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TELUS Reports Third Quarter ResultsVANCOUVER, Nov. 2 /PRNewswire-FirstCall/ -- TELUS Corporation today reported that third quarter 2007 revenue increased 4.5 per cent to $2.31 billion from a year ago. The performance was driven by nine per cent growth in both wireless revenue and wireline data revenue, partially offset by declines in local and long distance wireline revenues. Consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) increased 3.6 per cent to $987 million due to an increase in wireless EBITDA of eight per cent, while wireline EBITDA decreased by one per cent. Net income in the quarter was $410 million and earnings per share (EPS) were $1.24, up 28 per cent and 32 per cent respectively. Net income included favourable tax related adjustments of approximately $93 million or 28 cents per share, compared to $30 million or nine cents a year ago, as well as a favourable expense recovery this quarter of $4.9 million or one cent per share after tax for options with a net-cash settlement feature. Also contributing to the increase in EPS were higher EBITDA, lower financing charges and a reduction in shares outstanding as a result of the repurchases pursuant to the normal course issuer bid. Excluding tax related adjustments in both periods and the option expense recovery, net income was $312 million and EPS were $0.95, up 7.7 per cent and 11 per cent, respectively. Free cash flow remained strong at $503 million, down three per cent due to timing of cash interest payments and higher wireless capital expenditures. During the third quarter TELUS continued to repurchase shares under its normal course issuer bid program, completing $232 million of share buy backs. Average shares outstanding were three per cent lower than a year ago. Full year 2007 guidance has been updated and includes a slightly lower consolidated revenue range of $9.125 to $9.175 billion, a narrowing of the consolidated EBITDA range (as adjusted) - now at $3.725 to $3.775 billion, as well as an increase in the EPS (as adjusted) range to $3.55 to $3.65. Capital expenditure guidance remains unchanged. FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- C$ in millions, except per share amounts 3 months ended September 30 % (unaudited) 2007 2006 Change ------------------------------------------------------------------------- Operating revenues 2,309.9 2,210.7 4.5% EBITDA(1) 987.0 952.4 3.6% EBITDA (as adjusted)(2) 979.8 952.4 2.9% Income before income taxes and non-controlling interest 490.2 448.5 9.3% Net income(3) 409.9 319.6 28.3% Earnings per share (EPS), basic(3) 1.24 0.94 31.9% Cash provided by operating activities 831.8 570.4 45.8% Capital expenditures 434.1 423.9 2.4% Free cash flow(4) 502.9 519.8 (3.3%) (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 expense recovery of $7.2 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 $93 million or 28 cents per share, compared to $30 million or 9 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 "The third quarter results are a marked improvement compared to the second quarter due to TELUS' continued strength in wireless and data combined with improved efficiency of wireless marketing and retention. Also encouraging was a reduction in incremental costs and improved performance associated with the new wireline billing and client care system in Alberta." Mr. Entwistle stated "We experienced a sequential quarterly increase of 17,000 high speed customer additions, as improved order fulfillment and system stability allowed us to renew our marketing efforts in Alberta during the third quarter. I was also pleased to observe that we generated higher wireless gross additions, whilst maintaining stable customer loyalty and retention and strong net customer additions of 135,000. This was achieved with reduced marketing costs of acquisition." Mr. Entwistle also noted "We remain committed to returning capital to our shareholders as evidenced by our announcement today of a 20 per cent increase to the next quarterly dividend - the fourth year in a row of sizeable increases." Robert McFarlane, executive vice president and CFO, noted, "TELUS continues to demonstrate considerable financial strength and strong cash flow. Our financial policies have been reviewed and remain consistent. The strong balance sheet of TELUS along with strong operating performance enables TELUS to invest appropriately for future growth in our core telecom businesses while returning significant capital to investors in the form of growing dividends and substantial share repurchases. We now have a three year track record for significant ongoing share repurchases, which in the past year alone has led to a three per cent reduction in average shares outstanding. Notably, we intend to again renew in December our normal course issuer bid share repurchase program for 2008." "Further reflecting the financial strength of TELUS is the company's healthy investment grade credit ratings, the successful mid-year refinancing of $1.5 billion at much lower interest rates, and having no major maturities of debt until 2011," McFarlane noted. "Furthermore, TELUS has no exposure to asset backed commercial paper, either corporately or in our defined benefit pension plans." ------------------------------------------------------------------------- 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 - October 31, 2007. ------------------------------------------------------------------------- OPERATING HIGHLIGHTS TELUS wireless - Net subscriber additions remained strong at 134,500, a small 2.0% decrease from the same quarter in 2006. Postpaid additions were 98,200, down 9.6%, while prepaid loading increased by 27% to 36,300 - Revenues increased by $95 million or 9.4% to $1.1 billion in the third quarter of 2007, when compared with the same period in 2006 - Wireless data revenue increased $42 million or 56% due to migration to full function personal data devices and increased text messaging - ARPU (average revenue per subscriber unit per month) decreased by 1.3% to $64.80 as a result of increased voice re-price due to competitive pressures. The data component continued to increase, up by 41% to $7.20 - EBITDA (as adjusted) increased by $40 million over the third quarter of 2006, representing 8.3% growth, due to network revenue growth - Cost of acquisition per gross addition decreased 1.8% year-over-year and 11% sequentially to $379 - Blended monthly subscriber churn increased to 1.43% from 1.36% a year ago but was slightly lower than 1.45% in the second quarter. Postpaid churn remained low at 1.05%. - Cash flow (EBITDA as adjusted less capital expenditures) increased $21 million or 5.7% to $391.5 million in the quarter due to an increase in EBITDA. Capital expenditures also increased with continued investments in higher speed wireless networks. TELUS wireline - Revenues increased by $4 million or 0.4% to $1.2 billion in the third quarter of 2007, when compared with the same period in 2006. Strong data growth offset declines in local and long distance revenues - Data revenues increased by $36 million or 8.7% due to strong year- over-year high-speed Internet growth and enhanced data and hosting services - EBITDA (as adjusted) decreased by $13 million or 2.7%, due to higher expenses including $8 million of additional expenses related to the new billing and client care system implemented in Alberta in the second quarter - TELUS added 31,300 net high-speed Internet subscribers, building TELUS' high-speed base to 994,000, a 14% increase from a year ago. High-speed Internet net additions recovered from the second quarter as improved system stability allowed Internet marketing efforts to be renewed in the third quarter - Network access lines (NALs) declined by 35,000 in the quarter. Total NALs were down 3.0% 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 as adjusted less capital expenditures) declined 2.5% to $154 million, due to the decrease in EBITDA Corporate Developments Local phone service deregulated The CRTC accepted TELUS' application for deregulation of residential and business phone service in several communities across British Columbia, Alberta, and Quebec in the quarter. Residential phone service in Vancouver, Victoria, Calgary, Edmonton, and Rimouski was deregulated, as was local business service in all major centres in TELUS' operating territory. TELUS has applied for deregulation of residential phone service in several dozen additional communities, and expects decisions from the CRTC in the coming months. The rules announced by Industry Canada in the spring 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. TELUS continues share repurchases During the third quarter, TELUS continued to purchase shares under its Normal Course Issuer Bid (NCIB). Repurchases in the quarter totaled approximately 4.3 million shares for a total outlay of $232 million. For nine months this year, the total outlay has been $602 million. Since commencing in December 2004, TELUS has repurchased a total of 49.9 million shares for $2.37 billion under three NCIB programs, resulting in an 8.7 per cent reduction in shares outstanding. Yellow Pages Group selects TELUS as IT provider in west TELUS announced on October 31 that the Yellow Pages Group (YPG) has selected it to provide support services and manage information technology infrastructure for their Western Canada-based operations. The long-term contract with Canada's largest directory publisher is valued at approximately $90 million. Under the agreement, TELUS will provide a range of services including IT infrastructure operations, IP applications development, wireless services, document services, and managed network services ranging from help desk to desktop to computing operations. TELUS will also provide facilities and managed services for YPG's online directory system in TELUS Internet Data Centres. TELUS signs eight-year deal with Western Canada Lottery Corporation TELUS signed an eight-year contract with the Western Canada Lottery Corporation to implement an Alberta-wide secure IP-based network. The network will support approximately 2,350 on-line lottery ticket terminals, connecting the machines throughout Alberta with the company's central computer system in Winnipeg. The TELUS IP network will also provide the communications infrastructure needed to support any network growth plans over the coming years. TELUS launches online assessment tool In September, TELUS launched a new strategic online assessment tool, the TELUS Online Wireless Solutions Roadmap. The tool helps businesses evaluate their plans for strategic wireless investments and ensure they will drive business performance. The Wireless Solutions Roadmap addresses an anticipated shift in the market. New research from TELUS and IDC Canada shows Canadian business is on the cusp of a new wave of adoption in wireless business technology as firms move beyond the basics of mobile email and web access. More than 90 per cent of Canadian firms now have mobile email and web access. TELUS first in North America to launch two HTC smartphones TELUS and High Tech Computer Corp. (HTC), the world's leading provider of Microsoft Windows Mobile-based smart devices, announced the first North American availability of the HTC Touch and the HTC S640. The HTC Touch is a deceptively small and stylish smartphone that ushers in an innovative new concept in intuitive touch screen navigation. The HTC S640, with a full QWERTY-keypad, is a smartphone that brings a variety of productivity and entertainment solutions to clients. Both devices feature a variety of Windows Mobile services and operate on the EVDO network, Canada's fastest coast-to-coast mobile network. Wireless data add-on plan, sliver BlackBerry Pearl cater to consumer customers Today, TELUS introduced the BlackBerry Pearl 8130 with its silver-coloured finish and a new $15 add-on wireless data plan delivering up to two megabytes of email usage to consumers. The BlackBerry Pearl 8130 is tailored for consumers looking for email and web access along with multimedia services in a single device. The Pearl gives customers the ability to listen to music, record video, take photos and store up to eight gigabytes of data. It is also the first smartphone in Canada preloaded with the popular social network application Facebook. Complementing the Pearl, TELUS also introduced a new consumer wireless data plan that can be added to existing packages. Email 15 provides up to two megabytes of email monthly - the equivalent of 600 emails, perfect for clients that want to stay connected while on the go. Led Zeppelin makes mobile debut only at TELUS in Canada TELUS and Led Zeppelin have partnered to provide wireless customers with an entirely new way to access the legendary rock band's music. Starting November 13, TELUS will be the exclusive wireless service provider in Canada for the band's ring tones, wallpapers, and wireless song downloads. TELUS first to bring Canadians the LG Shine TELUS is the first Canadian company to offer the LG Shine mobile phone. Part of LG's iconic series of phones has been a favourite of Canadian fashion leaders. The LG Shine is the latest in phone fashion with a sleek metal casing, cool reflective look and high definition screen. This phone also features a high quality camera and full line-up of SPARK entertainment and messaging services including access to TELUS Mobile Music, TELUS Mobile TV, TELUS Mobile Radio and Instant Messaging. TELUS and ZTE launch award winning wireless phone In August, TELUS and ZTE announced the exclusive availability of the ZTE D90, featuring Digit Wireless' Fastap keypad. The first mobile handset in the world to feature both Zi Corporation's eZiType software for increased data input speed and accuracy, and the Digit Wireless Fastap keyboard, the ZTE D90 is ideal for heavy messengers. With the announcement, ZTE became the first wireless phone manufacturer from mainland China to directly offer a device for sale in Canada. The Ontario College of Art & Design partnership fostering innovative phone design TELUS and the Ontario College of Art & Design (OCAD) have partnered to introduce an innovative new design course that will help the school's third-year students explore and develop their talents in wireless phone design. Reflecting TELUS' commitment to delivering innovative products and services, and to giving where we live, the OCAD/TELUS Handset Project is unique in Canada, and aims to foster innovation in mobile phone design. To further assist in the development of Canadian design talent, one deserving student will be offered a four-month summer internship with TELUS working in product development. TELUS TV comes to Quebec TELUS TV was launched in several Quebec communities during the quarter, including Saint-Georges-de-Beauce, Rimouski, Mont-Joli, Luceville, Sainte-Luce and Sainte-Blandine. TELUS TV is a 100 per cent digital service bringing customers exceptional sound and video quality for hundreds of TV channels, video-on-demand, and other services. It is also available in an increasing number of neighbourhoods of greater Vancouver, Calgary, and Edmonton. TELUS Day of Service On September 29, more than 6,000 TELUS team members took a day out of their schedules to give where they live during the TELUS Day of Service. TELUS employees, retirees, relatives and friends took part in a nation-wide volunteer drive making a difference in the communities where they live and work. Team members participated in more than 225 volunteer activities through 150 charitable organizations in 17 communities across Quebec, Ontario, Alberta and B.C. TELUS Day of Service volunteer efforts included environmentally themed projects such as clean-up efforts at Stanley Park in Vancouver, the River Valley in Edmonton and the Soverdi in Montreal. Other volunteer projects included stocking shelves at the Daily Bread Food Bank in Toronto, supporting Habitat for Humanity and regional youth soccer clinics for underprivileged children. On this day alone, more than 18,000 volunteer hours were logged in support of worthwhile causes. TELUS executive Robert McFarlane named Canada's Top CFO by Canadian Business Robert McFarlane, executive vice-president and chief financial officer, was named Top CFO by Canadian Business magazine at the All-Star awards luncheon in Toronto in October. The All-Star Execs are drawn by Canadian Business from a pool of Canada's largest publicly traded firms. To be eligible for consideration for this program, a company must meet certain financial performance measures including three-year revenue growth, three-year net income growth and three-year total shareholder return. Robert was chosen from among an exclusive group of business leaders as Canada's Top CFO by an independent panel of experts. An interview with Robert is featured in the current issue of Canadian Business, which hit newsstands on November 1. TELUS recognized for one of the best annual reports in world The 2006 TELUS annual report ranked among the top one percent in the world by the Annual Report on Annual Reports, the only organization in the world that compares, rates and ranks annual reports globally. TELUS is one of three Canadian companies and the only telecommunications company to achieve one of the top ratings. An independent panel evaluates more than 500 annual reports from a selection of more than 1,000 listed corporations worldwide. The survey is regarded as the most comprehensive and authoritative by evaluating each report on 50 aspects of corporate reporting including financial, performance, business and investor measures. TELUS named to global Dow Jones Sustainability Index for seventh straight year In September, the Dow Jones Sustainability World Index, a corporate sustainability ranking, recognized TELUS as an economic, environmental and social leader for the seventh consecutive year. TELUS is the only North American telecommunications company and one of just 10 Canadian businesses across all sectors included in the global index. TELUS' total score improved this year and was among the highest awarded in the telecom sector. The judges gave TELUS high marks for corporate governance, risk and crisis management, privacy protection, environmental reporting, human capital development and stakeholder engagement. TELUS helping kids with diabetes live better lives and partners to find a cure The 2007 TELUS President's Invitational Golf Tournament donated $115,000 to an innovative centre that helps kids with diabetes live healthier lives. The Charles H. Best Diabetes Centre is the only registered charity in Canada dedicated to making life better for kids with Type 1 diabetes. The donation was raised at the TELUS Business Solutions annual charity golf event, which is also a thank you from TELUS to some of its top Ontario customers for their loyalty and business. TELUS in October announced a three-year partnership with the Juvenile Diabetes Research Foundation (JDRF). The partnership will provide the JDRF with $1.2 million to fund Canadian-based research programs hunting for a cure for Type 1 diabetes. TELUS also announced its three-year title sponsorship of the JDRF's primary fundraising event - the TELUS Walk to Cure Diabetes. This partnership is an excellent representation of TELUS' community investment approach, which is focused on youth, technology, and health and wellness. Support of Quebec Major Junior Hockey League delivers excitement of hockey to clients TELUS and the Quebec Major Junior Hockey League renewed their partnership with a five-year deal in the quarter. Reflecting TELUS' continued support of Canadian athletes and amateur sport, the agreement includes the webcasting of all 630 games of the '07-'08 QMJHL season, a first in the history of the league. All playoff games will also be webcast for the fans. In addition, nearly 250 QMJHL-based ringtones, theme songs, pictures, interviews and videos are being offered exclusively to TELUS subscribers for download to mobile handsets during the season. Partnership greens Montreal The City of Montreal, Societe de verdissement du Montreal metropolitain (SOVERDI) and TELUS announced the completion of the first step in the greening of Montreal. Thanks to a three-way partnership announced in 2006, more than 5,800 trees, shrubs and perennials have been planted in alleys and schoolyards, in front of housing cooperatives, and along riverbanks and highways throughout the Island of Montreal this year. TELUS Open raises $110,000 for Operation Enfant Soleil More than 250 TELUS clients, partners, and employees donated a total of $109,718 to Operation Enfant Soleil during the TELUS Open on September 20. The money raised will help improve the quality of paediatric care for thousands of children across Quebec. TELUS renews Shelf Prospectus On August 3, TELUS filed a preliminary short form base shelf prospectus with securities regulators in Canada and the United States. This enables TELUS to sell up to C$3 billion of debt, equity and/or warrants should the Company decide to issue such securities at any time during the next two years. The shelf prospectus replaced an existing C$3 billion shelf prospectus that expired on September 24, 2007. TELUS has no immediate intention to offer securities pursuant to the shelf prospectus. Dividend Declaration raises level by 20% Board of Directors has declared a quarterly dividend of forty-five cents ($0.45) Canadian per share on the issued and outstanding Common shares and forty-five cents ($0.45) Canadian per share on the issued and outstanding Non-Voting shares of the Company payable on January 1, 2008 to holders of record at the close of business on December 11, 2007. The dividends above are designated as "eligible" dividends for the purposes of the Income Tax Act (Canada) and any similar provincial legislation. This quarterly dividend represents a 7.5 cent increase or 20 per cent from the $0.375 quarterly dividend paid on October 1, 2007 and the dividend paid a year earlier on January 1, 2007. About TELUS TELUS (TSX: T, T.A; NYSE: TU) is a leading national telecommunications company in Canada, with $9.0 billion of annual revenue and 11.0.million customer connections including 5.4 million wireless subscribers, 4.4 million wireline network access lines and 1.2 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 September 30 Three months Nine months (millions except per share amounts) 2007 2006 2007 2006 ------------------------------------------------------------------------- (restated) (restated) OPERATING REVENUES $2,309.9 $2,210.7 $6,743.6 $6,426.4 ------------------------------------------------------------------------- OPERATING EXPENSES Operations 1,316.5 1,245.8 4,093.4 3,654.3 Restructuring costs 6.4 12.5 14.3 59.9 Depreciation 332.5 325.8 968.5 1,000.2 Amortization of intangible assets 70.1 57.5 192.2 168.3 ------------------------------------------------------------------------- 1,725.5 1,641.6 5,268.4 4,882.7 ------------------------------------------------------------------------- OPERATING INCOME 584.4 569.1 1,475.2 1,543.7 Other expense, net 8.0 4.0 30.3 17.9 Financing costs 86.2 116.6 331.0 371.1 ------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 490.2 448.5 1,113.9 1,154.7 Income taxes 78.6 126.5 251.6 261.3 Non-controlling interests 1.7 2.4 4.5 7.1 ------------------------------------------------------------------------- NET INCOME AND COMMON SHARE AND NON-VOTING SHARE INCOME 409.9 319.6 857.8 886.3 OTHER COMPREHENSIVE INCOME Change in unrealized fair value of derivatives designated as cash flow hedges 8.5 - 64.3 - Foreign currency translation adjustment arising from translating financial statements of self- sustaining foreign operations (1.1) 0.4 (4.9) 1.2 Change in unrealized fair value of available-for-sale financial assets (0.2) - (0.3) - ------------------------------------------------------------------------- 7.2 0.4 59.1 1.2 ------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 417.1 $ 320.0 $ 916.9 $ 887.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET INCOME PER COMMON SHARE AND NON-VOTING SHARE - Basic $ 1.24 $ 0.94 $ 2.57 $ 2.57 - Diluted $ 1.23 $ 0.92 $ 2.55 $ 2.54 DIVIDENDS DECLARED PER COMMON SHARE AND NON-VOTING SHARE $ 0.375 $ 0.275 $ 1.125 $ 0.825 TOTAL WEIGHTED AVERAGE COMMON SHARES AND NON-VOTING SHARES OUTSTANDING - Basic 330.1 341.4 333.5 345.2 - Diluted 332.8 346.0 336.2 348.8 TELUS Corporation interim consolidated balance sheets (unaudited) September 30, December 31, As at (millions) 2007 2006 ------------------------------------------------------------------------- (restated) ASSETS Current Assets Cash and temporary investments, net $ 1.0 $ - Short-term investments 44.1 110.2 Accounts receivable 590.7 707.2 Income and other taxes receivable 269.0 95.4 Inventories 170.6 196.4 Prepaid expenses and other 209.0 195.3 Current portion of derivative assets 16.4 40.4 ------------------------------------------------------------------------- 1,300.8 1,344.9 ------------------------------------------------------------------------- Capital Assets, Net Property, plant, equipment and other 7,354.0 7,466.5 Intangible assets subject to amortization 779.0 549.2 Intangible assets with indefinite lives 2,966.5 2,966.4 ------------------------------------------------------------------------- 11,099.5 10,982.1 ------------------------------------------------------------------------- Other Assets Deferred charges 1,098.2 956.6 Investments 30.3 35.2 Goodwill 3,168.5 3,169.5 ------------------------------------------------------------------------- 4,297.0 4,161.3 ------------------------------------------------------------------------- $ 16,697.3 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Cash and temporary investments, net $ - $ 11.5 Accounts payable and accrued liabilities 1,438.5 1,363.6 Income and other taxes payable 5.1 10.3 Restructuring accounts payable and accrued liabilities 32.1 53.1 Dividends payable 123.4 - Advance billings and customer deposits 614.5 606.3 Current maturities of long-term debt 6.0 1,433.5 Current portion of derivative liabilities 13.6 165.8 Current portion of future income taxes 426.5 137.2 ------------------------------------------------------------------------- 2,659.7 3,781.3 ------------------------------------------------------------------------- Long-Term Debt 4,496.6 3,474.7 ------------------------------------------------------------------------- Other Long-Term Liabilities 1,760.8 1,257.3 ------------------------------------------------------------------------- Future Income Taxes 1,076.8 1,023.3 ------------------------------------------------------------------------- Non-Controlling Interests 23.8 23.6 ------------------------------------------------------------------------- Shareholders' Equity 6,679.6 6,928.1 ------------------------------------------------------------------------- $ 16,697.3 $ 16,488.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation interim consolidated statements of cash flows (unaudited) Three months Nine months Periods ended September 30 (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 409.9 $ 319.6 $ 857.8 $ 886.3 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 402.6 383.3 1,160.7 1,168.5 Future income taxes 222.7 146.3 393.4 284.8 Share-based compensation (3.3) 14.2 126.4 35.3 Net employee defined benefit plans expense (24.0) (1.5) (69.0) (4.4) Employer contributions to employee defined benefit plans (18.9) (28.8) (67.5) (104.3) Restructuring costs, net of cash payments 3.3 (1.2) (21.0) 2.2 Amortization of deferred gains on sale-leaseback of buildings, amortization of deferred charges and other, net 5.9 3.9 1.1 12.5 Net change in non-cash working capital (166.4) (265.4) (27.6) (224.4) ------------------------------------------------------------------------- Cash provided by operating activities 831.8 570.4 2,354.3 2,056.5 ------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (434.1) (423.9) (1,297.8) (1,203.2) Acquisitions - (25.0) - (44.5) Proceeds from the sale of property and other assets 4.1 6.9 5.4 14.9 Change in non-current materials and supplies, purchase of investments and other - (9.0) (7.7) (20.4) ------------------------------------------------------------------------- Cash used by investing activities (430.0) (451.0) (1,300.1) (1,253.2) ------------------------------------------------------------------------- FINANCING ACTIVITIES Common Shares and Non-Voting Shares issued 0.1 37.2 0.7 82.9 Dividends to shareholders - (93.8) (250.9) (284.5) Purchase of Common Shares and Non-Voting Shares for cancellation (232.2) (119.7) (602.4) (600.7) Long-term debt issued 2,679.9 499.0 4,771.5 1,341.8 Redemptions and repayment of long-term debt (2,850.8) (448.9) (4,955.4) (1,064.4) Partial repayment of deferred hedging liability - - - (309.4) Dividends paid by a subsidiary to non-controlling interests - - (4.3) (3.0) Other - - (0.9) - ------------------------------------------------------------------------- Cash used by financing activities (403.0) (126.2) (1,041.7) (837.3) ------------------------------------------------------------------------- CASH POSITION Increase (decrease) in cash and temporary investments, net (1.2) (6.8) 12.5 (34.0) Cash and temporary investments, net, beginning of period 2.2 (18.6) (11.5) 8.6 ------------------------------------------------------------------------- Cash and temporary investments, net, end of period $ 1.0 $ (25.4) $ 1.0 $ (25.4) ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Interest (paid) $ (41.1) $ (13.0) $ (283.2) $ (297.6) ------------------------------------------------------------------------- Interest received $ 1.4 $ 0.6 $ 8.9 $ 23.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes (inclusive of Investment Tax Credits (paid) received, net $ (1.7) $ (0.6) $ 0.9 $ 94.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- TELUS Corporation segmented information (unaudited) Three-month periods ended September 30 Wireline Wireless (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $1,204.6 $1,200.3 $1,105.3 $1,010.4 Intersegment revenue 29.7 23.5 7.0 6.0 ------------------------------------------------------------------------- 1,234.3 1,223.8 1,112.3 1,016.4 ------------------------------------------------------------------------- Operating expenses Operations expense 761.6 742.5 591.6 532.8 Restructuring costs 6.4 11.7 - 0.8 ------------------------------------------------------------------------- 768.0 754.2 591.6 533.6 ------------------------------------------------------------------------- EBITDA(1) $ 466.3 $ 469.6 $ 520.7 $ 482.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 302.6 $ 311.4 $ 131.5 $ 112.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ 163.7 $ 158.2 $ 389.2 $ 370.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) 771.1 742.5 589.3 532.8 Restructuring costs 6.4 11.7 - 0.8 ------------------------------------------------------------------------- 777.5 754.2 589.3 533.6 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ 456.8 $ 469.6 $ 523.0 $ 482.8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 302.6 $ 311.4 $ 131.5 $ 112.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ 154.2 $ 158.2 $ 391.5 $ 370.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three-month periods ended September 30 Eliminations Consolidated (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ - $ - $2,309.9 $2,210.7 Intersegment revenue (36.7) (29.5) - - ------------------------------------------------------------------------- (36.7) (29.5) 2,309.9 2,210.7 ------------------------------------------------------------------------- Operating expenses Operations expense (36.7) (29.5) 1,316.5 1,245.8 Restructuring costs - - 6.4 12.5 ------------------------------------------------------------------------- (36.7) (29.5) 1,322.9 1,258.3 ------------------------------------------------------------------------- EBITDA(1) $ - $ - $ 987.0 $ 952.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 434.1 $ 423.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ - $ - $ 552.9 $ 528.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) (36.7) (29.5) 1,323.7 1,245.8 Restructuring costs - - 6.4 12.5 ------------------------------------------------------------------------- (36.7) (29.5) 1,330.1 1,258.3 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ - $ - $ 979.8 $ 952.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $ 434.1 $ 423.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ - $ - $ 545.7 $ 528.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) (from above) $ 979.8 $ 952.4 Incremental charge (recovery)(3) (7.2) - -------------------------------------------------- EBITDA (from above) 987.0 952.4 Depreciation 332.5 325.8 Amortization 70.1 57.5 -------------------------------------------------- Operating income 584.4 569.1 Other expense, net 8.0 4.0 Financing costs 86.2 116.6 -------------------------------------------------- Income before income taxes and non-controlling interests 490.2 448.5 Income taxes 78.6 126.5 Non-controlling interests 1.7 2.4 -------------------------------------------------- Net income $ 409.9 $ 319.6 -------------------------------------------------- -------------------------------------------------- (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 (recovery from) operations of $(7.2) and did not result in an immediate cash outflow (inflow). 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) Nine-month periods ended September 30 Wireline Wireless (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $3,590.3 $3,588.8 $3,153.3 $2,837.6 Intersegment revenue 83.5 71.8 20.0 17.1 ------------------------------------------------------------------------- 3,673.8 3,660.6 3,173.3 2,854.7 ------------------------------------------------------------------------- Operating expenses Operations expense 2,439.1 2,211.5 1,757.8 1,531.7 Restructuring costs 13.6 56.4 0.7 3.5 ------------------------------------------------------------------------- 2,452.7 2,267.9 1,758.5 1,535.2 ------------------------------------------------------------------------- EBITDA(1) $1,221.1 $1,392.7 $1,414.8 $1,319.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 882.0 $ 881.8 $ 415.8 $ 321.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ 339.1 $ 510.9 $ 999.0 $ 998.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) 2,295.5 2,211.5 1,733.3 1,531.7 Restructuring costs 13.6 56.4 0.7 3.5 ------------------------------------------------------------------------- 2,309.1 2,267.9 1,734.0 1,535.2 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $1,364.7 $1,392.7 $1,439.3 $1,319.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ 882.0 $ 881.8 $ 415.8 $ 321.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ 482.7 $ 510.9 $1,023.5 $ 998.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine-month periods ended September 30 Eliminations Consolidated (millions) 2007 2006 2007 2006 ------------------------------------------------------------------------- Operating revenues External revenue $ - $ - $6,743.6 $6,426.4 Intersegment revenue (103.5) (88.9) - - ------------------------------------------------------------------------- (103.5) (88.9) 6,743.6 6,426.4 ------------------------------------------------------------------------- Operating expenses Operations expense (103.5) (88.9) 4,093.4 3,654.3 Restructuring costs - - 14.3 59.9 ------------------------------------------------------------------------- (103.5) (88.9) 4,107.7 3,714.2 ------------------------------------------------------------------------- EBITDA(1) $ - $ - $2,635.9 $2,712.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $1,297.8 $1,203.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA less CAPEX $ - $ - $1,338.1 $1,509.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating expenses (as adjusted)(3) Operations expense (as adjusted)(3) (103.5) (88.9) 3,925.3 3,654.3 Restructuring costs - - 14.3 59.9 ------------------------------------------------------------------------- (103.5) (88.9) 3,939.6 3,714.2 ------------------------------------------------------------------------- EBITDA (as adjusted)(3) $ - $ - $2,804.0 $2,712.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPEX(2) $ - $ - $1,297.8 $1,203.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) less CAPEX $ - $ - $1,506.2 $1,509.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA (as adjusted) (from above) $2,804.0 $2,712.2 Incremental charge(3) 168.1 - -------------------------------------------------- EBITDA (from above) 2,635.9 2,712.2 Depreciation 968.5 1,000.2 Amortization 192.2 168.3 -------------------------------------------------- Operating income 1,475.2 1,543.7 Other expense, net 30.3 17.9 Financing costs 331.0 371.1 -------------------------------------------------- Income before income taxes and non-controlling interests 1,113.9 1,154.7 Income taxes 251.6 261.3 Non-controlling interests 4.5 7.1 -------------------------------------------------- Net income $ 857.8 $ 886.3 -------------------------------------------------- -------------------------------------------------- (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 $168.1 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 2.6% 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 approximately 4.5 to five percentage points (excluding competitors' subscriber write- offs in the first half of 2007); restructuring expenses of approximately $25 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 (including more active price discounting); 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 and second quarter Management's discussion and analyses, as well as updates reported in Section 10 of this document. ------------------------------------------------------------------------- Management's discussion and analysis October 31, 2007 The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month and nine-month periods ended September 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 third quarter and first nine months 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 third quarter and first nine months of 2007 ------------------------------------------------------------------------- 6. Financial condition A discussion of changes in the balance sheet for the nine-month period ended September 30, 2007 ------------------------------------------------------------------------- 7. Liquidity and capital A discussion of cash flow, liquidity, credit resources 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 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 to be acquired by a consortium led by Teachers Private Capital, the private investment arm of the Ontario Teachers' Pension Plan, and the U.S.-based Providence Equity Partners and Madison Dearborn Partners, LLC. The consortium also included TD Securities Inc. who, with several other institutions, agreed to provide equity financing for the purchase. The BCE Board recommended that their common shareholders accept the offer at an all-cash price of $42.75 per common share. In September 2007, BCE Inc. announced that its shareholders overwhelmingly approved the plan of arrangement, which involves the acquisition by the consortium of all outstanding common and preferred shares of BCE. The closing of the transaction is subject to receipt of regulatory approvals widely expected to occur in the first half of 2008. The CRTC continues to process and approve certain applications from incumbent telecommunications companies for regulatory forbearance of both residential and business local services. This provides more flexibility in pricing and bundling of services for incumbents as they compete with other service providers. 1.3 Consolidated highlights ------------------------------------------------------------------------- ($ millions, except shares, per share Quarters ended Nine-month periods amounts, subscribers September 30 ended Sept. 30 and ratios) 2007 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Consolidated statements of income ------------------------------------------------------------------------- Operating revenues 2,309.9 2,210.7 4.5 % 6,743.6 6,426.4 4.9 % Operating income 584.4 569.1 2.7 % 1,475.2 1,543.7 (4.4)% Net-cash settlement feature (recovery) expense(1) (7.2) - - 168.1 - - -------- ------- -------- -------- -------- -------- Operating income (as adjusted) 577.2 569.1 1.4 % 1,643.3 1,543.7 6.5 % Income before income taxes 490.2 448.5 9.3 % 1,113.9 1,154.7 (3.5)% Net-cash settlement feature (recovery) expense (7.2) - - 168.1 - - -------- ------- -------- -------- -------- -------- Income before income taxes (as adjusted) 483.0 448.5 7.7 % 1,282.0 1,154.7 11.0 % Net income 409.9 319.6 28.3 % 857.8 886.3 (3.2)% Net-cash settlement feature (recovery) expense, after tax (4.9) - - 104.1 - - -------- ------- -------- -------- -------- -------- Net income (as adjusted) 405.0 319.6 26.7 % 961.9 886.3 8.5 % Earnings per share, basic ($) 1.24 0.94 31.9 % 2.57 2.57 - % Net-cash settlement feature per share (0.01) - - 0.31 - - -------- ------- -------- -------- -------- -------- Earnings per share, basic (as adjusted)(2) ($) 1.23 0.94 30.9 % 2.88 2.57 12.1 % Earnings per share, diluted ($) 1.23 0.92 33.7 % 2.55 2.54 0.4 % Cash dividends declared per share ($) 0.375 0.275 36.4 % 1.125 0.825 36.4 % ------------------------------------------------------------------------- Consolidated statements of cash flows ------------------------------------------------------------------------- Cash provided by operating activities 831.8 570.4 45.8 % 2,354.3 2,056.5 14.5 % Cash used by investing activities 430.0 451.0 (4.7)% 1,300.1 1,253.2 3.7 % Capital expenditures 434.1 423.9 2.4 % 1,297.8 1,203.2 7.9 % Cash used by financing activities 403.0 126.2 n.m. 1,041.7 837.3 24.4 % ------------------------------------------------------------------------- Subscribers and other measures ------------------------------------------------------------------------- Subscriber connections(3) (thousands) at Sept. 30 11,008 10,531 4.5 % EBITDA(4) 987.0 952.4 3.6 % 2,635.9 2,712.2 (2.8)% Net-cash settlement feature (recovery) expense (7.2) - - 168.1 - - -------- ------- -------- -------- -------- -------- EBITDA (as adjusted)(4) 979.8 952.4 2.9 % 2,804.0 2,712.2 3.4 % Free cash flow(5) 502.9 519.8 (3.3)% 1,145.4 1,346.4 (14.9)% ------------------------------------------------------------------------- Debt and payout ratios ------------------------------------------------------------------------- Net debt to EBITDA - excluding restructuring(6) 1.7 1.7 - Dividend payout ratio (%)(7) 46 39 7 pts ------------------------------------------------------------------------- n.m. - not meaningful; pts - percentage point(s) (1) A non-cash (recovery) 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 and second 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 nine- month period ended September 30, 2007, $168.1 million in respect of this charge was recorded in Operations expense ($104.1 million after-tax impact in Net income or 31 cents per share). The recovery in the third quarter was an adjustment to the initial estimate recorded. The net-cash settlement feature expense for full year of 2007 is expected to be approximately $170 million. See Caution regarding forward looking statements as well as Section 9 for TELUS' guidance for the full year. Highlights for the third quarter and first nine months of 2007, as discussed in Section 5: Results from operations, include the following: - Subscriber connections increased by 477,000 during the 12-month period ended September 30, 2007. The number of wireless subscribers grew by 10.9% to 5.41 million, the number of Internet subscribers grew by 7.5% to 1.16 million and the number of network access lines decreased by 3.0% to 4.44 million. - Operating revenues increased by $99.2 million and $317.2 million, respectively, in the third quarter and first nine 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 wireline voice local and long distance revenue. - Operating income increased by $15.3 million in the third quarter of 2007 and decreased by $68.5 million in the first nine months of 2007, when compared to the same periods in 2006. Excluding the net-cash settlement feature expense recorded in 2007, operating income (as adjusted) increased by $8.1 million and $99.6 million, respectively, in the third quarter and the first nine months, primarily due to growth in wireless EBITDA partly offset by higher amortization expenses. - Income before income taxes increased by $41.7 million in the third quarter of 2007 and decreased by $40.8 million in the first nine months of 2007, when compared to the same periods in 2006. Excluding the effect of the net-cash settlement feature, Income before income taxes increased by $34.5 million and $127.3 million, respectively, in the third quarter and the first nine months, due to lower financing costs and growth in operating income (as adjusted). - Net income in 2007 included favourable tax-related adjustments of approximately $93 million or 28 cents per share in the third quarter and approximately $107 million or 32 cents per share in the first nine months. In 2006, favourable tax-related adjustments of approximately $30 million or nine cents per share were recorded in the third quarter and $145 million or 42 cents per share were recorded in the first nine months. - Net income and EPS - basic for the third quarter of 2007 increased by $90.3 million and 30 cents, respectively, when compared to the same period in 2006. Net income for the first nine months of 2007 decreased by $28.5 million when compared to the same period in 2006, while EPS - basic was unchanged. Excluding the effect of the net-cash settlement feature for first nine months of 2007, Net income (as adjusted) increased by $75.6 million while EPS - basic (as adjusted) increased by 31 cents. - The average numbers of shares outstanding during third quarter and first nine months of 2007 were 3% lower than in same periods in 2006. The decrease in shares was due to repurchases under normal course issuer bid (NCIB) programs as well as fewer shares being issued from treasury following the introduction of the net-cash settlement feature for options. Highlights for the third quarter and first nine months of 2007, as discussed in Section 7: Liquidity and capital resources, include the following: - Cash provided by operating activities increased by $261.4 million and $297.8 million, respectively, in the third quarter and first nine months of 2007, when compared to the same periods in 2006. In 2007, proceeds from securitized accounts receivable increased by $50 million during the third quarter and first nine months of 2007, while in 2006, proceeds decreased by $185 million and $150 million, respectively, for comparative increases in 2007 operating cash flow of $235 million and $200 million, respectively. - Cash used by investing activities decreased by $21.0 million in the third quarter and increased by $46.9 million in the first nine months of 2007, when compared to the same periods in 2006. The decrease for the quarter was primarily due to acquisitions in the prior year period. Capital expenditure intensity ratios were consistent at about 19% of consolidated revenues in the third quarter and first nine months of both 2007 and 2006. Capital expenditures increased by $10.2 million and $94.6 million, respectively, in the third quarter and first nine months of 2007, when compared with the same periods in 2006 due to primarily to increased investment in digital wireless capacity and coverage. - Cash used by financing activities increased by $276.8 million and $204.4 million, respectively, in the third quarter and first nine months of 2007, when compared to the same periods in 2006. Under its NCIB programs, the Company repurchased 4.3 million shares for cancellation for an outlay of $232.2 million in the third quarter of 2007 (2006: 2.1 million shares for $119.7 million), while for the first nine months of 2007, the Company repurchased 10.5 million shares for cancellation for outlay of $602.4 million (2006: 12.7 million shares for $600.7 million). The increase cash used by financing activities for the first nine-months included the June 1, 2007 repayment of $1,483.3 million (US$1,166.5 million) for matured 7.50% Notes, net of $1 billion debt issue in March 2007 and outstanding commercial paper issue of $293.9 million. - Free cash flow decreased by $16.9 million and $201.0 million, respectively, in the third quarter and first nine months of 2007, when compared to the same periods in 2006. The decrease for the third quarter was caused by higher interest payments (mainly from March 2007 debt issues with semi-annual interest payments), higher capital expenditures and higher share-based compensation payments, net of improved EBITDA and lower restructuring payments. The decrease for the first nine months of 2007 was caused by lower EBITDA, higher capital expenditures, and lower recoveries of cash taxes and related interest, partly offset by lower restructuring payments, share-based compensation expense in excess of payments and lower interest payments. - Net debt to EBITDA of 1.7 continued to be in the long-term target range of 1.5 to 2.0 times. - The dividend payout ratio based on actual earnings at September 30, 2007 was 46% and the dividend payout ratio calculated to exclude the impacts of tax-related adjustments and the charge for introducing the net-cash feature was also 46% - within the target guideline of 45 to 55% of net sustainable earnings. 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 and second 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: Focusing relentlessly on the growth markets of data, IP and wireless The Company expanded the number of urban areas where TELUS TV(R) service is offered. On September 17, TELUS TV was officially launched in the Eastern Quebec communities of Luceville, Mont-Joli, Rimouski, Sainte-Blandine, Saint- Georges-de-Beauce and Sainte-Luce. TELUS' digital television and entertainment service is made possible by investments in broadband infrastructure. The service is also available in select areas of Calgary, Greater Edmonton and the Lower Mainland of B.C. In August, TELUS signed an eight-year contract with the Western Canada Lottery Corporation to implement an Alberta-wide Internet Protocol (IP) lottery terminal network. The IP network will connect more than 2,300 lottery ticket machines in Alberta to each other and to the WCLC headquarters in Winnipeg. Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business On June 21, 2007, TELUS had 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, 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. In its second quarter results news release on August 3, TELUS announced it had concluded its assessment and did not intend to submit a competing offer to acquire BCE. An expense of approximately $4 million related to various costs of this assessment was recorded in Other expense in the third quarter. Investing in internal capabilities to build a high-performance culture and efficient operations TELUS recognizes that training is a key element for success and has implemented many training programs. By the end of the quarter, close to 100 per cent of TELUS team members completed the mandatory online ethics and respect course. The course is designed to help team members in their ethical decisions at work, point them to TELUS' related policies and to teach with case situations and dilemmas to apply judgement. Underlying this initiative is an "Ask First, Act Later" approach when a proper course of action is unclear. TELUS' mandatory security awareness course was also being completed by team members. This online course interactively promotes a safe, secure environment for clients and employees alike. It is also designed to protect company assets, sensitive information and our client's privacy. TELUS has hundreds of training courses including the Premier Sales Organization training program and the training programs for the Connections Women's Network, and the Spirited Teamwork - Stronger Together program. Recently, the American Society for Training & Development recognized these TELUS initiatives with a BEST award and recognized TELUS as one of the top organizations when it comes to using employee learning and development to enable enterprise-wide success. 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 and second 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. After two full quarters of wireless number portability (WNP), implemented March 2007, indications are that WNP has been a net contributing factor to increased subscriber loading (inbound porting exceeded outbound porting). WNP initially contributed to increased wireless customer retention costs as a percentage of revenues in the second quarter of 2007 (8.2% compared to 6.2% in 2006) and continues to contribute to a small increase in subscriber churn (total churn was 1.45% and 1.43% in the second and third quarters of 2007 compared to 1.30% and 1.36% in the same periods in 2006). 4.2 Operational capabilities Regulation To the end of September, the CRTC has granted forbearance for residential local services in Calgary, Edmonton, Fort McMurray, Rimouski, Victoria and most Greater Vancouver exchanges, as well as nine additional exchanges in Eastern Quebec. The areas forborne from regulation cover more than one million residential subscribers of TELUS. As communities are deregulated, TELUS for the first time will be able to bring promotions and bundles of services that are better tailored to the needs of community residents. TELUS expects to receive decisions on a number of other applications in the near future. In September, the CRTC granted forbearance for eligible business local services in 35 exchanges, including Calgary, Edmonton, Fort McMurray and Rimouski, Victoria and most of Greater Vancouver, or approximately two-thirds of TELUS' total business lines. 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, while largely successful, 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 to maintain service levels. The critical billing function performed as expected. At this time the backlogs have been significantly reduced and additional call centre resources are being reduced. The additional expenses in the third quarter were approximately $8 million or half of the $16 million expenses recorded in the second quarter. See Section 10.3 Process risks. Transition to the new system in 2007 reduced Wireline EBITDA by approximately $8 million in the third quarter and $37 million in the nine- month period. This included costs primarily related to additional temporary labour to perform system fixes and maintain service levels were $8 million in the third quarter and $24 million for the nine-month period. It also included a one-time reduction of $13 million in long distance revenue recorded in the second quarter of 2007. 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 the second quarter, the U.S. based parent company AMP'D Mobile, Inc. entered bankruptcy proceedings in the U.S. As a result, AMP'D Mobile sales were discontinued in Canada. In the second quarter, TELUS recorded a pre-tax write-off of its $11.8 million equity investment in AMP'D Mobile, Inc. (in Other expense, net) along with pre-tax adjustments of approximately $5 million for accelerated depreciation and amortization and approximately $2 million in Operations expense. Operations expense in the third quarter included approximately $3 million for a write-down of subscriber equipment and write- off of prepaid marketing costs. 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 third quarter of 2007, approximately 350,000 Common Shares and 3.97 million Non-Voting Shares were repurchased for cancellation for an outlay totalling $232.2 million. From December 20, 2004 to September 30, 2007 under three NCIB programs, approximately 19 million Common Shares and 30.9 million Non-Voting Shares were repurchased for cancellation for an outlay totalling $2.37 billion. See Section 7.3 Cash used by financing activities. Pay dividends The dividend declared in the third quarter of 2007, payable on October 1, was 37.5 cents per share, an increase of 36.4% from the dividend declared in the third quarter of 2006. The dividend declared for the fourth quarter of 2007 increased by 7.5 cents per share, or 20%, to 45 cents per share, which is payable on January 1, 2008. Use proceeds from securitized receivables and bank facilities, as needed, to supplement free cash flow and meet other cash requirements The balance of proceeds from securitized accounts receivable increased by a net $50 million during the third quarter of 2007, closing at $550 million. During the second quarter, proceeds increased from $150 million to $550 million at May 31 and were reduced to $500 million at June 30. Increases in proceeds were used for general corporate purposes. Maintain a minimum $1 billion in unutilized liquidity TELUS had more than $1.4 billion of available liquidity from unutilized credit facilities at September 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 US$1,166.5 million, 7.50% Notes. Preserve access to the capital markets at a reasonable cost by maintaining investment grade credit ratings and targeting improved credit ratings in the range of BBB+ to A-, or the equivalent, in the future Three of four rating agencies put their outlooks to under review in the second quarter due to TELUS being in non-exclusive discussions to acquire BCE. With the TELUS' announcement in August that it did not intend to submit a competing offer to acquire BCE, the rating agencies in the third quarter reinstated their stable trend outlooks. At October 31, 2007, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. See Section 7.7 Credit Ratings. --------------------------------------------------------------------- 4.4 Changes in internal control over financial reporting There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 5. Results from operations 5.1 General The Company has two reportable segments: wireline and wireless. Segmentation is based on similarities in technology, the technical expertise required to deliver the products and services, the distribution channels used and regulatory treatment. Intersegment sales are recorded at the exchange value. Segmented information is regularly reported to the Company's Chief Executive Officer (the chief operating decision-maker). See Note 5 of the interim Consolidated financial statements. 5.2 Quarterly results summary ------------------------------------------------------------------------- ($ in millions, except per share amounts) 2007 Q3 2007 Q2 2007 Q1 2006 Q4 ------------------------------------------------------------------------- Segmented revenue (external) Wireline segment 1,204.6 1,180.1 1,205.6 1,234.3 Wireless segment 1,105.3 1,048.0 1,000.0 1,020.3 ------------------------------------------------------------------------- Operating revenues (consolidated) 2,309.9 2,228.1 2,205.6 2,254.6 Operations expense 1,316.5 1,340.3 1,436.6 1,368.6 Restructuring costs 6.4 3.2 4.7 7.9 ------------------------------------------------------------------------- EBITDA(1) 987.0 884.6 764.3 878.1 Depreciation 332.5 318.3 317.7 353.2 Amortization of intangible assets 70.1 72.5 49.6 53.9 ------------------------------------------------------------------------- Operating income 584.4 493.8 397.0 471.0 Other expense (income) 8.0 18.5 3.8 10.1 Financing costs 86.2 127.2 117.6 133.6 ------------------------------------------------------------------------- Income before income taxes and non-controlling interest 490.2 348.1 275.6 327.3 Income taxes 78.6 93.7 79.3 89.7 Non-controlling interests 1.7 1.3 1.5 1.4 ------------------------------------------------------------------------- Net income 409.9 253.1 194.8 236.2 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income per Common Share and Non-Voting Share - basic 1.24 0.76 0.58 0.70 - diluted 1.23 0.75 0.57 0.69 Dividends declared per Common Share and Non-Voting Share 0.375 0.375 0.375 0.375 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ in millions, except per share amounts) 2006 Q3 2006 Q2 2006 Q1 2005 Q4 ------------------------------------------------------------------------- Segmented revenue (external) Wireline segment 1,200.3 1,189.9 1,198.6 1,209.9 Wireless segment 1,010.4 945.3 881.9 876.8 ------------------------------------------------------------------------- Operating revenues (consolidated) 2,210.7 2,135.2 2,080.5 2,086.7 Operations expense 1,245.8 1,207.4 1,201.1 1,316.8 Restructuring costs 12.5 30.7 16.7 35.5 ------------------------------------------------------------------------- EBITDA(1) 952.4 897.1 862.7 734.4 Depreciation 325.8 335.2 339.2 346.2 Amortization of intangible assets 57.5 46.9 63.9 67.0 ------------------------------------------------------------------------- Operating income 569.1 515.0 459.6 321.2 TELUS Corporation CONTACT: Media relations: Allison Vale, (416) 629-6425,[email protected]; Investor relations: Robert Mitchell, (416) 279-3219,[email protected] |