------------------------------------------- NET INCOME PER COMMON SHARE AND NON-VOTING SHARE - Basic $ 0.76 $ 1.03 $ 1.34 $ 1.63 - Diluted $ 0.75 $ 1.02 $ 1.32 $ 1.62 DIVIDENDS DECLARED PER COMMON SHARE AND NON- VOTING SHARE $ 0.375 $ 0.275 $ 0.75 $ 0.55 TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON- VOTING SHARES OUTSTANDING - Basic 333.5 344.9 335.3 347.1 - Diluted 336.9 348.5 338.3 350.6 TELUS Corporation interim consolidated balance sheets (unaudited) As at (millions) June 30, December 31, 2007 2006 ------------------------------------------------------------------------- (adjusted) ASSETS Current Assets Cash and temporary investments, net $ 2.2 $ - Short-term investments 54.8 110.2 Accounts receivable 571.8 707.2 Income and other taxes receivable 99.2 95.4 Inventories 158.8 196.4 Prepaid expenses and other 291.7 195.3 Current portion of derivative assets 48.7 40.4 ------------------------------------------------------------------------- 1,227.2 1,344.9 ------------------------------------------------------------------------- Capital Assets, Net Property, plant, equipment and other 7,296.7 7,466.5 Intangible assets subject to amortization 813.4 549.2 Intangible assets with indefinite lives 2,966.5 2,966.4 ------------------------------------------------------------------------- 11,076.6 10,982.1 ------------------------------------------------------------------------- Other Assets Deferred charges 1,064.6 956.6 Investments 30.6 35.2 Goodwill 3,168.8 3,169.5 ------------------------------------------------------------------------- 4,264.0 4,161.3 ------------------------------------------------------------------------- $ 16,567.8 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Cash and temporary investments, net $ - $ 11.5 Accounts payable and accrued liabilities 1,547.9 1,363.6 Income and other taxes payable 6.7 10.3 Restructuring accounts payable and accrued liabilities 28.8 53.1 Advance billings and customer deposits 609.4 606.3 Current maturities of long-term debt 6.4 1,433.5 Current portion of derivative liabilities 10.1 165.8 Current portion of future income taxes 258.1 137.2 ------------------------------------------------------------------------- 2,467.4 3,781.3 ------------------------------------------------------------------------- Long-Term Debt 4,800.5 3,474.7 ------------------------------------------------------------------------- Other Long-Term Liabilities 1,644.4 1,257.3 ------------------------------------------------------------------------- Future Income Taxes 1,018.6 1,023.3 ------------------------------------------------------------------------- Non-Controlling Interests 22.1 23.6 ------------------------------------------------------------------------- Shareholders' Equity 6,614.8 6,928.1 ------------------------------------------------------------------------- $ 16,567.8 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation interim consolidated statements of cash flows (unaudited) Three months Six months Periods ended June 30 (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 253.1 $ 356.6 $ 447.9 $ 566.7 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 390.8 382.1 758.1 785.2 Future income taxes 92.5 25.4 170.7 138.5 Share-based compensation (8.9) 12.7 129.7 21.1 Net employee defined benefit plans expense (21.0) (1.3) (45.0) (2.9) Employer contributions to employee defined benefit plans (14.7) (45.0) (48.6) (75.5) Restructuring costs, net of cash payments (7.3) 19.0 (24.3) 3.4 Amortization of deferred gains on sale-leaseback of buildings, amortization of deferred charges and other, net 4.3 (7.3) (4.8) 8.6 Net change in non-cash working capital 373.1 70.8 138.8 41.0 ------------------------------------------------------------------------- Cash provided by operating activities 1,061.9 813.0 1,522.5 1,486.1 ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (481.8) (458.8) (863.7) (779.3) Acquisitions - (19.5) - (19.5) Proceeds from the sale of property and other assets 1.3 0.6 1.3 8.0 Change in non-current materials and supplies, purchase of investments and other 2.7 (8.4) (7.7) (11.4) ------------------------------------------------------------------------- Cash used by investing activities (477.8) (486.1) (870.1) (802.2) ------------------------------------------------------------------------- FINANCING ACTIVITIES Common Shares and Non- Voting Shares issued 0.2 12.5 0.6 45.7 Dividends to shareholders (125.0) (94.8) (250.9) (190.7) Purchase of Common Shares and Non-Voting Shares for cancellation (169.5) (249.4) (370.2) (481.0) Long-term debt issued 993.8 662.2 2,091.6 842.8 Redemptions and repayment of long-term debt (1,811.1) (362.5) (2,104.6) (615.5) Partial repayment of deferred hedging liability - (309.4) - (309.4) Dividends paid by a subsidiary to non- controlling interests (4.3) (3.0) (4.3) (3.0) Other - - (0.9) - ------------------------------------------------------------------------- Cash provided (used) by financing activities (1,115.9) (344.4) (638.7) (711.1) ------------------------------------------------------------------------- CASH POSITION Increase (decrease) in cash and temporary investments, net (531.8) (17.5) 13.7 (27.2) Cash and temporary investments, net, beginning of period 534.0 (1.1) (11.5) 8.6 ------------------------------------------------------------------------- Cash and temporary investments, net, end of period $ 2.2 $ (18.6) $ 2.2 $ (18.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Interest (paid) $ (218.5) $ (271.5) $ (242.1) $ (284.6) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest received $ 5.6 $ 0.8 $ 7.5 $ 23.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes (inclusive of Investment Tax Credits) (paid) received, net $ (3.6) $ (0.7) $ 2.6 $ 95.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation segmented information (unaudited) Three-month periods ended June 30 Wireline Wireless (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ 1,180.1 $ 1,189.9 $ 1,048.0 $ 945.3 Intersegment revenue 28.7 24.8 6.7 5.2 ------------------------------------------------------------------------- 1,208.8 1,214.7 1,054.7 950.5 ------------------------------------------------------------------------- Operating expenses Operations expense 772.1 728.6 603.6 508.8 Restructuring costs 2.8 29.8 0.4 0.9 ------------------------------------------------------------------------- 774.9 758.4 604.0 509.7 ------------------------------------------------------------------------- EBITDA(1) $ 433.9 $ 456.3 $ 450.7 $ 440.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 308.7 $ 311.4 $ 173.1 $ 147.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ 125.2 $ 144.9 $ 277.6 $ 293.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) 772.1 728.6 601.8 508.8 Restructuring costs 2.8 29.8 0.4 0.9 ------------------------------------------------------------------------- 774.9 758.4 602.2 509.7 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ 433.9 $ 456.3 $ 452.5 $ 440.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 308.7 $ 311.4 $ 173.1 $ 147.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ 125.2 $ 144.9 $ 279.4 $ 293.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three-month periods ended June 30 Eliminations Consolidated (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ - $ - $ 2,228.1 $ 2,135.2 Intersegment revenue (35.4) (30.0) - - ------------------------------------------------------------------------- (35.4) (30.0) 2,228.1 2,135.2 ------------------------------------------------------------------------- Operating expenses Operations expense (35.4) (30.0) 1,340.3 1,207.4 Restructuring costs - - 3.2 30.7 ------------------------------------------------------------------------- (35.4) (30.0) 1,343.5 1,238.1 ------------------------------------------------------------------------- EBITDA(1) $ - $ - $ 884.6 $ 897.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 481.8 $ 458.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ - $ - $ 402.8 $ 438.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) (35.4) (30.0) 1,338.5 1,207.4 Restructuring costs - - 3.2 30.7 ------------------------------------------------------------------------- (35.4) (30.0) 1,341.7 1,238.1 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ - $ - $ 886.4 $ 897.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 481.8 $ 458.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ - $ - $ 404.6 $ 438.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) (from above) $ 886.4 $ 897.1 Incremental charge(3) 1.8 - ---------------------------------------------- EBITDA (from above) 884.6 897.1 Depreciation 318.3 335.2 Amortization 72.5 46.9 ---------------------------------------------- Operating income 493.8 515.0 Other expense, net 18.5 9.6 Financing costs 127.2 127.5 ---------------------------------------------- Income before income taxes and non- controlling interests 348.1 377.9 Income taxes 93.7 18.7 Non-controlling interests 1.3 2.6 ---------------------------------------------- Net income $ 253.1 $ 356.6 ---------------------------------------------- ---------------------------------------------- (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 $1.8 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. TELUS Corporation segmented information (unaudited) Six-month periods ended June 30 Wireline Wireless (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ 2,385.7 $ 2,388.5 $ 2,048.0 $ 1,827.2 Intersegment revenue 53.8 48.3 13.0 11.1 ------------------------------------------------------------------------- 2,439.5 2,436.8 2,061.0 1,838.3 ------------------------------------------------------------------------- Operating expenses Operations expense 1,677.5 1,469.0 1,166.2 998.9 Restructuring costs 7.2 44.7 0.7 2.7 ------------------------------------------------------------------------- 1,684.7 1,513.7 1,166.9 1,001.6 ------------------------------------------------------------------------- EBITDA(1) $ 754.8 $ 923.1 $ 894.1 $ 836.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 579.4 $ 570.4 $ 284.3 $ 208.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ 175.4 $ 352.7 $ 609.8 $ 627.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) 1,524.4 1,469.0 1,144.0 998.9 Restructuring costs 7.2 44.7 0.7 2.7 ------------------------------------------------------------------------- 1,531.6 1,513.7 1,144.7 1,001.6 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ 907.9 $ 923.1 $ 916.3 $ 836.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 579.4 $ 570.4 $ 284.3 $ 208.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ 328.5 $ 352.7 $ 632.0 $ 627.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Six-month periods ended June 30 Eliminations Consolidated (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ - $ - $ 4,433.7 $ 4,215.7 Intersegment revenue (66.8) (59.4) - - ------------------------------------------------------------------------- (66.8) (59.4) 4,433.7 4,215.7 ------------------------------------------------------------------------- Operating expenses Operations expense (66.8) (59.4) 2,776.9 2,408.5 Restructuring costs - - 7.9 47.4 ------------------------------------------------------------------------- (66.8) (59.4) 2,784.8 2,455.9 ------------------------------------------------------------------------- EBITDA(1) $ - $ - $ 1,648.9 $ 1,759.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 863.7 $ 779.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ - $ - $ 785.2 $ 980.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) (66.8) (59.4) 2,601.6 2,408.5 Restructuring costs - - 7.9 47.4 ------------------------------------------------------------------------- (66.8) (59.4) 2,609.5 2,455.9 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ - $ - $ 1,824.2 $ 1,759.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 863.7 $ 779.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ - $ - $ 960.5 $ 980.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) (from above) $ 1,824.2 $ 1,759.8 Incremental charge(3) 175.3 - ---------------------------------------------- EBITDA (from above) 1,648.9 1,759.8 Depreciation 636.0 674.4 Amortization 122.1 110.8 ---------------------------------------------- Operating income 890.8 974.6 Other expense, net 22.3 13.9 Financing costs 244.8 254.5 ---------------------------------------------- Income before income taxes and non- controlling interests 623.7 706.2 Income taxes 173.0 134.8 Non-controlling interests 2.8 4.7 ---------------------------------------------- Net income $ 447.9 $ 566.7 ---------------------------------------------- ---------------------------------------------- (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 $175.3 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. Caution regarding 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 2.5% 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 $35 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); 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 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); any prospective acquisitions or divestitures; 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 annual and 2007 first quarter Management's discussion and analyses, as well as updates reported in Section 10 of this document. ------------------------------------------------------------------------- Management's discussion and analysis August 1, 2007 The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month and six-month periods ended June 30, 2007 and 2006, and should be read together with TELUS' interim 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' interim 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 interim 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 second quarter and first half 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 second quarter and first half of 2007 ------------------------------------------------------------------------- 6. Financial condition A discussion of changes in the balance sheet for the six-month period ended June 30, 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' revised 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 Canadian telecommunications industry developments In mid-April 2007, Canada's largest telecommunications service provider BCE Inc. announced a strategic review process. Three consortia that included Canadian pension funds and U.S. private equity investors signed non-disclosure and standstill agreements to gain access to a BCE data room in order to enable them to potentially prepare an offer to BCE shareholders under a competitive auction process. On June 21, 2007, TELUS confirmed that it had entered into a mutual non-disclosure and standstill agreement and was pursuing non-exclusive discussions to acquire BCE. On June 26, the three consortia submitted bids to acquire BCE, while TELUS announced that inadequacies in BCE's bid process did not make it possible for TELUS to submit an offer as part of the strategic review process announced by BCE. On June 30, BCE announced that it had entered into a definitive agreement for BCE to be acquired by a consortium led by Teachers Private Capital, a division of the Ontario Teachers Pension Plan. The BCE Board recommended that their common shareholders accept the offer at an all-cash price of $42.75 per common share. Other consortium members include Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. TELUS in July continued its assessment of whether it should potentially make a competing offer for BCE. TELUS has concluded this assessment and it does not intend to submit a competing offer to acquire BCE. See Caution regarding forward-looking statements. In July 2007, the Minister of Industry and the Minister of Finance announced the creation of a Competition Review Panel to review Canadian competition and investment legislation: the Competition Act and the Investment Canada Act. The Panel will report to the Minister of Industry by June 30, 2008. Implications for the telecommunications industry include possible change to, or removal of, the effective 47% restriction on foreign ownership for the telecom sector. See Section 10.1 Regulatory - Foreign ownership restrictions. On July 23, a new independent telecommunications complaints commission, known as the Commissioner for Complaints for Telecommunications Services (CCTS), was launched to help consumers and small businesses handle un-resolved service concerns. The CCTS was created in response to a request from the Minister of Industry to telecommunications companies to work together to establish and fund this independent agency. Founding members TELUS, Bell Aliant, Bell Canada, SaskTel, MTS Allstream, Rogers, Virgin Mobile, Cogeco, Videotron, and Vonage filed a joint proposal for the structure and mandate of the new organization with the CRTC (Canadian Radio-television and Telecommunications Commission) for its consideration. The CCTS is intended to assist where the normal complaint resolution process of member companies do not resolve concerns. 1.3 Consolidated highlights ------------------------------------------------------------------------- ($ millions, except shares, per share Quarters ended Six-month periods amounts, subscribers June 30 ended June 30 and ratios) 2007 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Consolidated statements of income ------------------------------------------------------------------------- Operating revenues 2,228.1 2,135.2 4.4 % 4,433.7 4,215.7 5.2 % Operating income 493.8 515.0 (4.1)% 890.8 974.6 (8.6)% Net-cash settlement feature expense(1) 1.8 - - 175.3 - - -------- -------- -------- -------- -------- ------- Operating income (as adjusted) 495.6 515.0 (3.8)% 1,066.1 974.6 9.4 % Income before income taxes 348.1 377.9 (7.9)% 623.7 706.2 (11.7)% Net-cash settlement feature expense 1.8 - - 175.3 - - -------- -------- -------- -------- -------- ------- Income before income taxes (as adjusted) 349.9 377.9 (7.4)% 799.0 706.2 13.1 % Net income 253.1 356.6 (29.0)% 447.9 566.7 (21.0)% Net-cash settlement feature expense, after tax 1.3 - - 109.0 - - -------- -------- -------- -------- -------- ------- Net income (as adjusted) 254.4 356.6 (28.7)% 556.9 566.7 (1.7)% Earnings per share, basic ($) 0.76 1.03 (26.2)% 1.34 1.63 (17.8)% Net-cash settlement feature per share - - - 0.33 - - -------- -------- -------- -------- -------- ------- Earnings per share, basic (as adjusted) (2) ($) 0.76 1.03 (26.2)% 1.67 1.63 2.5 % Earnings per share, diluted ($) 0.75 1.02 (26.5)% 1.32 1.62 (18.5)% Cash dividends declared per share ($) 0.375 0.275 36.4 % 0.75 0.55 36.4 % ------------------------------------------------------------------------- Consolidated statements of cash flows ------------------------------------------------------------------------- Cash provided by operating activities 1,061.9 813.0 30.6 % 1,522.5 1,486.1 2.4 % Cash used by investing activities 477.8 486.1 (1.7)% 870.1 802.2 8.5 % Capital expenditures 481.8 458.8 5.0 % 863.7 779.3 10.8 % Cash used by financing activities 1,115.9 344.4 n.m. 638.7 711.1 (10.2)% ------------------------------------------------------------------------- Subscribers and other measures ------------------------------------------------------------------------- Subscriber connections(3) (thousands) at June 30 10,885 10,404 4.6 % EBITDA(4) 884.6 897.1 (1.4)% 1,648.9 1,759.8 (6.3)% Net-cash settlement feature expense 1.8 - - 175.3 - - -------- -------- -------- -------- -------- ------- EBITDA (as adjusted)(4) 886.4 897.1 (1.2)% 1,824.2 1,759.8 3.7 % Free cash flow(5) 161.7 191.0 (15.3)% 642.5 826.6 (22.3)% ------------------------------------------------------------------------- Debt and payout ratios ------------------------------------------------------------------------- Net debt to total capitalization ratio (%)(6) 48.0 47.8 0.2 pts Net debt to EBITDA - excluding restructuring(6) 1.8 1.8 - Dividend payout ratio (%)(7) 50 46 4 pts ------------------------------------------------------------------------- n.m. - not meaningful; pts - percentage point(s) (1) A non-cash expense recorded in 2007 for introducing a net-cash settlement feature for share option awards granted prior to 2005. (2) Earnings per share - basic (as adjusted) excludes the charge for introducing the net cash settlement feature, is regularly reported to the chief operating decision-maker and corresponds to the definition used in setting TELUS' 2007 basic earnings per share target and revised guidance. (3) The sum of wireless subscribers, network access lines and Internet subscribers measured at the end of the respective periods. (4) 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. (5) Free cash flow is a non-GAAP measure. See Section 11.2 Free cash flow. (6) See Section 11.4 Definition of liquidity and capital resource measures. (7) The current annualized rate of dividend declared per share divided by basic earnings per share for the 12-month trailing period. ------------------------------------------------------------------------- TELUS' annual guidance for 2007, described in Section 9 of its 2007 first quarter Management's discussion and analysis included the expectation that a non-cash charge of approximately $180 million would be recorded in Operations expense as a result of introducing a net-cash settlement feature for share option awards granted prior to 2005. For the six-month period ended June 30, 2007, $175.3 million in respect of this charge was recorded in Operations expense ($109.0 million after-tax impact in Net income or 33 cents per share). Highlights for the second quarter and first six months of 2007, as discussed in Section 5: Results from operations, include the following: - Subscriber connections increased by 481,000 during the 12-month period ended June 30, 2007. The number of wireless subscribers grew by 11.3% to 5.27 million, the number of Internet subscribers grew by 8.3% to 1.135 million and the number of network access lines decreased by 3.1% to 4.48 million. - Operating revenues increased by $92.9 million and $218.0 million, respectively, in the second quarter and first six months of 2007, when compared to the same periods in 2006 due primarily to growth in wireless network revenues and wireline data revenues, which more than offset declines in long distance revenue. - Operating income decreased by $21.2 million and $83.8 million, respectively, in the second quarter and first six months of 2007 when compared with the same periods in 2006. When adjusted to exclude the net-cash settlement feature expense recorded in 2007, Operating income decreased by $19.4 million in the second quarter and increased by $91.5 million in the first six months. In the second quarter, growth in wireless EBITDA (as adjusted) and a lower depreciation expense were more than offset by lower wireline EBITDA (as adjusted) and higher amortization expense for a wireline billing and client care system put into service in March. For the six-month period, increased wireless EBITDA (as adjusted) and lower net depreciation and amortization expense exceeded erosion in wireline EBITDA (as adjusted). - Income before income taxes decreased by $29.8 million and $82.5 million, respectively, in the second quarter and first six months of 2007 when compared with the same periods in 2006. Excluding the effect of the net-cash settlement feature, Income before income taxes decreased by $28.0 million and increased by $92.8 million, respectively, as a result of changes in adjusted operating income and a second quarter 2007 equity investment write-off, partly offset in the six-month period by lower financing costs. - Net income included favourable tax-related adjustments of approximately $10 million or three cents per share in the second quarter of 2007 and approximately $14 million or four cents per share in the first six months of 2007. This compares with favourable tax adjustments of approximately $118 million or 34 cents per share in the second quarter of 2006 and $115 million or 33 cents per share in the first six months of 2006. - Net income and EPS for the second quarter of 2007 decreased by $103.5 million and 27 cents, respectively, when compared to the same period in 2006. Similarly, Net income and EPS for the first six months of 2007 decreased by $118.8 million and 29 cents, respectively, when compared to the same period in 2006. Excluding the effect of the net-cash settlement feature for first six months of 2007, Net income (as adjusted) decreased by $9.8 million while EPS - basic (as adjusted) increased by four cents. - The average number of shares outstanding during second quarter and first half of 2007 were approximately 3% lower than in 2006 due to share repurchase programs and a lower number of shares issued because of the net-cash settlement feature for options. Highlights for the second quarter and first half of 2007, as discussed in Section 7: Liquidity and capital resources, include the following: - Cash provided by operating activities increased by $248.9 million and $36.4 million, respectively, in the second quarter and first six months of 2007, when compared to the same periods in 2006. Contributing to the increase was reduced interest paid. Proceeds from securitized accounts receivable increased by a net $350 million during the second quarter of 2007, compared with an increase of $135 million during the second quarter of 2006 for a comparative increase in operating cash flow of $215 million. - Cash used by investing activities decreased by $8.3 million in the second quarter of 2007 and increased by $67.9 million in the first six months of 2007, when compared to the same periods in 2006. The decrease in the second quarter was due mainly to an acquisition in 2006. Otherwise, investing activities increased because of higher capital expenditures to support new enterprise customers in Central Canada as well as network sustainment, continued enhancement of digital wireless capacity and coverage, and strategic investments in high-speed EVDO (evolution data optimized) wireless network technology. - On May 15, 2007, TELUS' entered into an unsecured commercial paper program, which is backstopped by a portion of its credit facility, enabling it to issue commercial paper up to a maximum aggregate of $800 million (or U.S. dollar equivalent), to be used for general corporate purposes. - Cash used by financing activities increased by $771.5 million in the second quarter of 2007 and decreased by $72.4 million in the first six months of 2007, when compared to the same periods in 2006. The increase in the second quarter included the June 1, 2007 repayment of $1,483.3 million (U.S. $1,166.5 million) for 7.50% Notes that matured, partly offset by the net issue of $663.5 million of commercial paper. The decrease for the six-month period included a lower amount used to repurchase shares under the normal course issuer bid (NCIB), net of increased dividend payments. - Free cash flow decreased by $29.3 million and $184.1 million, respectively, in the second quarter and first six months of 2007, when compared to the same periods in 2006. The decrease for the second quarter was caused by lower EBITDA net of restructuring and share-based compensation payments, and higher capital expenditures partly offset by lower interest payments. The decrease for the first six months of 2007 was caused by lower EBITDA net of restructuring payments, higher capital expenditures, and lower recoveries of cash taxes, partly offset by shared-based compensation expense in excess of payments and lower interest payments. - Net debt to total capitalization of 48% at June 30, 2007 continued to be in the long-term target range of 45 to 50%. - Net debt to EBITDA of 1.8 continued to be in the long-term target range of 1.5 to 2.0 times. - The dividend payout ratio of 50%, measured as the annualized dividend declared in the second quarter divided by earnings per share for the 12-month trailing period, was at the guideline midpoint of 45 to 55% of net sustainable earnings; favourable tax-related adjustments for the trailing 12 months nearly offset the unfavourable impact of introducing the net cash settlement feature in 2007. 2. Core business, vision and strategy The following discussion is qualified in its entirety by the Caution regarding 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 annual and 2007 first quarter Management's discussions and analyses, 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. Recent activities supporting, and events affecting, the Company's six strategic imperatives include the following: Building national capabilities across data, IP, voice and wireless In May, TELUS announced in that it expects to invest $23 million in Quebec by the fall of 2007 to expand and upgrade wireless 1X digital network coverage in up to 30 additional communities, as well as enhance existing digital coverage in the greater Montreal and Quebec City areas where TELUS network traffic continues to increase. Through the expansion, 30 new communities will have access to the full suite of TELUS Spark(TM) mobile services that includes entertainment, information, messaging, downloadable music, ringtones and games. In July, TELUS announced the availability of faster speeds on its wireless high-speed EVDO network in B.C., Alberta and Quebec. The EVDO network was upgraded to the next generation, Rev A, which has typical download speeds of 450 to 800 kilobits per second (with a maximum possible speed of 3.1 megabits per second) and typical upload speeds of 300 to 400 kilobits per second (with a maximum possible speed of 1.8 megabits per second). The speed increase helps improve the experience of streaming services and sharing of large data files such as pictures. TELUS wireless high speed services are available in areas of British Columbia, Alberta, Winnipeg, Ontario and Quebec, reaching more than 60 per cent of Canadians. When traveling in the United States, TELUS customers can roam onto EVDO Rev A networks in 242 major metropolitan areas. TELUS has a variety of EVDO Rev A-capable devices available now and more are expected. These products operate throughout the full EVDO coverage area and are backward compatible with the 1X data network, which offers coverage to 94 per cent of Canadians, when outside the EVDO coverage area. The Company enhanced wireless international roaming for its business and consumer customers with the June launch of the BlackBerry 8830 World Edition smartphone. TELUS also expanded its global roaming services so that users of the new BlackBerry can access voice and data services internationally using GSM-based networks. In North America, coverage is provided on CDMA-based 1X and high-speed EVDO networks. In July, TELUS launched its first Ethernet to the suite (ETTS) building - the Melville - a 42-story multi-dwelling unit tower in Vancouver. ETTS leverages the latest technology to deliver greater bandwidth and higher speeds to customers. Melville residents will have access to high-speed Internet at up to 25 Mbps (five to seven faster than average) and the opportunity to leverage the full suite of Future Friendly(R) Home products and services. Focusing relentlessly on the growth markets of data, IP and wireless TELUS was selected this quarter by the Department of Public Works and Government Services Canada through a competitive bid process to provide and manage the telecommunications services for the Department of National Defence (DND), including national and international locations. TELUS will provide managed telecommunications services including voice, data, video and IP solutions. The advanced telecommunications framework supports DND's goals of accessing a cost-effective infrastructure that supports their current requirements and, at the same time, provides a secure IP backbone for new services and solutions.This contract value is estimated at $200 million over five years. In addition, TELUS is providing the Government of Alberta with the latest multimedia technology for some 73 courtrooms in the new Calgary Courts Centre. TELUS will design, supply, install and maintain technology to provide digital recording, video-conferencing, remote witness facilitation, electronic annotation, and remote management, which is expected to improve safety and efficiency in the justice system. The Company was also selected to provide the TELUS Community Care Management Solution (CCMS) to Ontario-based Closing the Gap Healthcare Group. CCMS is an electronic health record and patient management system that makes patient data available to community, home care and long-term care providers, wherever their jobs take them. TELUS will implement, host and manage application software from New Zealand-based Healthphone, as well as provide network connectivity and security support, "24x7" customer service and required hardware such as personal digital assistants, mobile phones, infrastructure and servers. Building integrated solutions that differentiate TELUS from its competitors TELUS has introduced a number of new services in 2007. One new solution is TELUS Fleet Tracking Bundle for small businesses, which allows companies to efficiently track their mobile assets in real-time using global positioning system (GPS) technology. The bundle includes a TELUS wireless data plan, Fleet Complete GPS software from Complete Innovations and a GPS modem professionally installed by TELUS dealers or retailer Best Buy. Another new service is a new wireless tool for Canadian financial institutions, TELUS Mobile Customer Self Service(TM). The service provides two- way interaction between financial institutions and their customers, enabling secure banking transactions that include actionable alerts (such as questionable account activity or transaction approvals), on-demand access to account information and no-hold customer service via text messaging. Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business In March 2007, AMP'D Mobile Canada Inc. launched its interactive and customized mobile entertainment, information and messaging services targeting the high value, young adult (ages 18 to 35) market segment in Canada. In early June, the U.S. based parent company AMP'D Mobile, Inc. entered bankruptcy proceedings in the U.S. As a result, AMP'D Mobile sales have been discontinued in Canada. See Section 4.2 for financial impacts on TELUS results. 3. Key performance drivers The following discussion is qualified in its entirety by the Caution regarding 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 annual and 2007 first quarter Management's discussions and analyses, as well as 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 Caution regarding 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. Early indications are that implementing wireless number portability (WNP) in March 2007 has been a net contributing factor to increased subscriber loading (inbound porting exceeded outbound porting), but has also contributed to increased wireless customer retention costs (8.2% of network revenue in the second quarter of 2007 compared to 6.2% of network revenue in the same period in 2006) and increased subscriber churn (1.45% in the second quarter of 2007 compared to 1.30% in the same period in 2006). 4.2 Operational capabilities Regulation Following the April 2007, Federal Government Order-in-Council that varied the conditions for forbearance from regulation of local services, TELUS filed forbearance applications for residential local services in Victoria, Vancouver, Calgary, Edmonton and Rimouski. TELUS later applied for deregulation of regulated business phone services in phone exchanges covering 78 per cent of business lines in B.C. and Alberta, and 52 per cent in eastern Quebec. The CRTC granted forbearance for residential services in Fort McMurray on July 25, with additional rulings expected for Victoria, Vancouver, Calgary and Edmonton by early August. Forbearance was previously received for Fort McMurray, contingent on meeting competitor quality-of-service measures, which are now met. For further discussion, see Section 10.1 Regulatory. Development of a new billing and client care 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. During the second quarter of 2007, the transition from pilot to full scale implementation resulted in initial system difficulties that reduced order processing capability, which caused increased installation backlogs and higher than expected costs such as extra call centre resources in order to maintain service levels. The critical billing function performed as expected and at this time the backlogs have been significantly reduced and call centre operations are expected to return to normal levels. See Section 10.3 Process risks. Transition to the new system reduced Wireline EBITDA by approximately $29 million in the second quarter of 2007, including $16 million of costs primarily related to additional temporary labour to perform system fixes and maintain service levels, as well as a one-time reduction of $13 million in long distance revenue. The one-time revenue reduction resulted from system enhancements, which provided management with better data for estimating earned, but unbilled revenue. AMP'D Mobile Canada In early June, the U.S. based parent company AMP'D Mobile, Inc. entered bankruptcy proceedings in the U.S. As a result, AMP'D Mobile sales have been discontinued in Canada. TELUS' interim Consolidated financial statements for June 30, 2007 include a pre-tax write-off of its $11.8 million equity investment in AMP'D Mobile, Inc. (reflected in Other expense, net) as well as pre-tax adjustments of approximately $5 million for accelerated depreciation and approximately $2 million in Operations expense. 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. 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 second quarter of 2007, a total of 2.7 million Common and Non-Voting Shares were repurchased for cancellation for an outlay of $169.5 million. From December 20, 2004 to June 30, 2007, TELUS repurchased a total of 45.6 million Common and Non-Voting Shares for $2.14 billion under three NCIB programs. See Section 7.3 Cash used by financing activities. Pay dividends The dividend declared in the second quarter of 2007, payable on July 1, was 37.5 cents per share, an increase of 36.4% from the dividend declared in the second quarter of 2006. Use proceeds from securitized receivables and bank facilities, as needed, to supplement free cash flow and meet other cash requirements During the second quarter of 2007, the balance of proceeds from securitized accounts receivable increased from $150 million to $550 million on May 31, and was later reduced to $500 million at June 30. The proceeds were used for general corporate purposes including repayment of U.S. $1,166.5 million 7.50% Notes that matured June 1. Maintain a minimum $1 billion in unutilized liquidity TELUS had approximately $1.3 billion of available liquidity from unutilized credit facilities at June 30, 2007. See Section 7.5 Credit facilities. Maintain position of fully hedging foreign exchange exposure for indebtedness Maintained for the 8.00% U.S. dollar Notes due 2011, the one remaining foreign currency-denominated debt issue. 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 second quarter commercial paper issue of $663.5 million and the second quarter increase in proceeds from securitized accounts receivable, were used for general corporate purposes and repayment of $1,483.3 million for the June 1 maturity of U.S. $1,166.5 million, 7.50% Notes. 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 June 30, 2007, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. Three of four credit rating agencies placed their outlooks under review on June 21, 2007, when TELUS announced that it was in non-exclusive discussions to acquire BCE. See Section 7.7 Credit Ratings. ------------------------------------------------------------------------- 4.4 Changes in internal control over financial reporting There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 5. 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. 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 ]