[May 05, 2004] TELUS Reports First Quarter Results VANCOUVER, May 5 /PRNewswire-FirstCall/ -- TELUS Corporation (TSX: T and T.A / NYSE: TU) today reported for the first quarter of 2004 excellent wireless performance at TELUS Mobility and a strong increase in free cash flow. Operating revenues of $1.8 billion in the quarter increased 4% from a year ago. Overall operating earnings (EBITDA) were up 9% due to strong performance at TELUS Mobility. Reported earnings per share for the first quarter were 28 cents, compared to 26 cents for the same period a year ago. Free cash flow was $443 million this quarter, a $176 million improvement from a year ago. FINANCIAL HIGHLIGHTS Rounded to nearest C$ Millions, except per share amounts 3 months ended March 31 (unaudited) 2004 2003 % Change ------------------------------------------------------------------------- Operating revenues 1,803.8 1,740.9 3.6 EBITDA(1) 721.3 644.3 8.6 Net income 101.3 89.5 13.2 Earnings per share (EPS) 0.28 0.26 7.7 Capital expenditures 309.7 207.8 49.0 Cash provided by operating activities 588.1 404.7 45.3 Free cash flow (2) 443.3 267.6 65.7 (1) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is defined as Operating revenues less Operations expense less Restructuring and workforce reduction costs. (2) See note 2 of the Consolidated highlights table in management's discussion and analysis. Darren Entwistle, president and CEO, commented that "Our strategy to evolve the revenue mix of TELUS into the growth businesses of wireless and data has driven consolidated top and bottom line growth. In addition, it has better positioned TELUS in the face of a challenging wireline environment. In this regard, our wireline business is focused on revitalizing revenue growth, creating differentiated customer service and realizing continued cost efficiency. Moreover, we continue to see strong growth in high-speed Internet net additions, which now represent approximately two-thirds of our total Internet subscriber base. TELUS Mobility stood out this quarter with 19% revenue growth, 39% operating earnings growth, 14% increase in subscriber net additions and low churn - a great reflection of our excellence in customer service. Notably, on a consolidated basis, TELUS continues to generate strong growth in EBITDA, net income, EPS and cash flow for the benefit of our equity and debt holders." Robert McFarlane, executive vice president and CFO, stated "TELUS generated significant free cash flow of $443 million, up 66% this quarter from a year ago. This was largely due to higher operating earnings, cash recovery of prior years' taxes and lower restructuring payments this quarter, partially offset by higher capital expenditures. As a result, we continue to delever our balance sheet well ahead of plan. Given significant semi-annual interest payments in the second and fourth quarters, combined with a strong consolidated operating outlook, we expect 2004 free cash flow to exceed $1.1 billion. Additionally, today we are revising our EPS guidance up five cents per share to a range of $1.10 to $1.30. This positive outlook obviously bodes well for TELUS' future financial health and market valuation." CORPORATE DEVELOPMENTS TELUS renews bank credit facilities for $1.6 billion TELUS has received C$1.6 billion in commitments from a syndicate of 18 financial institutions. The new credit facilities consist of a C$800 million (or U.S. dollar equivalent) revolving four-year credit facility (expiring in 2008) and a C$800 million (or U.S. dollar equivalent) 364-day revolving stand-by credit facility extendible at TELUS' option for any amount outstanding as at the one-year anniversary date for one year on a non-revolving basis. The new facilities will replace TELUS' existing C$2.1 billion of committed credit facilities prior to their termination dates and have substantially similar terms with the exception of more flexible reporting requirements and covenant calculations. These new facilities are subject to final documentation and are expected to be finalized shortly. TELUS' credit rating upgraded to investment grade by Moody's In March, Moody's Investors Services announced it had upgraded the Senior Unsecured rating of TELUS Corporation to Baa3 from Ba1 with a stable outlook. While this is investment grade, it remains one notch below the BBB-mid investment grade ratings consistently maintained by the three other credit rating agencies (Standard & Poor's, Dominion Bond Rating Services and Fitch Ratings). The upgrade reflected Moody's belief that the company will, on average, maintain free cash flow in 2004 and 2005. TELUS wins six-year, $66 million data & IP contract with The Co-operators Continuing a national expansion effort focused on the provision of superior data, IP and wireless solutions, TELUS Corporation today announced a six-year, $66 million contract with The Co-operators, the largest Canadian-owned, multi-product insurer. Through the term of the agreement, TELUS will provide Wide Area Network (WAN) and Local Area Network (LAN) data services to more than 600 Co-operators locations, as well as an extensive portfolio of voice services. Designed to deliver enhanced value to The Co-operators, the deal goes beyond the provision of traditional products and services, positioning TELUS as a partner in delivering IP solutions contributing to Co-operators strategic and business drivers. The enhanced reach, speed, bandwidth and reliability TELUS provides to businesses like The Co-operators, is increasingly recognized as enabling the IP-based applications essential to business success. TELUS signs multi-year deals with the Quebec government TELUS recently signed two significant contracts, valued at $11.8 million, with the Quebec government. The two deals provide information technology (IT) solutions to the Quebec Building Authority (QBA) and the Quebec Pension and Insurance Plan Administrative Commission. In the first contract, valued at $9 million over 2 years, TELUS will be providing a customer relations management tool to modernize the procedures and systems for the QBA. In the second agreement, valued at $2.8 million over 2.5 years, TELUS will be upgrading and maintaining the Quebec Pension and Insurance Plan Administrative Commission's IT infrastructure. These are two of the largest government deals that TELUS Quebec has signed to date and another example of TELUS' expansion into Central Canada. TELUS and O.N.Telcom form strategic alliance TELUS and O.N.Telcom announced their intent to form a strategic alliance that provides O.N.Telcom with resources to improve its competitiveness and financial performance and offers TELUS access to an important market in Northeastern Ontario. Under the terms of the agreement, TELUS will provide management support services to O.N.Telcom, as well as access to its products and services. The agreement provides O.N.Telcom with access to the TELUS national IP backbone, technology and services while positioning the company for improved customer service from TELUS' extensive product and market development initiatives. The strategic alliance provides both parties with unique marketing opportunities across O.N.Telcom's existing service area, as well as larger urban centres like North Bay, Sudbury and Sault Ste. Marie. TELUS committed to corporate social responsibility - 2003 report now available At TELUS, we are committed to the role we play in corporate citizenship and our ability to make a positive difference in the communities where we live, work and serve. TELUS' 2003 corporate social responsibility report continues to build on global reporting standards and best practices for sustainability reporting involving all aspects of an organization's performance. The report represents an important step in our journey towards triple bottom-line reporting through discussions on our economic, environmental, and social performances. Detailed information on our commitment to corporate social responsibility can be found in our 2003 corporate social responsibility report, available online at: telus.com/socialresponsibility. Canadian Business Magazine reported in March that TELUS Mobility's approach to hiring the best and the brightest pays off in many ways, including the promotion of workplace diversity. The magazine found TELUS Mobility was among the Top 10 Canadian corporations in terms of hiring visible minorities and aboriginal peoples, and is well ahead of the national corporate average. TELUS expands services to Internet customers TELUS continues to deliver on its commitment to provide a wide selection of legal online music to customers with the launch of Pureradio(TM) from TELUS. The new service provides high-speed Internet users the ability to listen to high quality streaming music from 75 continuous play music channels and the ability to quickly download songs. The launch of Pureradio follows the recent launch of Puretracks(TM) from TELUS, which made TELUS Canada's first Internet Service Provider (ISP) to offer a legal music download service. Both services are based on a partnership with Moontaxi Media Inc., a leading North American online music distributor dedicated to delivering high quality music content in both streaming and download formats. TELUS also launched TELUS Fast Dial-up to improve the speed of Internet service for dial-up customers in B.C. and Alberta. Adding TELUS Fast Dial-up to existing dial-up services provides customers with up to five times faster Web browsing and downloading access and improved e-mail capabilities. This new add-on service utilizes sophisticated Web accelerator technologies that compress, optimize and streamline Web content. The TELUS Fast Dial-up service is an additional $2.95 per month on existing dial-up plans. TELUS Mobility expands Mike, 1X data networks TELUS Mobility continued its ongoing expansion of its all-in-one Mike iDEN network into rural and remote regions of Quebec, Ontario, Alberta and B.C., including Kamloops, the Okanagan Valley, Merritt and sections of the Coquihalla Highway. In March, TELUS Mobility announced a $4.5 million expansion of its 1X digital wireless network across the Chaudiere-Appalaches and Cote-Nord regions in Quebec. New products and services from TELUS Mobility TELUS Mobility, Nextel extend Direct Connect(TM) service across North America On May 4, TELUS Mobility and Nextel Communications, Inc. announced a cross-border roaming partnership allowing Nextel and TELUS Mobility Mike(R) clients to use their Direct Connect(TM) walkie-talkie service to stay in instant contact with any other Mike or Nextel user across North America. The roaming agreement also allows for cross-border data services, including BlackBerry(R) and mobile e-mail, two-way messaging and wireless Web access. The instant-contact power of the Direct Connect Push To Talk(TM) (PTT) service - with its connection speeds of less than a second - has made the Nextel and Mike networks the wireless communications network of choice for business across the continent. TELUS Mobility expects to extend Direct Connect roaming services to countries such as Mexico and several South American countries later in 2004. TELUS Mobility had expanded Direct Connect service across Canada in October 2003. TELUS Mobility launches two new BlackBerry(R) devices Also on May 4, TELUS Mobility and Research In Motion (RIM(R)) launched two new BlackBerry(R) handhelds devices across Canada. The BlackBerry 7510(TM) operates on TELUS Mobility's Mike network and is the first BlackBerry device equipped with Mike's Direct Connect walkie-talkie service. The BlackBerry 7750(TM) operates on TELUS Mobility's national 1X wireless data network, which now includes North American wide roaming, and is the first 1X BlackBerry equipped with a high-resolution colour screen. Both BlackBerry models offer mobile professionals a one- stop wireless solution that allows them to stay connected with secure, wireless access to e-mail and corporate data, digital phone, wireless Web access and organizer features. TELUS Mobility announces production of first Fastap(TM) phone At the CTIA Wireless 2004 conference in Atlanta in March, Digit Wireless, consumer electronics giant LG Electronics and TELUS Mobility announced an agreement to produce the world's first Fastap enabled mobile phone. Digit's Fastap keypad technology allows mobile phone users to quickly type text messages and other data using letter, number and punctuation keys arranged neatly around a standard mobile phone keypad. TELUS Mobility plans to offer Fastap enabled mobile phones exclusively in Canada in 2004. Rugged wireless modems from Sierra Wireless and Cypress Solutions Targeting the public safety, utility and heavy industry markets, TELUS Mobility introduced rugged digital wireless data modems from Cypress Solutions and Sierra Wireless that take advantage of TELUS Mobility's national 1X wireless data network. The Sierra SWMP555 wireless modem is a rugged 1X modem certified to both Society of Automotive Engineers and US military standards for humidity, mechanical shock and vibration. The embedded Trimble SQ module provides accurate reporting of position and velocity with ultra-low power consumption. The five new 1X modems from Cypress Solutions (CTM 100, 101, 102, 110 and 120) offer GPS capability and have SAE, Oil and Gas and mil-spec certification. Developments in Wi-Fi Spotnik and TELUS Mobility extend Wi-Fi to VIA trains In February, Spotnik Mobile and partner TELUS Mobility announced the launch of Spotnik MobileSpot(TM) Wi-Fi service aboard high-speed VIA Rail Canada trains traveling between Montreal and Quebec City. Designed specifically for the transportation market, MobileSpot allows clients to access broadband Internet service while in transit and beyond the reach of conventional Wi-Fi Hotspots. TELUS Mobility and Spotnik have rolled out hundreds of Hotspots in public locations nationwide. Wireless industry announces Wi-Fi agreement Canada's national wireless carriers signed an inter-carrier agreement in March establishing common standards for roaming and interoperability of public Wi-Fi Hotspots each operates. TELUS Mobility, Bell Mobility, Rogers Wireless and Microcell Solutions have joined to create a common brand identifier for Wi-Fi Hotspots in Canada and to offer a common browser-based login to all clients to ensure a consistent and secure experience for users in all Hotspot locations. The four carriers have also committed to build more than 500 new Hotspot locations over the next year, which will more than double their number in Canada. TELUS continues significant support of amateur sport in Canada with new sponsorships TELUS and the Canadian Snowboard Federation announced that TELUS has become the official telecommunications sponsor of the Canadian Snowboard Federation. This significant agreement will extend to 2012, and provides TELUS with sponsorship of several Canadian Snowboard Federation initiatives. TELUS also announced its support for, and the opening of the TELUS Centre for Sport, an operations headquarters that brings together key sport agencies focused on improving Canada's athletic performance. The centre provides much needed office and meeting space for several sport organizations to promote amateur sport and prepare athletes and coaches for world-class performance. This collaborative new environment will be a hub for management, training and education for the B.C. sport system. Dividend declaration The Board of Directors declared a quarterly dividend of fifteen cents ($0.15) per share on outstanding Common and Non-Voting Shares payable on July 1, 2004 to shareholders of record on the close of business on June 10, 2004. Forward-looking statements ------------------------------------------------------------------------- ------------------------------------------------------------------------- This document and the 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 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 the targets, expectations, estimates or intentions expressed in the forward-looking statements. Factors that could cause actual results to differ materially include but are not limited to: competition; economic fluctuations; financing and debt requirements; tax matters; dividends; human resources (including the outcome of outstanding labour relations issues); technology (including reliance on systems and information technology); regulatory developments; process risks; health and safety; strategic partners; litigation; business continuity events and other risk factors discussed herein and listed from time to time in TELUS' reports, comprehensive public disclosure documents, including the Annual Information Form, and in other filings with securities commissions in Canada and the United States. See the Risks and uncertainties section in TELUS' 2003 Annual Report - Management's discussion and analysis for further information. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ------------------------------------------------------------------------- ------------------------------------------------------------------------- Management's discussion and analysis - May 5, 2004 The following is a discussion of the consolidated financial condition and results of operations of TELUS Corporation for the three-month periods ended March 31, 2004 and 2003, 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 Company's discussion regarding forward-looking statements (see Forward-looking statements). 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 20 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 have been reviewed by TELUS' Audit Committee and approved by TELUS' Board of Directors. All amounts are in Canadian dollars unless otherwise specified. The following discussion is comprised of significant updates since Management's discussion and analysis in TELUS' 2003 Annual Report: 1. Core business, vision and strategy 2. Key performance drivers 3. Capability to deliver results 4. Results 5. Risks and uncertainties 1. Core business, vision and strategy Strategic imperatives TELUS continues to be guided by its six strategic imperatives established four years ago that serve as a guideline for the Company's actions. Some examples of TELUS' progress in 2004 against these imperatives follow: Partnering, acquiring and divesting to accelerate the implementation of TELUS' strategy and focus TELUS' resources on core business On March 4, TELUS, O.N.Telcom, and the Province of Ontario announced their intention to enter into a strategic alliance, in which TELUS will provide O.N. Telcom with management support services and access to its products and services. The agreement provides O.N.Telcom with access to the TELUS national IP backbone, technology and services while positioning O.N.Telcom for improved customer service from TELUS' extensive product and market development initiatives. The agreement strengthens TELUS' relationship with the Ontario provincial government. 2. Key performance drivers Reaching a collective agreement In February 2004, TELUS Communications Inc. ("TCI") filed applications with both the Canadian Industrial Relations Board ("CIRB") and the Federal Court of Appeal seeking a review of the CIRB's earlier decisions, which imposed a communications ban and required TCI to offer binding arbitration to the Telecommunications Workers Union ("TWU"). On April 8, 2004, the CIRB rendered the full reasons regarding the complaints that led to its earlier decisions. The CIRB imposed a further communications ban on TCI, prohibiting communications with bargaining unit members on matters of employment and collective interest until such time as the conditions of the Canada Labour Code with respect to gaining the right to strike or lockout have been satisfied. TCI will also be seeking reconsideration and a judicial review of the CIRB's April 8, 2004 decision. TCI and the TWU have had discussions, at times with the assistance of each party's legal counsel, to agree on the binding arbitration process such as the selection of an arbitrator, terms of reference/guiding principles that an arbitrator would take into consideration, hearing location, dates, etc. The parties have not made much progress. On March 25, 2004, the TWU filed an application with the CIRB requesting that the Vice-Chairperson name an arbitrator and specify that such arbitrator would be responsible for setting the terms of reference/criteria and procedures related to binding arbitration. On April 1, 2004, TCI requested that the TWU's application be placed on hold pending the outcome of the CIRB's reconsideration decision. On April 8, 2004, the CIRB issued a letter advising both TCI and the union that the union's application would be placed in abeyance until the CIRB renders a decision on the reconsideration application. 3. Capability to deliver results Capabilities are discussed in the Company's 2003 annual Management's discussion and analysis. 4. Results Critical accounting estimates The Company's critical accounting estimates are discussed in the Company's 2003 annual Management's discussion and analysis. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting policy developments Share-based compensation (Note 2(a) of the interim consolidated financial statements) Commencing with the Company's 2004 fiscal year, the amended recommendations of the CICA for accounting for share-based compensation (such amendments arising in 2003) (CICA Handbook Section 3870) apply to the Company. The Company has selected the modified-prospective transition method (also referred to as the retroactive application without restatement method), implemented effective January 1, 2004. To reflect the fair value of options granted subsequent to 2001, and vesting prior to 2004, certain components of common equity in the December 31, 2003, Consolidated Balance Sheet balances have been restated. Equity settled obligations (Note 2(b) of the interim consolidated financial statements) Commencing with the Company's 2004 fiscal year, the Company early adopted the amended recommendations of the CICA for the presentation and disclosures of financial instruments (CICA Handbook Section 3860) specifically concerning the classification of obligations that an issuer can settle with its own equity instruments (such amendments arising in 2003). The amendments result in the Company's convertible debentures being classified as a liability on the consolidated balance sheets (previously classified as a component of equity) and the associated interest expense correspondingly being classified with financing costs on the consolidated statements of income (previously recorded net of income taxes as an adjustment to retained earnings). The conversion option embedded in the convertible debentures continues to be presented as a component of shareholders' equity. As required, these amended recommendations have been applied retroactively. As a result of the reclassification of convertible debentures, minor changes were effected in historical Net debt to EBITDA ratios, and historical Net debt to total capitalization ratios. The reclassification of the associated interest expense resulted in minor changes in historical EBITDA interest coverage ratios. Financial impact of price cap decisions As discussed in detail in TELUS' 2003 annual report management's discussion and analysis, the price cap regulatory regime has been in place since June of 2002. The incremental impact of these decisions on the Communications segment Operating revenues and EBITDA are no longer expected to be significant. The assumptions for 2004 annual guidance originally anticipated about $24 million negative impact on revenues, and $20 million negative impact on EBITDA. It is currently expected that the negative impact on revenues and EBITDA will be approximately $10 million as a result of a higher inflation rate of 3.4%, as measured by the 2003 chain-weighted Gross Domestic Product Price Inflation ("GDP-PI"). See Risks and uncertainties - Regulation for an update on CRTC proceedings that deal with the disposal of amounts accumulated in price cap deferral accounts. Results of operations Consolidated highlights Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ in millions except per share amounts) Operating revenues 1,803.8 1,740.9 62.9 3.6 EBITDA(1) 721.3 664.3 57.0 8.6 Net income 101.3 89.5 11.8 13.2 Earnings per share, basic and diluted 0.28 0.26 0.02 7.7 Cash dividends declared per share 0.15 0.15 - - Cash provided by operating activities 588.1 404.7 183.4 45.3 Capital expenditures 309.7 207.8 101.9 49.0 Free cash flow(2) 443.3 267.6 175.7 65.7 ---------------------------------------------------------------------- Non-GAAP measures used by management to evaluate performance of business units and segments (1) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is calculated as: 2004 Q1 2003 Q1 -------- -------- Operating revenues 1,803.8 1,740.9 Less Operations expense 1,066.6 1,070.1 Less Restructuring and workforce reduction costs 15.9 6.5 -------- -------- EBITDA 721.3 664.3 The Company has issued guidance on and reports EBITDA because it is a key measure used by management to evaluate performance of business units and it is utilized in measuring compliance with debt covenants. The Company also believes EBITDA is a measure commonly reported and widely used by investors as an indicator of a company's operating performance and ability to incur and service debt. The Company believes EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost. EBITDA is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to Operating income or Net income in measuring the Company's performance or used as an exclusive measure of cash flow because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. Investors should carefully consider the specific items included in TELUS' computation of EBITDA. While EBITDA has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance and debt servicing ability relative to other companies, investors should be cautioned that EBITDA as reported by TELUS may not be comparable in all instances to EBITDA as reported by other companies. (2) Free cash flow excludes certain working capital changes, and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. Free cash flow is not a calculation based on Canadian or U.S. GAAP and should not be considered an alternative to consolidated statements of cash flows. Free cash flow is a measure that can be used to gauge TELUS' performance over time. Investors should be cautioned that Free cash flow as reported by TELUS may not be comparable in all instances to Free cash flow as reported by other companies. While the closest GAAP measure is Cash provided by operating activities, Free cash flow is relevant because it provides an indication of how much cash is available before changes in working capital (such as trade payables, and trade receivables, which can be significantly distorted by securitization changes that do not reflect operating results) and after funding capital expenditures. The following shows the calculation of Free Cash Flow and reconciles EBITDA and Free cash flow with Cash provided by operating activities: 2004 Q1 2003 Q1 -------- -------- EBITDA 721.3 664.3 Restructuring and workforce reduction costs, net of cash payments (52.5) (147.4) Excess of share compensation expense over payments 5.0 - Cash interest paid (22.8) (36.0) Cash interest received 14.2 1.0 Income taxes received (paid) 104.6 (0.6) Capital expenditures (capex) (309.7) (207.8) Investment tax credits received (included in EBITDA or capex and Income taxes received (paid)) (16.8) (5.9) -------- -------- Free cash flow 443.3 267.6 Deduct excess of share compensation expense over payments (5.0) - Add back capital expenditures 309.7 207.8 Share-based compensation 4.7 - Net employee defined benefit plans expense (credit) 4.9 13.1 Employer contributions to employee defined benefit plans (28.6) (18.0) Other net operating activities 6.1 6.9 Non-cash working capital changes except changes in taxes and interest (147.0) (72.7) -------- -------- Cash provided by operating activities 588.1 404.7 ------------------------------------------------------------------------- Consolidated Operating revenue and EBITDA increased significantly in the first quarter of 2004, when compared with the same period in 2003, primarily as a result of 20.4% growth in TELUS Mobility Network revenues, with only a 9.0% increase in TELUS Mobility operations expenses. TELUS' Communications segment experienced a 2.9% decrease in Operating revenue, primarily in local and long distance services, while reducing operations expenses by 4.5%. Further detail is presented below by segment. Consolidated Financing costs decreased by $19.3 million in the first quarter of 2004, when compared with the same period in 2003, as a result of lower interest on long-term and short-term debt, and increased interest income including interest income from the settlement of tax matters. Income before taxes and non-controlling interest increased by $81.4 million to $164.7 million in the first quarter of 2004 as compared with the first quarter of 2003, as a result of improved operating profitability and lower net financing costs. Increased Income taxes were a result of this higher income and a favourable $47.0 million income tax adjustment recorded in the first quarter of 2003 for the settlement of tax matters relating to prior years, which had higher tax rates. Consequently, Net income increased by $11.8 million or 13.2%. Basic and diluted earnings per share increased by two cents in the first quarter of 2004, as compared with the same period last year as a result of increased Net income, partly offset by a larger number of shares outstanding. Basic earnings per share impacts of tax settlements and related interest for the first quarters of 2004 and 2003 were approximately four cents and 15 cents, respectively. Excluding these impacts, basic earnings per share increased by approximately 13 cents. Significant growth in Cash provided by operating activities and Free cash flow in the first quarter of 2004, when compared with the first quarter of 2003, included the cash recovery of income taxes, lower payments under restructuring programs, improved operating profitability and lower interest paid. Cash provided by operating activities was net of a $150 million reduction in securitized receivables, while Free cash flow was net of an increase in capital expenditures. Communications segment capital expenditures increased significantly in the first quarter of 2004, due to investment in new service development and infrastructure to improve customer service and support new customers. Communications segment - Operating revenues decreased by 2.9% in the first quarter of 2004, when compared with the same period in 2003. Normalized for the divestiture of certain application development assets in 2003, Operating revenues decreased by approximately $25.0 million or 2.0%. - Network access lines decreased by 22,000 during the first quarter of 2004 as a result of competition and technological substitution. - High speed Internet net additions were 43,600 in the first quarter of 2004, an increase of 35.8% over the first quarter of 2003. - Operations expenses decreased by $33.0 million and included additional Operational Efficiency Program salary and benefit savings of $23.0 million. - EBITDA decreased by $12.2 million from lower revenues and a $9.4 million increase in restructuring charges, partly offset by lower operations expenses. Restructuring charges were recorded for 2004 initiatives including geographical consolidation of an information technology department from 15 locations to two primary locations. - Cash flow (EBITDA less capital expenditures) decreased by $118.1 million to $214.1 million in the first quarter of 2004, when compared with the same period in 2003, primarily because of an increase in capital spending. Mobility segment - Total revenue grew by 18.9% in the first quarter of 2004, when compared with the same period in 2003. Network revenue grew by 20% year-over-year for the second successive quarter including a record increase of $100.3 million in the first quarter of 2004, when compared with the same period last year. - ARPU (average revenue per subscriber unit) increased $3 to $57, representing a fifth consecutive quarter of year over year increases. - Acquisition cost of acquisition ("Acquisition COA") improved to $383 from $425, a notable achievement when coupled with significant subscriber growth. - EBITDA increased by $69.2 million or 38.7% representing a Network revenue flow through of 69%. - EBITDA margin expanded by 5.5 percentage points to 41.8% of Network revenue (38.9% of total revenue). - Cash flow (EBITDA less capital expenditures) increased by $73.2 million or 58.9% to a record $197.5 million. - Net subscriber additions were 76,100 or 14.1% higher than the first quarter of 2003. Notably, higher revenue-generating postpaid subscriber net additions increased significantly by 49.4%, representing a third successive quarter of positive growth. Postpaid subscribers were 82.2% of total net subscriber additions in the first quarter of 2004. - Blended churn remained a healthy 1.5%. The following discussion for Operating revenues, Operations expense, Restructuring and workforce reduction costs, EBITDA and Capital expenditures is presented on a segmented basis. All other discussion is presented for the consolidated financial results. Operating revenues - Communications segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Voice local (and contribution) 528.9 538.8 (9.9) (1.8) Voice long distance 229.6 251.1 (21.5) (8.6) Data 339.8 342.8 (3.0) (0.9) Other 72.8 75.8 (3.0) (4.0) ---------------------------------------------------------------------- External operating revenue 1,171.1 1,208.5 (37.4) (3.1) Intersegment revenue 25.0 23.4 1.6 6.8 ---------------------------------------------------------------------- Total operating revenue 1,196.1 1,231.9 (35.8) (2.9) ---------------------------------------------------------------------- Key operating indicators - Communications segment (000s) 2004 2003 Change % ---------------------------------------------------------------------- As at March 31 --------------- Network access lines 4,848 4,913 (65) (1.3) High-speed Internet subscribers 605.2 442.1 163.1 36.9 Dial-up Internet subscribers 309.1 372.1 (63.0) (16.9) -------- --------- -------- -------- Total Internet subscribers(1) 914.3 814.2 100.1 12.3 Quarters ended March 31 ------------------------ Change in network access lines (22) 2 (24) NM High-speed Internet net additions 43.6 32.1 11.5 35.8 Dial-up Internet net reductions (10.7) (19.6) 8.9 45.4 -------- --------- -------- Total Internet subscriber net additions(1) 32.9 12.5 20.4 163.2 ---------------------------------------------------------------------- (1) As a result of a subscriber audit following a billing system conversion in the third quarter of 2002, Internet subscriber counts and net additions for the first quarter of 2003 are net of reductions of approximately 6.4 dial-up subscribers and approximately 3.0 high-speed Internet subscribers. NM - not meaningful The Communications segment continued to experience an industry-wide trend of declining traditional revenues and softness in data revenue growth. - Voice local revenue is generated from: (i) access to the Company's network, which is provided to customers on a monthly subscription basis; (ii) from the Company's optional and pay-per-use enhanced services, and; (iii) the Company's share of contribution pool funds for providing service in high cost rural service areas. Voice local revenue decreased in the first quarter of 2004, when compared with the first quarter of 2003, primarily as a result of fewer access lines, partly offset by modest increases in interconnection and enhanced services revenues. Consumer network access lines decreased by 12,000 in the first quarter of 2004 as compared with a decrease of 2,000 in the first quarter of 2003. Consumer line losses resulted from technological substitution, including substitution to wireless, and competitive activity. Business network access lines decreased by 10,000 in the first quarter of 2004 compared with an increase of 4,000 in the same period in 2003. Business lines decreased primarily as a result of Centrex line losses to competition (including Alberta Supernet) and migration to more efficient ISDN services. The year-over-year decrease in total access lines in the first quarter of 2004 was 1.3%. - Voice long distance revenue decreased significantly in first quarter of 2004, when compared with the same period in 2003. The decrease was primarily as a result of fewer consumer minutes and price competition. Wholesale settlement revenues were relatively unchanged as higher volumes were offset by lower prices. Substitution to alternative technologies such as e-mail, Internet and wireless contributed to long distance revenue and minute erosion. - Data revenues include Internet access, hosting and applications, LAN/WAN, gateway service, internetworking and remote access, managed information technology (IT) services and legacy data services such as private line, switched data services, data local access, and data equipment sales. Wireless data revenues are included in Mobility segment Network revenues. Communications segment data revenue in the first quarter of 2003 included approximately $10.8 million of application development revenues from assets that were divested in the second and fourth quarters last year. Data revenue growth normalized for the disposal of assets was $7.9 million or 2.3% in the first quarter of 2004, as compared with 2003. Internet service revenues increased by $5.4 million in the first quarter of 2004, when compared with the same period in 2003, primarily as a result of growth in the Internet subscriber base. TELUS high-speed Internet subscriber net additions increased by 35.8% in the first quarter of 2004, when compared with the same period in 2003, bringing high-speed Internet subscribers to 605,200 at March 31, 2004. Managed workplace revenues increased by $12.3 million due to higher functional outsourcing services. Partly offsetting growth in Internet and managed workplace were lower legacy data services revenues. - Other revenue decreased in the first quarter of 2004, when compared with the same period in 2003, primarily as a result of lower voice equipment rental and sales and the conclusion in the first quarter of 2004 of amortization of deferred individual line service grant revenues. The annual impact of the conclusion of individual line service grants will be lower revenues of $6.7 million in 2004. Individual line service grants were provided in respect of the conversion of multi-party lines to single lines in high cost rural areas in Alberta in the early 1990s. - Intersegment revenues represent services provided by the Communications segment to the Mobility segment. These revenues are eliminated upon consolidation together with the associated expense in TELUS Mobility. Total external operating revenue discussed above included non-incumbent local exchange carrier (non-ILEC) revenues of $128.4 million for the first quarter of 2004, compared with $140.7 million for the same period in 2003, a decrease of $12.3 million or 8.7%. Growth in non-ILEC application development revenues was affected by the disposal of certain assets discussed in data revenues above, reducing the revenues by approximately $10.8 million in the first quarter of 2004, when compared with the same period one year ago. Normalized for such asset disposals, non-ILEC revenues decreased by approximately $1.5 million or 1.2% as a result of lower wholesale traffic and prices, partly offset by higher recurring revenue streams. The following is a discussion of TELUS Mobility revenues and key operating indicators. Operating revenues - Mobility segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Network revenue 592.4 492.1 100.3 20.4 Equipment revenue 40.3 40.3 - - ---------------------------------------------------------------------- External operating revenue 632.7 532.4 100.3 18.8 Intersegment revenue 4.6 3.7 0.9 24.3 ---------------------------------------------------------------------- Total operating revenue 637.3 536.1 101.2 18.9 ---------------------------------------------------------------------- Key operating indicators - Mobility segment (000s for subscribers and additions) 2004 2003 Change % ---------------------------------------------------------------------- As at March 31 --------------- Subscribers - postpaid 2,876.5 2,533.9 342.6 13.5 Subscribers - prepaid 623.6 528.3 95.3 18.0 -------- -------- -------- -------- Subscribers - total 3,500.1 3,062.2 437.9 14.3 Digital POPs(1) covered including roaming/resale (millions)(2) 29.5 27.9 1.6 5.7 Quarters ended March 31 ------------------------ Net subscriber additions - postpaid 64.7 43.3 21.4 49.4 Net subscriber additions - prepaid 11.4 23.4 (12.0) (51.3) -------- -------- -------- -------- Net subscriber additions - total 76.1 66.7 9.4 14.1 Churn, per month (%)(3a) 1.5 1.5 - - Acquisition COA(3b) per gross subscriber addition ($)(3c) 383 425 (42) (9.9) ARPU ($)(3d) 57 54 3 5.6 Average minutes of use per subscriber per month ("MOU") 362 315 47 14.9 EBITDA to network revenue (%) 41.8 36.3 5.5 - Retention COA to network revenue (%) 5.0 3.4 1.6 - EBITDA excluding Acquisition COA ($ millions)(3e) 336.1 266.1 70.0 26.3 ---------------------------------------------------------------------- (1) POPs is an acronym for population. A POP refers to one person living in a population area, which in whole or substantial part is included in the coverage areas. (2) TELUS Mobility has not activated all digital-roaming areas. As at March 31, 2004, TELUS Mobility PCS digital population coverage was 22.2 million and 29.5 million including the roaming/resale agreements principally with Bell Mobility and Aliant Telecom Wireless. (3) The following are not measures under accounting principles generally accepted in Canada and the U.S. These measures are industry metrics and are useful in assessing the operating performance of a wireless company. The definitions of these measures are as follows: a. Churn is calculated as the number of subscriber units disconnected during the period divided by the average number of units on the network, expressed as a rate per month. b. Acquisition COA consists of the total of handset subsidies, commissions, and advertising and promotion expenses related to the initial customer acquisition during a given period. c. Acquisition COA per gross subscriber addition is Acquisition COA divided by gross subscriber activations during the period. d. ARPU is calculated as network service revenue divided by the average number of units on the network during the period, expressed as a rate per month. e. EBITDA excluding Acquisition COA is a measure for operational profitability normalized for the period costs of adding new customers. ------------------------------------------------------------- - TELUS Mobility Network revenue is generated from monthly billings for access fees, incremental airtime charges, prepaid time consumed or expired, wireless Internet services and fees for value-added services. Network revenue increased 20.4% for the quarter ended March 31, 2004 as compared with the same period in 2003. This growth was a result of the continued expansion of the cumulative subscriber base by 14.3% to approximately 3.5 million subscribers from 3.1 million subscribers one year ago. In addition, ARPU increased to a Canadian industry-leading $57 in the first quarter of 2004 as compared with $54 in 2003, representing a fifth successive quarter of year over year increases. TELUS Mobility's execution of its strategic focus on profitable revenue growth and subscriber retention resulted in a higher ARPU and slightly improved year over year churn. The improved ARPU was a result of increased usage, increased acceptance of data and Internet based products and pricing discipline. Average minutes of use (MOU) per subscriber per month were 362 in the first quarter 2004 as compared with 315 in the same period last year. At March 31, 2004, postpaid subscribers accounted for 82.2% of the total cumulative subscriber base as compared with 82.7% one-year earlier, remaining relatively stable, and contributing to the significant ARPU premium TELUS Mobility enjoys over its competitors. Net postpaid subscriber additions of 64,700 for the first quarter of 2004 represented 85.0% of all net additions as compared with 43,300 (64.9%) for the corresponding period in 2003, representing a significant increase of 49.4%. This was the third consecutive quarter of positive net postpaid subscriber growth. Moreover, total net subscriber additions for the first quarter of 2004 improved by 14.1% over the same quarter in 2003. This overall positive trend was driven in part by the continued successful advertising campaign initiated in the fourth quarter of 2003 that highlighted TELUS' new camera phones and picture messaging service. The campaign helped to establish a market leadership position for TELUS Mobility in the camera phone marketplace. Blended postpaid and prepaid churn rate slightly improved to 1.49% in the first quarter of 2004 as compared with 1.53% in the first quarter of 2003. Deactivations increased slightly by 10.9% to 154,200 for the first quarter of 2004 as compared with 139,000 for the same period last year. This was a notable accomplishment considering a 14.3% increase in the cumulative subscriber base in the face of aggressive competition. The low churn rate can be attributed to improved network quality and coverage, excellent client service levels, client contracts for one to three years as part of loyalty and retention programs and specific grandfathered rate plans. - Equipment sales, rental and service revenue in the first quarter of 2004 remained unchanged at $40.3 million when compared with the corresponding quarter in 2003 despite a 12% growth in gross subscriber additions from 205,700 to 230,300, caused mainly by increased promotional and contracting activity and improved vendor pricing including favourable foreign exchange rates passed on to the client. Handset revenues associated with gross subscriber activations are included in acquisition COA. - Intersegment revenues represent services provided by the Mobility segment to the Communications segment and are eliminated upon consolidation along with the associated expense in TELUS Communications. The following is a discussion of Communications segment expenses. Operations expense - Communications segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Salaries, benefits and other employee-related costs 390.5 400.7 (10.2) (2.5) Other operations expenses 316.2 339.0 (22.8) (6.7) ---------------------------------------------------------------------- Total operations expense 706.7 739.7 (33.0) (4.5) ---------------------------------------------------------------------- Operations expense for the Communications segment decreased in first quarter of 2004, when compared with the first quarter of 2003, primarily due to Operational Efficiency Program savings and reduced Intercarrier facilities, transit and termination costs. There were 18,522 full-time equivalent employees at the end of March 2004, a decrease of 693 when compared with 19,215 at the end of March 2003. - Salaries, benefits and employee-related expenses decreased in the first quarter of 2004, when compared with the same period in 2003. Incremental savings in salaries, benefits and employee-related overhead costs under the Operational Efficiency Program (duration from 2001 to 2003) were $23.0 million in the first quarter of 2004. The final staff departures in 2004 under this program were approximately 50. In addition, pension expense for defined benefit and defined contribution plans decreased by $6.3 million primarily as a result of increased investment returns in 2003. Consequently, TELUS' Communications segment annual pension expense is expected to decrease by approximately $25.0 million for 2004, when compared with 2003. These reductions were partly offset by a $5.2 million share-based compensation expense, recognized commencing January 1, 2004, as discussed in Accounting policy developments. Overtime expenses in the first quarter of 2004 increased by $3.0 million when compared with the first quarter of 2003, but were $6.0 million lower when compared with the fourth quarter of 2003. The increase as compared with the same period in 2003 was incurred primarily to continue to improve customer service. Additional costs for the new partnership with the Calgary Health Authority and establishment of the Montreal call centre were $6.1 million in the first quarter of 2004. This increased cost was partly offset by savings on outsourcing of approximately $1.8 million included in Other operations expense. Staff increased by 107 for these two functions since the beginning of 2004. All other costs collectively increased in line with inflation rates. - Other operations expenses decreased in the first quarter of 2004, when compared with the same period in 2003, principally due to: (i) reduced facilities, transit and termination costs, which decreased by $19.6 million as a result of lower outbound traffic volumes and lower rates for U.S. and international traffic termination, as well as migration of off-net costs to on-net facilities; (ii) lower bad debt expense that decreased by $5.3 million as a result of tightened credit policies, more effective collection practices and reduced loss experience; and (iii) increased capitalized labour of $5.1 million due to higher capital investment activity in the first quarter of 2004, when compared with the same period in 2003. Partially offsetting these lower costs were $4.1 million increased contract and consulting expenses incurred for improvement of internal systems and processes, and $3.0 million increased brand and consumer advertising and promotions expense. Included in the total segment expenses discussed above are non-ILEC operations expenses for the first quarter of 2004 of $137.5 million, as compared with $155.2 million for the same period in 2003. This represented a decrease of $17.7 million or 11.4% as a result of asset disposals in 2004 and lower wholesale transit and termination costs associated with lower long distance revenues. Normalized for asset disposals, non-ILEC operations expenses for the first quarter of 2004 decreased by $9.1 million or 6.2%. Operations expense - Mobility segment Quarters ended March 31 2004 2003 Change % ---------------------------------------------------------------------- ($ millions) Equipment sales expenses 89.2 83.8 5.4 6.4 Network operating expenses 102.5 86.1 16.4 19.0 Marketing expenses 61.4 55.8 5.6 10.0 General and administration expenses 136.4 131.8 4.6 3.5 ---------------------------------------------------------------------- Total operations expense 389.5 357.5 32.0 9.0 ---------------------------------------------------------------------- FIRST AND FINAL ADD TO FOLLOW TELUS Corporation CONTACT: Media Relations: Nick Culo, (780) 493-7236,[email protected]; Investor Relations: John Wheeler, (780) 493-7310,[email protected] [ Back To TMCnet.com's Homepage ]