TELUS reports strong results for fourth quarter 2016 and Announces 2017 financial targets
(firmenpresse) - VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 02/09/17 -- (TSX: T)(NYSE: TU) - TELUS Corporation
Strong customer loading across key growth segments with 127,000 net new postpaid wireless, Internet and TELUS TV customer additions, up 17 per cent from last year
Industry-leading wireless monthly postpaid churn of 0.98 per cent, third consecutive year with churn below 1.00 per cent
Strong ARPU growth of 3.9 per cent and best-in-class lifetime revenue per client of $5,300
$1.2 billion returned to shareholders in 2016; 7 to 10 per cent annual dividend increase targeted in 2017
Targeting 2017 revenue growth of up to 3.5 per cent and EBITDA growth of up to 6.0 per cent on a consolidated basis
TELUS Corporation''s consolidated operating revenue increased 2.7 per cent to $3.3 billion in the fourth quarter of 2016, over the same period a year ago, reflecting higher data revenue and subscriber growth in both wireless and wireline operations. Earnings before interest, income taxes, depreciation and amortization (EBITDA) decreased by 21 per cent to $769 million due to significantly higher restructuring and other costs which included the immediately vesting transformative compensation expense (transformative compensation) of $305 million. When excluding restructuring and other costs as well as net gains and equity income related to real estate joint venture developments in the fourth quarter of 2016, adjusted EBITDA was up 3.1 per cent to $1.1 billion, and up 5.1 per cent when excluding a non-recurring gain on certain real estate assets in the fourth quarter of 2015. This growth reflects higher wireless and wireline revenue, as well as ongoing execution of operational efficiency and effectiveness initiatives.
"TELUS delivered robust fourth quarter results reflecting strong revenue, EBITDA and subscriber growth across both of our wireless and wireline businesses," said Darren Entwistle, President and CEO. "Our exceptional team continued to demonstrate their ability to navigate successfully the competitive environment, delivering the best customer experience and shareholder value in the industry."
Mr. Entwistle added "TELUS built upon our track record of delivering industry-leading shareholder-friendly initiatives in 2016. Notably, we returned over $1.2 billion to shareholders in both dividends and share purchases and we are targeting another 7 to 10 per cent increase in dividends in 2017. TELUS has now returned approximately $14 billion to shareholders, including $8.7 billion in dividends and $5.2 billion in share purchases, representing $24 per share since 2004."
Mr. Entwistle further commented "As we look to 2017, TELUS is once again providing industry-leading revenue, EBITDA and dividend growth targets, highlighting the confidence we have in the entire global TELUS organization. These targets are representative of the ongoing excellence of our long-term strategy, reflecting the consistency, diversity and combined strength of both our wireless and wireline operating segments that underpin our shareholder-friendly initiatives."
Doug French, TELUS Executive Vice-President and CFO said, "TELUS'' fourth quarter results demonstrated a strong finish to 2016, reflecting our team''s consistent execution against our long-standing strategy along with maintaining an organization-wide focus on operational efficiency and effectiveness. Looking forward into 2017, we remain focused on delivering strong financial and operating performance, leading customer experience and maintaining our strong balance sheet position while we continue to make the generational investments in broadband and wireless networks. Through these investments, TELUS will continue to enhance its network leadership driving profitable growth and free cash flow to support ongoing investor returns well into the future."
In wireless, network revenue growth was driven by an 11 per cent increase in data revenue, reflecting a larger proportion of higher-rate two-year plans in the revenue mix, increased adoption of larger data buckets or topping up of data buckets, continued subscriber growth, a more favourable postpaid subscriber mix, and increased data usage from data-intensive devices. In wireline, data revenue growth of 6.1 per cent was generated by increased Internet and enhanced data service revenues from continued high-speed Internet subscriber growth and higher revenue per customer, growth in business process outsourcing revenues, and an increase in TELUS TV revenues from subscriber growth and higher revenue per customer.
In the quarter, TELUS attracted 127,000 new wireless postpaid, high-speed Internet and TV customers, up 18,000 over the same quarter a year ago and up 12,000 sequentially over the prior quarter. Net additions in the quarter included 87,000 wireless postpaid customers, 24,000 high-speed Internet subscribers, and 16,000 TELUS TV customers. These gains were partially offset by the ongoing loss of traditional telephone network access lines and a moderating decline in wireless prepaid customers. TELUS'' total wireless subscriber base of 8.6 million is up 1.5 per cent from a year ago, reflecting a 2.7 per cent increase in the postpaid subscriber base to more than 7.5 million. TELUS'' high-speed Internet connections have increased 5.7 per cent to 1.7 million, while TELUS TV subscribers are higher by 5.4 per cent to more than 1 million.
TELUS delivered an industry-leading wireless monthly postpaid churn rate of 0.98 per cent. TELUS'' postpaid churn rate has now been below the 1 per cent level for 13 of the past 14 quarters. For the year, postpaid monthly churn was 0.95 per cent.
CONSOLIDATED FINANCIAL HIGHLIGHTS
For the quarter, net income of $87 million and basic earnings per share (EPS) of $0.14 were impacted by significantly higher restructuring and others costs, primarily reflecting the transformative compensation expense. When excluding restructuring and other costs, net gains and equity income from real estate joint venture developments, and favourable income tax-related adjustments, adjusted net income declined by 2.5 per cent, while adjusted basic EPS of $0.53 decreased slightly from the same period a year ago.
Free cash flow of $(191) million in the fourth quarter declined from $197 million a year ago, primarily due to payments in respect of transformative compensation and higher capital expenditures.
In the fourth quarter of 2016, TELUS returned $311 million to shareholders including $272 million in dividends paid and $39 million in share purchases under its 2017 normal course issuer bid (NCIB) program. In 2016, TELUS returned more than $1.2 billion to shareholders, including $1.07 billion in dividends paid and the purchase of approximately 4.3 million shares for $169 million.
Fourth Quarter 2016 Operating Highlights
TELUS wireless
TELUS wireline
TELUS sets 2017 consolidated financial targets
TELUS'' consolidated financial targets for 2017 are reflective of the company''s strategic investments in advanced broadband technology and wireless infrastructure, a commitment by the TELUS team to deliver client service excellence and continued focus on cost efficiency and effectiveness. TELUS'' 2017 financial targets are supportive of the Company''s multi-year dividend growth program first announced in May 2011, under which TELUS has since delivered 12 dividend increases. TELUS plans to continue delivering on its dividend growth program in 2017 through 2019, targeting annual dividend growth between 7 and 10 per cent.
In 2017, TELUS plans to continue generating positive subscriber growth in its key growth segments, including wireless, high-speed Internet and TELUS TV. Increasing customer demand for reliable access and fast data services are expected to support wireless and Internet growth. TELUS International and TELUS Health are also expected to contribute to TELUS'' diversified growth profile.
For 2017, TELUS is targeting consolidated annual revenue growth of between 2.5 and 3.5 per cent, driven by higher contribution from wireless network revenue reflecting continued subscriber and ARPU growth as well as ongoing wireline revenue growth from higher data services revenue.
Consolidated EBITDA excluding restructuring and other costs is targeted to be higher by 3.0 to 6.0 per cent driven by higher wireless network revenue growth, margin improvements from wireless and wireline data services and savings from ongoing cost efficiency and effectiveness initiatives. Higher subsidies for smartphones are expected to continue pressuring cost of acquisition and retention expense.
Basic earnings per share (EPS) is targeted to increase by 2.0 to 8.0 per cent driven primarily by EBITDA growth.
Consolidated capital expenditures for 2017, excluding the purchase of spectrum licences, are targeted to be approximately $2.9 billion. TELUS plans to continue connecting more homes and businesses directly to its fibre-optic network, to support ongoing high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. The investments in fibre will also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G. We also intend to continue investing in our wireless network for 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
TELUS'' cash income tax payments for the full year are estimated to decline over 2016 levels to between $300 million and $360 million (2016 - $600 million). The decline in cash tax payments reflects both lower instalment payments for 2017 based on 2016 income and a lower final instalment payment for 2016 to be made in early 2017, partly offset by a decrease in income tax recoveries.
The preceding disclosure respecting TELUS'' 2017 financial targets contains forward-looking information and is fully qualified by the ''Caution regarding forward-looking statements'' at the beginning of the accompanying Management''s review of operations for the fourth quarter of 2016 and in the full year 2016 Management''s discussion and analysis filed on the date hereof on SEDAR, especially Section 10 entitled ''Risks and Risk Management'' thereof which is hereby incorporated by reference, and is based on management''s expectations and assumptions as set out in Section 1.7 entitled ''Financial and operating targets for 2017'' in the accompanying Management''s review of operations for the fourth quarter of 2016.
Corporate Highlights
TELUS makes significant contributions and investments in the communities where team members live, work and serve and to the Canadian economy on behalf of customers, shareholders and team members by:
Dividend Declaration
The TELUS Board of Directors has declared a quarterly dividend of 48 cents ($0.48) Canadian per share on the issued and outstanding Common Shares of the Company payable on April 3, 2017 to holders of record at the close of business on March 10, 2017.
This first quarter dividend represents a four cent increase from the $0.44 quarterly dividend paid on April 1, 2016.
About TELUS
TELUS (TSX: T)(NYSE: TU) is Canada''s fastest-growing national telecommunications company, with $12.8 billion of annual revenue and 12.7 million subscriber connections, including 8.6 million wireless subscribers, 1.7 million high-speed Internet subscribers, 1.4 million residential network access lines and more than 1.0 million TELUS TV customers. TELUS provides a wide range of communications products and services, including wireless, data, Internet protocol (IP), voice, television, entertainment and video, and is Canada''s largest healthcare IT provider.
In support of our philosophy to give where we live, TELUS, our team members and retirees have contributed over $482 million to charitable and not-for-profit organizations and volunteered more than 7.7 million hours of service to local communities since 2000. Created in 2005 by President and CEO Darren Entwistle, TELUS'' 12 Canadian community boards and 5 International boards have led the Company''s support of grassroots charities and have contributed more than $60 million in support of 5,595 local charitable projects, enriching the lives of more than 2 million children and youth, annually. TELUS was honoured to be named the most outstanding philanthropic corporation globally for 2010 by the Association of Fundraising Professionals, becoming the first Canadian company to receive this prestigious international recognition.
For more information about TELUS, please visit .
Access to Quarterly results information
Interested investors, the media and others may review this quarterly earnings news release, management''s discussion and analysis, quarterly results slides, audio and transcript of the investor webcast call, supplementary financial information, the 2016 annual Management''s discussion and analysis and financial statements, and our full 2016 annual report at .
TELUS'' fourth quarter 2016 and 2017 targets conference call is scheduled for Thursday, February 9, 2017 at 11:00am ET (8:00am PT) and will feature a presentation followed by a question and answer period with investment analysts. Interested parties can access the webcast at . A telephone playback will be available on February 9 until March 15, 2017 at 1-855-201-2300. Please use reference number 1211356# and access code 77377#. An archive of the webcast will also be available at and a transcript will be posted on the website within a few business days.
Caution regarding forward-looking statements
This document contains forward-looking statements about expected events and the financial and operating performance of TELUS Corporation. The terms TELUS, the Company, we, us and our refer to TELUS Corporation and, where the context of the narrative permits or requires, its subsidiaries.
Forward-looking statements include any statements that do not refer to historical facts. They include, but are not limited to, statements relating to our objectives and our strategies to achieve those objectives, our targets (including our annual targets for 2017 described in Section 1.7 of this document), outlook, updates, our multi-year dividend growth program, our multi-year share purchase program, and statements about anticipated trends regarding our business and the environment in which we operate (in particular: Section 1 Discussion of operations). Forward-looking statements are typically identified by the words assumption, goal, guidance, objective, outlook, strategy, target and other similar expressions, or future or conditional verbs such as aim, anticipate, believe, could, expect, intend, may, plan, predict, seek, should, strive and will.
By their nature, forward-looking statements are subject to inherent risks and uncertainties and are based on assumptions, including assumptions about future economic conditions and courses of action. The assumptions on which our annual targets for 2017 are based are discussed in Section 1.7 of this document. These assumptions may ultimately prove to have been inaccurate and, as a result, our actual results or events may differ materially from our expectations expressed in or implied by the forward-looking statements.
Risks and uncertainties that could cause actual performance or events to differ materially from the forward-looking statements made herein and in other TELUS filings include, but are not limited to, the following:
These risks are described in additional detail in Section 10 Risks and risk management in our 2016 Management''s discussion and analysis (MD&A), which will be filed concurrently with this document. That description is incorporated by reference in this cautionary statement but is not intended to be a complete list of the risks that could affect the Company.
Many of these factors are beyond our control or our current expectations or knowledge. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. Except as otherwise indicated in this document, the forward-looking statements made herein do not reflect the potential impact of any non-recurring or special items or any mergers, acquisitions, dispositions or other business combinations or transactions that may be announced or that may occur after the date of this document.
Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements in this document describe our expectations and are based on our assumptions as at the date of this document and are subject to change after this date. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements.
This cautionary statement qualifies all of the forward-looking statements in this document.
Management''s review of operations (MRO)
February 9, 2017
Contents
1. Discussion of operations
This section contains forward-looking statements, including those with respect to our expectations for capitalization of long-term debt interest, deployment of wireless spectrum licences, ARPU growth, wireless retention spending and high-speed Internet subscriber growth trends as they relate to the future. There can be no assurance that we have accurately identified the trends based on past results, or that these trends will continue. See Caution regarding forward-looking statements at the beginning of this MRO.
1.1 Preparation of Management''s review of operations (MRO)
The following sections discuss the consolidated financial position and financial performance of TELUS for the three-month period and year ended December 31, 2016. The discussion should be read together with the accompanying summary financial information. Our operating and reportable segments are wireless and wireline. Segmented information is regularly reported to our Chief Executive Officer (the chief operating decision-maker).
The generally accepted accounting principles (GAAP) we use are the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our use of the term IFRS in this MRO is a reference to these standards. In our discussion, we also use certain non-GAAP financial measures to evaluate our performance, monitor compliance with debt covenants and manage our capital structure. These measures are defined, qualified and reconciled with their nearest GAAP measures in Section 4.1. All currency amounts are in Canadian dollars, unless otherwise specified.
Additional information relating to the Company, including our annual information form and other filings with securities commissions or similar regulatory authorities in Canada, is available on SEDAR (). Our filings with the Securities and Exchange Commission in the United States, including Form 40-F, are available on EDGAR ().
Our disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management on a timely basis, so that appropriate decisions can be made regarding public disclosure. This document was reviewed by TELUS'' Audit Committee and approved by our Board of Directors for issuance on February 9, 2017.
In this MRO, unless otherwise indicated, results for the fourth quarter and full year of 2016 are compared with corresponding results from the fourth quarter and full year of 2015.
1.2 Consolidated operations
The following is a discussion of our consolidated financial performance. Segmented discussion is provided in Section 1.3 Wireless segment,Section 1.4 Wireline segment and in Section 3.3 Cash used by investing activities - capital expenditures.
Consolidatedoperating revenues increased by $88 million in the fourth quarter of 2016 and $297 million for the full year of 2016.
For additional discussion on wireless and wireline revenues, see Section 1.3 Wireless segment and Section 1.4 Wireline segment.
Operating expenses increased by $312 million in the fourth quarter of 2016 and $468 million for the full year of 2016. This increase included the immediately vesting transformative compensation expense (transformative compensation) of $305 million recorded in the fourth quarter of 2016.
For substantially all of our Canadian-situated employees, the next salary increases are planned for 2019. This arrangement will provide us with financial flexibility to make the necessary growth and retention investments within a competitive environment.
Excluding the transformative compensation expense, Employee benefits expense reflects a decrease in employee compensation of $100 million in the fourth quarter and a $74 million decrease for the full year. These decreases resulted mainly from lower employee-related restructuring costs and realizing the benefits from operational efficiency and effectiveness initiatives, partly offset by an increase in TELUS International (Cda) Inc. (TELUS International) employees and compensation to support growth in business process outsourcing revenue.
Operating income decreased by $224 million in the fourth quarter of 2016 and $171 million for the full year of 2016. Excluding the effects of the $305 million transformative compensation expense recorded in the fourth quarter of 2016, Operating income increased by $81 million in the fourth quarter and $134 million for the full year. For discussion of consolidated EBITDA and adjusted EBITDA, please see Other operating highlights, which follows later in this section.
Financing costs increased by $20 million in the fourth quarter of 2016 and $73 million for the full year of 2016.
Total income tax expense decreased by $70 million in the fourth quarter of 2016 and $98 million for the full year of 2016, primarily due to lower Income before income taxes, including the effects of the transformative compensation expense recorded in the fourth quarter of 2016. The decreases also resulted from revaluations of deferred income tax liabilities in 2016 to reflect the provincial income tax rate reduction in Quebec beginning in 2017, the $48 million non-cash adjustment in the second quarter of 2015 to revalue deferred income tax liabilities arising from an increase in the Alberta provincial corporate tax rate, partly offset for the full year by lower recoveries related to the settlement of prior years'' income tax-related matters (excluding related interest income).
Net income attributable to Common Shares decreased by 69% in the fourth quarter of 2016 and 12% for the full year of 2016. Excluding restructuring and other costs, income tax-related adjustments, net gains and equity income from real estate joint venture developments in 2016, the gain on the exchange of wireless spectrum licences in 2016 and the asset retirement from the closure of Black''s Photography retail stores in 2015, adjusted Net income decreased by 2.5% in the fourth quarter of 2016 and 1.7% for the full year of 2016.
Basic EPS decreased by 68% in the fourth quarter of 2016 and 10% for the full year of 2016. The reduction in the number of shares outstanding, as a result of our normal course issuer bid (NCIB) program, net of share option exercises, contributed positively to basic EPS by approximately $0.01 in the fourth quarter of 2016 and $0.03 for the full year of 2016. Excluding restructuring and other costs, net gains and equity income from real estate joint venture developments, income tax-related adjustments, the gain on the exchange of wireless spectrum licences and the asset retirement from the closure of Black''s Photography retail stores, adjusted basic EPS decreased by $0.01 in the fourth quarter of 2016 and was unchanged for the full year of 2016.
Comprehensive income decreased by $839 million in the fourth quarter of 2016 and $627 million for the full year of 2016, primarily due to changes in employee defined benefit plan re-measurement amounts and lower Net income. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges, foreign currency translation adjustments arising from translating financial statements of foreign operations, and changes in the unrealized fair value of available-for-sale investments.
Other operating highlights
1.3 Wireless segment
Wireless trends and seasonality
The historical trend in wireless network revenue reflects growth in both our ARPU and subscriber base. This growth, coupled with higher-value smartphones in the sales mix, was partially offset by the decline in wireless equipment revenue, reflecting higher per-unit subsidies and lower retention volumes. Retention volumes declined due to (i) the effects on contract renewals of higher handset prices (including the effect of higher supplier costs due to depreciation of the Canadian dollar relative to the U.S. dollar over the last two years), as well as an increasing number of customers choosing to stay on month-to-month service; (ii) increased competitive intensity; and (iii) economic conditions resulting in customers purchasing fewer handsets.
The wireless ARPU growth trend has increased in 2016 due to a higher mix of data share plans and an increased mix of higher-rate plans including the newly launched Premium Plus plans in June 2016. This was partly offset by competitive pressures driving larger allotments of data provided in rate plans, including data sharing and international data roaming features and plans, consumer response to increased frequency of customer data usage notifications and offloading of data traffic to increasingly available Wi-Fi hotspots. ARPU is expected to continue to increase modestly in 2017, as a result of the continued growth in data usage and the ongoing shift in our subscriber base towards higher-value postpaid customers, as seen in the third and fourth quarters of 2016. However, the level of ARPU is highly dependent on competition, the economic environment, consumer behaviour, the regulatory environment, device selection and other factors, and, as a consequence, there cannot be assurance that ARPU growth will continue to materialize.
Retention spending as a percentage of network revenue has increased to 14.7% in 2016 from 13.9% in 2015, mainly from an increase in the sales mix of higher-subsidy smartphones and competitive pressures. While retention volumes decreased in 2016, we have generally experienced a higher volume of contract renewals than prior to 2015. We expect this trend to continue with two-year contracts in the consumer and small business base. We may also experience continuing pressure on our postpaid subscriber churn if competitive intensity continues, in part due to an increase in customers on expired contracts, as well as customers bringing their own devices and therefore not entering into term contracts. Accordingly, our wireless segment historical operating results and trends may not be reflective of results and trends for future periods.
Historically, there have been significant third and fourth quarter seasonal effects reflected in higher wireless subscriber additions, an increase in related acquisition costs and equipment sales, and higher retention costs due to contract renewals in those quarters. These impacts can be more pronounced around popular device launches and seasonal events such as back to school, Black Friday and Christmas. The costs associated with higher seasonal loading volumes have typically resulted in sequential decreases in wireless EBITDA from the second quarter through to the fourth quarter, typically followed by sequential increases in wireless EBITDA from the fourth quarter through to the second quarter. Subscriber additions have generally been lowest in the first quarter. Historically, wireless ARPU has experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by seasonal sequential declines in the fourth and first quarters. This seasonal effect on ARPU has moderated, as unlimited nationwide voice plans have become more prevalent and chargeable voice and long distance spikes become less pronounced. In addition, customers are opting for higher capacity data plans resulting in less variability in chargeable data usage. See Section 8.2 Accounting policy developments in our annual 2016 MD&A for the timing of revenue recognition and classification of revenue effects of IFRS 15, Revenue from Contracts with Customers.
Network revenue from external customers increased by $86 million in the fourth quarter of 2016 and $243 million for the full year of 2016. Data network revenue increased by 10.7% in the fourth quarter of 2016 and 9.4% for the full year of 2016, reflecting: (i) a larger proportion of higher-rate two-year plans in the revenue mix, including the newly launched Premium Plus plans in June 2016; (ii) a larger proportion of customers selecting plans with larger data buckets or topping up their data buckets; (iii) growth in the subscriber base; (iv) a higher postpaid subscriber mix; and (v) increasing data usage from data-intensive devices. Voice network revenue decreased by 1.3% in the fourth quarter of 2016 and 2.8% for the full year of 2016 due to the increased adoption of unlimited nationwide voice plans and continued but moderating substitution to data services, partly offset by growth in the subscriber base.
Equipment and other service revenues decreased by $15 million in the fourth quarter of 2016 and $89 million for the full year 2016, resulting from a combination of higher per-unit subsidies, lower retention volumes, competitive intensity and the discontinuance of Black''s Photography revenue from the closure of stores in August 2015, partly offset by increased postpaid gross additions and higher-value smartphones in the sales mix.
Other operating income decreased by $2 million in the fourth quarter of 2016 and increased by $28 million in the full year of 2016. The decrease for the quarter resulted from the non-recurrence of gains on the sale of certain real estate assets in 2015, partly offset by net gains and equity income related to real estate joint venture developments in 2016. The increase for the full year was mainly due to net gains and equity income related to real estate joint venture developments, gains from the sale of property, plant and equipment in 2016, and the gain from the exchange of wireless spectrum licences in the second quarter of 2016.
Intersegment revenue in the wireless segment represents network services provided to the wireline segment. Such revenues are eliminated upon consolidation along with the associated wireline expenses.
Total wireless operating expenses increased by $97 million in the fourth quarter of 2016 and $79 million for the full year of 2016.
Equipment sales expenses increased by $33 million in the fourth quarter of 2016 and $61 million for the full year of 2016, reflecting an increase in higher-value smartphones in the sales mix, including premium devices on Premium Plus plans, and increasing handset costs (including the effect of higher supplier costs due to depreciation of the Canadian dollar relative to the U.S. dollar over the last two years) and increased postpaid gross additions, partly offset by lower retention volumes, and by lower cost of sales from the closure of Black''s Photography stores in August 2015.
Network operating expenses increased by $10 million in the fourth quarter of 2016 and $14 million for the full year of 2016. The increases were mainly due to increased roaming volumes, partly offset by lower maintenance costs.
Marketing expenses increased by $2 million in the fourth quarter of 2016 and decreased by $16 million for the full year of 2016. Advertising and promotional expenses were higher during the fourth quarter from seasonal marketing activities, however were generally lower for the full year. In addition, both the fourth quarter and the full year marketing expenses benefitted from lower commission expenses driven by lower retention volumes.
Other goods and services purchased increased by $15 million in the fourth quarter of 2016 and $14 million for the full year of 2016, primarily due to increases in external labour, higher non-labour restructuring and other costs in the quarter, and higher bad debt provisions resulting from a larger subscriber base, partly offset in the full year by lower non-labour restructuring and other costs from provisions for the closure of Black''s Photography retail stores during the third quarter of 2015.
Employee benefits expense increased by $37 million in the fourth quarter of 2016 and $6 million for the full year of 2016, mainly due to the $70 million transformative compensation expense recorded in the fourth quarter of 2016 (see discussion under Employee benefits expense in Section 1.2). Excluding the transformative compensation expense, employee compensation decreased by $33 million in the fourth quarter and $64 million for the full year, mainly due to lower employee-related restructuring costs and realizing benefits from ongoing operational efficiency and effectiveness initiatives.
Wireless EBITDA decreased by $30 million in the fourth quarter of 2016 and increased by $100 million for the full year of 2016. The decrease for the quarter was mainly due to the transformative compensation expense recorded in the fourth quarter of 2016. Wireless adjusted EBITDA increased by $26 million in the fourth quarter of 2016 and $113 million for the full year of 2016, reflecting network revenue growth driven by higher ARPU and a larger customer base, as well as executing on ongoing operational efficiency and effectiveness initiatives, partly offset by higher acquisition and retention spending. Had 2015 adjusted EBITDA also excluded the non-recurring gain on certain real estate assets in the fourth quarter of 2015, wireless adjusted EBITDA would have reflected an increase of approximately $33 million or 5.1% in the fourth quarter of 2016, and an increase of approximately $120 million or 4.2% for the full year of 2016.
1.4 Wireline segment
Wireline trends
The trend of increasing wireline data service revenue reflects growth in business process outsourcing services, high-speed Internet and enhanced data services, TELUS TV revenues and TELUS Health revenues, and is partly offset by declining data equipment revenues. The increases in Internet and TV service revenues are being generated by higher revenue per customer and subscriber growth. The trend of declining wireline voice revenues is due to technological substitution and greater use of inclusive long distance and lower wholesale volumes competition from voice over IP (VoIP) service providers (including cable-TV competitors), resellers and facilities-based competitors, as well as technological substitution to wireless and IP-based services and applications, continuing increased competition in the small and medium-sized business market, and the impact of the economic slowdown.
High-speed Internet subscriber base growth slowed in 2016, primarily from the impact of the economic slowdown and competitive intensity; however, we expect continued subscriber growth as the economy recovers and as we continue our investments in expanding our fibre-optic network. TELUS TV subscriber base growth has moderated due to a declining overall market for paid TV services, resulting from the economic slowdown, the high rate of market penetration and increased competition, including from over-the-top (OTT) services. Residential network access line (NAL) losses continue to reflect the economic slowdown and the ongoing trend of substitution to wireless and Internet-based services.
Total wireline operating revenues increased by $26 million in the fourth quarter of 2016 and $135 million for the full year of 2016.
Net additions of high-speed Internet subscribers increased by 2,000 in the fourth quarter of 2016 and decreased by 23,000 for the full year of 2016. The increase in the fourth quarter of 2016 was driven by the continued expansion of our high-speed broadband footprint, including fibre to the premises and the pull-through impact from the continued adoption of Optik TV. The decrease for the full year of 2016 was due to the effects of heightened competitive intensity and the impact of the economic slowdown in Alberta, resulting in increased churn. Net additions of TELUS TV subscribers were down 9,000 in the fourth quarter of 2016 and 35,000 for the full year of 2016. The decreases reflected lower gross additions, a higher customer churn rate and a decline in satellite-TV subscribers due a declining overall market for paid TV services resulting from the economic slowdown in Alberta, a high rate of market penetration and the effects of heightened competitive intensity including OTT services. These pressures were partly offset by the continued focus on expanding our addressable high-speed Internet and Optik TV footprint, connecting more homes and business directly to fibre, and bundling these services together. This contributed to combined Internet and TV subscriber growth of 122,000 or 4.7% in 2016.
Residential NAL losses were 22,000 in the fourth quarter of 2016 and 93,000 for the full year of 2016, as compared to NAL losses of 24,000 and 89,000, respectively, for the same periods in 2015. The residential NAL losses continue to reflect the economic slowdown, the ongoing trend of substitution to wireless and Internet-based services, and increased competition, partially mitigated by the success of our bundled service offerings and our customers first initiatives.
Other operating income decreased by $12 million in the fourth quarter of 2016 and $26 million for the full year of 2016, mainly due to non-recurrence of gains on the sale of certain real estate assets in the fourth quarter of 2015, as well as a decrease in amounts recognized from the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities. Partly offsetting these were net gains and equity income on real estate joint venture developments in 2016.
Intersegment revenue represents services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated wireless expenses.
Total wireline operating expenses increased by $205 million in the fourth quarter of 2016 and $268 million for the full year of 2016, primarily due to the following factors:
Goods and services purchased increased by $37 million in the fourth quarter of 2016 and $43 million for the full year of 2016, due to increased network operating and administrative costs to support our growing subscriber base, and higher advertising and promotional expenses related to bundled offerings and in response to heightened competitive intensity, as well as higher TELUS TV costs of sales, partly offset by lower transit and termination costs and lower equipment costs related to declining equipment revenue.
Employee benefits expense increased by $168 million in the fourth quarter of 2016 and $225 million for the full year of 2016, mainly due to the transformative compensation expense recorded in the fourth quarter of 2016 (see discussion under Employee benefits expense in Section 1.2). Excluding the transformative compensation expense, Employee benefits expense decreased by $67 million in the fourth quarter and $10 million for the full year. These decreases were mainly due to lower employee-related restructuring costs, a lower defined benefit pension plan expense and a decrease in employee compensation in the fourth quarter from operational efficiency and effectiveness initiatives, partly offset by an increase in TELUS International employees and compensation supporting growing business process outsourcing revenue.
Wireline EBITDA decreased by $179 million in the fourth quarter and $133 million for the full year of 2016, mainly due to the transformative compensation expense recorded in the fourth quarter of 2016. Wireline adjusted EBITDA increased by 1.7% in the fourth quarter of 2016 and 4.1% for the full year of 2016, as compared to operating revenue increases of 1.5% in the fourth quarter of 2016 and 2.1% for the full year of 2016, excluding the net revenue impacts from the real estate joint venture developments. This reflects our execution on cost efficiency programs, as well as improving margins in data services, including Internet, business process outsourcing services, TELUS TV and TELUS Health services. Had 2015 adjusted EBITDA also excluded the non-recurring gain on certain real estate assets in the fourth quarter of 2015, wireline adjusted EBITDA would have reflected an increase of approximately $20 million or 5.0% in the fourth quarter of 2016, and an increase of approximately $79 million or 5.0% for the full year of 2016.
1.5 Summary of consolidated quarterly results and trends
Refer to the annual 2016 Management''s discussion and analysis (MD&A) for information regarding our summary of consolidated quarter results and our discussion of consolidated trends.
1.6 Performance scorecard (key performance measures)
In 2016, we achieved three of four original consolidated targets and all of our original segment targets, missing only the target for capital expenditures. In respect of updated guidance provided for five targets with our second quarter results, we achieved the revised target for consolidated revenue, consolidated EBITDA - excluding restructuring and other costs, and wireless segment EBITDA - excluding restructuring and other costs. We did not achieve the revised guidance for capital expenditures or wireline external revenue. Our original targets were announced on February 11, 2016.
We achieved our consolidated revenue target primarily due to growth in wireless network revenue, which exceeded the high end of our target range. Wireless network revenue growth resulted from higher than expected ARPU (driven by increased data usage) and growth in our subscriber base. Wireline revenues were slightly below the revised bottom end of our target range due to slower than anticipated growth in data revenues, continued declines in legacy voice services and lower business spending than expected in the second half of 2016.
We met our target for consolidated EBITDA - excluding restructuring and other costs. Our target for wireless EBITDA - excluding restructuring and other costs was met due to an increase in network revenue and executing on operational efficiency and effectiveness initiatives, partially offset by higher acquisition and retention spending. Our target for wireline EBITDA - excluding restructuring and other costs was met due to executing on our efficiency and effectiveness initiatives and improved margins in enhanced data services, TELUS TV services, business process outsourcing services and TELUS Health services.
Our basic EPS of $2.06 for 2016 included the effect of the transformative compensation expense recorded in other costs of $0.38 in the fourth quarter of 2016; however, the target for basic EPS did not include this expense. When the effects of the transformative compensation expense are excluded from basic EPS, we met our target range.
Our capital expenditures in 2016 exceeded both our original target and revised guidance, as we continued to focus on investments in broadband infrastructure, including our fibre-optic network, which also supports our small-cell technology strategy to improve coverage and prepares for a more efficient and timely evolution to 5G, as well as deployment of 700 MHz and 2500 MHz spectrum licences.
The following scorecard compares TELUS'' performance to our original or revised 2016 targets and also presents our 2017 targets. Our capital structure financial policies and report on financing and capital structure management plans are described in Section 4.3 of our 2016 annual MD&A. Our 2017 targets, plans and assumptions are forward-looking statements and should be read together with the Caution regarding forward-looking statements at the beginning of this MRO. (See also Section 10 - Risks and risk management in the 2016 annual MD&A.)
We made the following key assumptions when we announced the 2016 targets in February 2016.
Assumptions for 2016 targets and result
1.7 Financial and operating targets for 2017
For 2017, we have targeted consolidated revenues in the range of $13.120 to $13.250 billion, or growth of approximately 2.5 to 3.5%. Consolidated EBITDA - excluding restructuring and other costs is targeted in the range of $4.850 to $4.995 billion, or growth of approximately 3.0 to 6.0%. Revenue and EBITDA -- excluding restructuring and other costs growth is expected to result from increases in wireless and wireline data services, and savings from cost efficiency and effectiveness initiatives. Basic EPS is expected to be in the range of $2.49 to $2.64, or an increase of approximately 2.0 to 8.0%, when compared to 2016 basic EPS adjusted to exclude $0.38 for transformative compensation. This increase results primarily from growth in EBITDA - excluding restructuring and other costs. For 2017, we have not set public guidance targets for wireless and wireline.
Consolidated capital expenditures, excluding the purchase of spectrum licences, in 2017 is targeted to be approximately $2.9 billion. We plan to continue broadband infrastructure expansion and upgrades, including bringing fibre-optic cable deeper into the network and connecting more homes and businesses to the fibre-optic network, to support high-speed Internet and Optik TV subscriber growth and faster Internet broadband speeds. The investments in fibre will also support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G. We intend to continue investing in our 4G LTE expansion and upgrades, including the ongoing deployment of 700 MHz and 2500 MHz spectrum, as well as invest in network and system resiliency and reliability to support our ongoing customers first initiatives and ready the network and systems for future retirement of legacy assets.
Our capital structure financial policies and long-term financial objectives are described in Section 4.3 of our 2016 annual MD&A.
Achievement of our 2017 targets is subject to risks and uncertainties as noted in our Caution regarding forward-looking statements and in our 2016 annual MD&A filed on February 9, 2017. The 2017 targets are based on many assumptions including:
Assumptions for 2017 targets
2. Changes in financial position
Refer to the annual 2016 Management''s discussion and analysis (MD&A) for information regarding changes in the financial position.
3. Discussion of cash flow results
For detailed information on the following topics, refer to the 2016 annual Management''s discussion and analysis (MD&A): i) liquidity and capital resource measures; ii) credit facilities; iii) sale of trade receivables; iv) credit ratings; v) financial instruments, commitments and contingent liabilities; vi) outstanding share information; and vii) transactions between related parties.
3.1 Overview of cash flow results
Our capital structure financial policies, financing plan and report on financing and capital structure management plans are described in Section 4.3 of the 2016 annual MD&A.
3.2 Cash provided by operating activities
3.3 Cash used by investing activities
Wireless segment capital expenditures increased by $40 million in the fourth quarter of 2016 and $89 million for the full year of 2016, primarily due to continued investments in our fibre-optic network to support our small-cell technology strategy to improve coverage and prepare for a more efficient and timely evolution to 5G, as well as investments in cost efficiency initiatives. For the full year 2016, this also includes higher spending on the deployment of the 700 MHz and 2500 MHz spectrum bands. We also continued to invest in system and network resiliency and reliability in support of our ongoing customers first initiatives and to ready the network and systems for future retirement of legacy assets.
Wireline segment capital expenditures increased by $99 million in the fourth quarter of 2016 and $302 million for the full year of 2016 due to continuing investments in our broadband infrastructure, including connecting more homes and businesses directly to our fibre-optic network. This investment supports our high-speed Internet and Optik TV subscriber growth, as well as our customers'' demand for faster Internet speeds, and extends the reach and functionality of our business and healthcare solutions. We also continued to make investments in cost efficiency initiatives, as well as in system and network resiliency and reliability.
3.4 Cash provided (used) by financing activities
Dividends paid to the holders of Common Shares
Increases in dividends paid for the fourth quarter and full year 2016 reflect higher dividend rates under our dividend growth program, partially offset by a lower number of outstanding shares resulting from shares purchased and cancelled under our normal course issuer bid (NCIB) program.
Purchase of Common Shares for cancellation
Our 2016 NCIB concluded on September 14, 2016 and our 2017 NCIB commenced on September 30, 2016. In 2015, we purchased approximately 16 million shares for $628 million under the 2015 and 2016 NCIBs.
Long-term debt issues and repayments
Net issues and repayments in the fourth quarter of 2016 were primarily composed of: a $476 million increase in commercial paper, including foreign exchange effects, to a balance of $613 million (U.S.$456 million) at December 31, 2016, from $137 million (U.S.$104 million) at September 30, 2016. This was partially offset by a $29 million decrease in net draws on the TELUS International credit facility, including foreign exchange effects.
For the full year of 2016, net long-term debt issues and repayments were primarily composed of:
In comparison, net long-term debt issues and repayments in the fourth quarter of 2015 were primarily composed of:
For the full year of 2015, net long-term debt issues and repayments were primarily composed of the items noted for the fourth quarter and the following:
Our average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) was approximately 10.4 years at December 31, 2016 (approximately 11.1 years at December 31, 2015). Additionally, our weighted average cost of long-term debt (excluding commercial paper and the revolving component of the TELUS International credit facility) was 4.22% at December 31, 2016, as compared to 4.32% at December 31, 2015.
4. Definitions and reconciliations
4.1 Non-GAAP and other financial measures
We have issued guidance on and report certain non-GAAP measures that are used to evaluate the performance of TELUS, as well as to determine compliance with debt covenants and to manage our capital structure. As non-GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined, qualified and reconciled with their nearest GAAP measure.
Adjusted Net income and adjusted basic earnings per share: These measures are used to evaluate performance at a consolidated level and exclude items that may obscure the underlying trends in business performance. These measures should not be considered alternatives to Net income and basic earnings per share in measuring TELUS'' performance. Items that may, in management''s view, obscure the underlying trends in business performance include significant gains or losses associated with real estate development partnerships, gains on exchange of wireless spectrum licences, restructuring and other costs, long-term debt prepayment premiums (when applicable), income-tax related adjustments and asset retirements related to restructuring activities. (See Analysis of Net income and Analysis of basic EPS in Section 1.2.)
Capital intensity: This measure is calculated as capital expenditures (excluding spectrum licences) divided by total operating revenues. This measure provides a basis for comparing the level of capital expenditures to those of other companies of varying size within the same industry.
Dividend payout ratio: This is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the Consolidated financial statements, divided by the sum of basic earnings per share for the most recent four quarters for interim reporting periods. For fiscal years, the denominator is annual basic earnings per share. Our policy guideline for the annual dividend payout ratio is on a prospective basis, rather than on a trailing basis, and is 65 to 75% of sustainable earnings per share on a prospective basis.
Dividend payout ratio of adjusted net earnings: This ratio is a historical measure calculated as the sum of the last four quarterly dividends declared per Common Share, as reported in the financial statements, divided by adjusted net earnings per share. Adjusted net earnings per share is basic earnings per share, as used in the Dividend payout ratio, adjusted to exclude the gain on the exchange of wireless spectrum licences, net gains and equity income from real estate joint venture developments, business acquisition-related provisions, immediately vesting transformative compensation (transformative compensation) expense, long-term debt prepayment premium (when applicable) and income tax-related adjustments.
EBITDA (earnings before interest, income taxes, depreciation and amortization): We have issued guidance on and report EBITDA because it is a key measure used to evaluate performance at a consolidated level and segment contribution. EBITDA is commonly reported and widely used by investors and lending institutions as an indicator of a company''s operating performance and ability to incur and service debt, and as a valuation metric. EBITDA should not be considered an alternative to Net income in measuring TELUS'' performance, nor should it be used as an exclusive measure of cash flow. EBITDA as calculated by TELUS is equivalent to Operating revenues less the total of Goods and services purchased expense and Employee benefits expense.
We calculate EBITDA - excluding restructuring and other costs, as it is a component of the EBITDA - excluding restructuring and other costs interest coverage ratio and the Net debt to EBITDA - excluding restructuring and other costs ratio.
We may also calculate an adjusted EBITDA to exclude items of an unusual nature that do not reflect our ongoing operations and should not, in our opinion, be considered in a valuation metric, or should not be included in an assessment of our ability to service or incur debt.
Free cash flow: We report this measure as a supplementary indicator of our operating performance. It should not be considered an alternative to the measures in the condensed interim consolidated statements of cash flows. Free cash flow excludes certain working capital changes (such as trade receivables and trade payables), proceeds from divested assets and other sources and uses of cash, as found in the condensed interim consolidated statements of cash flows. It provides an indication of how much cash generated by operations is available after capital expenditures (excluding purchases of spectrum licences) that may be used to, among other things, pay dividends, repay debt, purchase shares or make other investments. Free cash flow may be supplemented from time to time by proceeds from divested assets or financing activities.
The following reconciles our definition of free cash flow with cash provided by operating activities.
Net debt: We believe that net debt is a useful measure because it represents the amount of Short-term borrowings and long-term debt obligations that are not covered by available Cash and temporary investments. The nearest IFRS measure to net debt is Long-term debt, including Current maturities of Long-term debt. Net debt is a component of the Net debt to EBITDA - excluding restructuring and other costs ratio.
Net debt to EBITDA - excluding restructuring and other costs: This measure is defined as net debt at the end of the period divided by 12-month trailing EBITDA - excluding restructuring and other costs. Our long-term policy guideline for this ratio is from 2.00 to 2.50 times. This measure is similar to the leverage ratio covenant in our credit facilities.
Restructuring and other costs: With the objective of reducing ongoing costs, we incur associated incremental, non-recurring restructuring costs. We may also incur atypical charges when undertaking major or transformational changes to our business or operating models. We also include incremental external costs incurred in connection with business acquisition or disposition activity, as well as litigation costs, in the context of significant losses and settlements, in other costs.
In the fourth quarter of 2016, we made transformative compensation lump-sum payments for substantially all of our existing unionized and non-unionized Canadian-situated workforces recorded in other costs. For the unionized and non-unionized workforces, approximately 40% of the after-tax value of such qualifying lump-sum payments was paid in our Common Shares by way of an employee benefit trust.
4.2 Operating indicators
The following measures are industry metrics that are useful in assessing the operating performance of a wireless and wireline telecommunications entity, but do not have a standardized meaning under IFRS-IASB.
Average revenue per subscriber unit per month (ARPU) for wireless subscribers is calculated as network revenue divided by the average number of subscriber units on the network during the period and is expressed as a rate per month.
Churn per month (or churn) is calculated as the number of subscriber units deactivated during a given period divided by the average number of subscriber units on the network during the period and is expressed as a rate per month. A TELUS, Koodo® or Public Mobile brand prepaid wireless subscriber is deactivated when the subscriber has no usage for 90 days following expiry of the prepaid credits.
Cost of acquisition (COA) consists of the total of the device subsidy (the device cost to TELUS less the initial charge to the customer), commissions, and advertising and promotion expenses related to the initial subscriber acquisition during a given period. As defined, COA excludes costs to retain existing subscribers (retention spend).
COA per gross subscriber addition is calculated as the cost of acquisition divided by the gross subscriber activations during the period.
Retention spend to network revenue represents direct costs associated with marketing and promotional efforts (including device subsidies and commissions) aimed at the retention of the existing subscriber base, divided by network revenue.
Wireless subscriber unit (subscriber) is defined as an active recurring mobile revenue-generating unit (e.g. mobile phone, tablet or mobile Internet key) with a unique subscriber identifier (SIM or IMEI number). In addition, TELUS has a direct billing or support relationship with the user of each device. Subscriber units exclude machine-to-machine (M2M) devices (a subset of the Internet of Things), such as those used for asset tracking, remote control monitoring and meter readings, vending machines and wireless automated teller machines.
Wireline subscriber connection is defined as an active recurring revenue-generating unit that has access to stand-alone services, including fixed Internet access, TELUS TV and residential network access lines (NALs). In addition, TELUS has a direct billing or support relationship with the user of each service. Reported subscriber units exclude business NALs as the impact of migrating from voice lines to IP services has led to business NAL losses without a similar decline in revenue, thus diminishing its relevance as a key performance indicator.
Contacts:
Media relations:
Shawn Hall
(604) 619-7913
Investor relations:
Paul Carpino
(647) 837-8100
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