EX-99.2 3 a18-14895_1ex99d2.htm EX-99.2

Exhibit 99.2

 



 

TELUS CORPORATION

 

Management’s discussion and analysis

 

2018 Q2

 

 



 

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, outlook, updates, and our multi-year dividend growth program. 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. These assumptions may ultimately prove to have been inaccurate and, as a result, our actual results or events may differ materially from expectations expressed in or implied by the forward-looking statements. An update to our assumptions for 2018 is in Section 9 Update to general trends, outlook and assumptions, and regulatory developments and proceedings in this Management’s discussion and analysis (MD&A).

 

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:

 

·                  Competition including: our ability to continue to retain customers through an enhanced customer service experience, including through the deployment and operation of evolving wireless and wireline network; the ability of industry competitors to successfully launch their respective platforms and to combine a mix of long distance, high-speed Internet access (HSIA) and, in some cases, wireless services under one bundled and/or discounted monthly rate, along with their existing broadcast or satellite-based TV services; the success of new products, new services and supporting systems, such as home automation security, Internet of Things (IoT) services for Internet-connected devices; continued intense rivalry across all services among wireless and wireline telecommunications companies, cable-TV providers, other communications companies and over-the-top (OTT) services, which, among other things, places pressures on current and future average billing per subscriber unit per month (ABPU) (as described in Section 5 Discussion of operations), average revenue per subscriber unit per month (ARPU), cost of acquisition, cost of retention and churn rate for all services, as do customer usage patterns, flat-rate pricing trends for voice and data, inclusive rate plans for voice and data and availability of Wi-Fi networks for data; mergers and acquisitions of industry competitors; pressures on high-speed Internet and TV ARPU and churn rate resulting from market conditions, government actions and customer usage patterns; residential and business network access line (NAL) losses; subscriber additions and retention volumes, and associated costs for wireless, TV and high-speed Internet services; our ability to obtain and offer content on a timely basis across multiple devices on wireless and TV platforms at a reasonable cost; our ability to compete successfully in customer care and business services (CCBS) contracting given our competitors’ brand recognition, consolidation and strategic alliances as well as technology development and our ongoing ability to provide a service experience that meets or exceeds customer expectations and, in our TELUS Health business, our ability to compete with other providers of electronic medical records and pharmacy management products, systems integrators and health service providers including those that own a vertically integrated mix of health services delivery, IT solutions, and related services, and global providers that could achieve expanded Canadian footprints.

 

·                  Technological substitution including: reduced utilization and increased commoditization of traditional wireline voice local and long distance services from impacts of OTT applications and wireless substitution, a declining overall market for paid TV services, including as a result of content piracy and signal theft and as a result of a rise in OTT direct to consumer video offerings and virtual multichannel video programming distribution platforms; the increasing number of households that have only wireless and/or Internet-based telephone services; potential wireless ABPU and ARPU declines as a result of, among other factors, substitution to messaging and OTT applications; substitution to increasingly available Wi-Fi services; and disruptive technologies such as OTT IP services, including Network as a Service in the business market, that may displace or re-rate our existing data services.

 

·                  Technology including: subscriber demand for data that may challenge network and spectrum capacity levels in the future and may be accompanied by increases in delivery cost; our reliance on information technology and our need to streamline our legacy systems; technology options, evolution paths and roll-out plans for video distribution platforms and telecommunications network technologies (including broadband initiatives, such as fibre to the premises (FTTP), wireless small-cell deployment, 5G wireless and availability of resources and ability to build out adequate broadband capacity); our reliance on wireless network access agreements, which have facilitated our deployment of wireless technologies; choice of suppliers and those suppliers’ ability to maintain and service their product lines, which could affect the success of upgrades to, and evolution of, technology that we offer; supplier concentration and market power for network equipment, TELUS TV® and wireless handsets; the performance of wireless technology; our expected long-term need to acquire additional spectrum capacity through future spectrum auctions and from third parties to address increasing demand for data; deployment and operation of new wireline broadband network technologies at a reasonable cost and availability and success of new products and services to be rolled out using such network technologies; network reliability and change management; self-learning tools and automation that may change the way we interact with customers; and uncertainties around our strategy to replace certain legacy wireline network technologies, systems and services to reduce operating costs.

 

 

2



 

·                  Regulatory decisions and developments including the potential of government intervention to further increase wireless competition; government intervention further to the CRTC’s determinations for wholesale GSM-based domestic roaming and the setting of such rates charged to wireless service providers (WSPs) on a retroactive basis; future spectrum auctions and spectrum policy determinations, including the amount of spectrum TELUS is able to acquire and its cost under the Technical, Policy and Licensing Framework for Spectrum in the 600 MHz Band, as well as cost and availability of spectrum in the 3500 MHz band; restrictions on the purchase, sale and transfer of spectrum licences; the impact of the CRTC’s wireline wholesale services review, with a review of rates and configurations for wholesale access currently in progress for TELUS; changes to the cost burden associated with CRTC-mandated network interconnections; disputes with certain municipalities regarding rights-of-way bylaws; and other potential threats to unitary federal regulatory authority over telecommunications, including provincial wireless and consumer protection legislation; the Competition Bureau’s market study on competition in broadband services; the CRTC’s forthcoming report on the retail practices of Canada’s large telecommunications carriers, as directed by the Governor in Council; the impacts of the CRTC’s decision to require pro-rated refunds when customers terminate their services; the CRTC’s phase-out of the local service subsidy regime and corresponding establishment of a broadband funding regime to support the enhancement of high-speed Internet services focusing on underserved areas in Canada; the impact of the review of the Minister of Canadian Heritage’s new Creative Canada policy framework announced on September 28, 2017; the CRTC’s consultation and report on distribution models of the future; vertical integration in the broadcasting industry resulting in competitors owning broadcast content services, and timely and effective enforcement of related regulatory safeguards; the review of the Copyright Act, which began in early 2018; the federal government’s review of the Broadcasting Act, Telecommunications Act and Radiocommunication Act as announced on June 5, 2018; the outcome of TELUS’ applications for renewal of its broadcasting distribution licences; the North American Free Trade Agreement renegotiation; and restrictions on non-Canadian ownership and control of TELUS Common Shares and the ongoing monitoring and compliance with such restrictions.

 

·                  Capital expenditure levels and potential outlays for spectrum licences in spectrum auctions or from third parties, due to: our broadband initiatives, including connecting more homes and businesses directly to fibre; our ongoing deployment of newer wireless technologies, including wireless small cells to improve coverage and capacity and prepare for a more efficient and timely evolution to 5G wireless services; utilizing acquired spectrum; investments in network resiliency and reliability; subscriber demand for data; evolving systems and business processes; implementing efficiency initiatives; supporting large complex deals; and future wireless spectrum auctions held by Innovation, Science and Economic Development Canada (ISED) including the 600 MHz spectrum auction scheduled to take place in March 2019 which will result in increased expenditures. Our capital expenditure levels could be impacted if we do not achieve our targeted operational and financial results.

 

·                  Human resource matters including: recruitment, retention and appropriate training in a highly competitive industry, and the level of employee engagement.

 

·                  Operational performance and business combination risks including: our reliance on legacy systems and ability to implement and support new products and services and business operations in a timely manner; our ability to implement effective change management for system replacements and upgrades, process redesigns and business integrations (such as our ability to successfully integrate acquisitions, complete divestitures or establish partnerships in a timely manner, and realize expected strategic benefits, including those following compliance with any regulatory orders); our ability to identify and manage new risks inherent to new service offerings that we may provide, including as a result of acquisitions, which could result in damage to our brand, our business in the relevant area or as a whole, additional exposure to litigation or regulatory proceedings; the implementation of complex large enterprise deals that may be adversely impacted by available resources; system limitations and degree of co-operation from other service providers; our ability to successfully manage operations in foreign jurisdictions, including managing risks such as currency fluctuations; and real estate joint venture re-development risks.

 

·                  Business continuity events including: our ability to maintain customer service and operate our networks in the event of human error or human-caused threats, such as cyberattacks and equipment failures that could cause various degrees of network outages; supply chain disruptions including as a result of government restrictions or trade actions; natural disaster threats; epidemics; pandemics; political instability in certain international locations; information security and privacy breaches, including data loss or theft of data; intentional threats to our infrastructure and business operations; and the completeness and effectiveness of business continuity and disaster recovery plans and responses.

 

·                  Ability to successfully implement cost reduction initiatives and realize planned savings, net of restructuring and other costs, without losing customer service focus or negatively affecting business operations. Examples of these initiatives are: our operating efficiency and effectiveness program to drive improvements in financial results, including the future benefits of the 2016 immediately vesting transformative compensation initiative; business integrations; business product simplification; business process outsourcing; offshoring and reorganizations, including any full-time equivalent (FTE) employee reduction programs; procurement initiatives; and real estate rationalization. Additional revenue and cost efficiency and effectiveness initiatives will continue to be assessed and implemented.

 

·                  Financing and debt requirements including: our ability to carry out financing activities, and our ability to maintain investment grade credit ratings in the range of BBB+ or the equivalent.

 

·                  Ability to sustain our dividend growth program through 2019. This program may be affected by factors such as the competitive environment, economic performance in Canada, our earnings and free cash flow, our levels of capital expenditures and spectrum licence purchases, acquisitions, the management of our capital structure, and regulatory decisions and developments. Quarterly dividend decisions are subject to assessment and determination by our Board of Directors (Board) based on the Company’s financial position and outlook. Shares may be purchased under our normal course issuer bid (NCIB) when and if we consider it opportunistic, based on the Company’s financial position and outlook, and the market price of TELUS shares. There can be no assurance that our dividend growth program or any NCIB will be maintained, not changed and/or completed through 2019.

 

 

3



 

·                  Taxation matters including: interpretation of complex domestic and foreign tax laws by the tax authorities that may differ from our interpretations; the timing of income and deductions, such as tax depreciation and operating expenses; changes in tax laws, including tax rates; tax expenses being materially different than anticipated, including the taxability of income and deductibility of tax attributes; elimination of income tax deferrals through the use of different tax year-ends for operating partnerships and corporate partners; and tax authorities adopting more aggressive auditing practices, for example, tax reassessments or adverse court decisions impacting the tax payable by us.

 

·                  Litigation and legal matters including: our ability to successfully respond to investigations and regulatory proceedings; our ability to defend against existing and potential claims and lawsuits, including intellectual property infringement claims and class actions based on consumer claims, data, privacy or security breaches and secondary market liability; and the complexity of legal compliance in domestic and foreign jurisdictions, including compliance with anti-bribery and foreign corrupt practices laws.

 

·                  Health, safety and the environment including: lost employee work time resulting from illness or injury, public concerns related to radio frequency emissions, environmental issues affecting our business including climate change, waste and waste recycling, risks relating to fuel systems on our properties, and changing government and public expectations regarding environmental matters and our responses.

 

·                  Economic growth and fluctuations including: the state of the economy in Canada, which may be influenced by economic and other developments outside of Canada, including potential outcomes of yet unknown policies and actions of foreign governments; future interest rates; inflation; unemployment levels; effects of fluctuating oil prices; effects of low business spending (such as reducing investments and cost structure); pension investment returns, funding and discount rates; and Canadian dollar: U.S. dollar exchange rates.

 

These risks are described in additional detail in Section 9 General trends, outlook and assumptions, and regulatory developments and proceedings and Section 10 Risks and risk management in our 2017 annual MD&A. Those descriptions are incorporated by reference in this cautionary statement but are 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 MD&A.

 

 

4



 

Management’s discussion and analysis (MD&A)

August 3, 2018

 

Contents

 

Section

 

Description

1.

 

Introduction

 

1.1 Preparation of the MD&A

 

 

 

 

1.2 The environment in which we operate

 

 

 

 

1.3 Consolidated highlights

2.

 

Core business and strategy

 

 

3.

 

Corporate priorities for 2018

 

 

4.

 

Capabilities

 

4.1 Principal markets addressed and competition

 

 

 

 

4.2 Operational resources

 

 

 

 

4.3 Liquidity and capital resources

 

 

 

 

4.4 Changes in internal control over financial reporting

5.

 

Discussion of operations

 

5.1 General

 

 

 

 

5.2 Summary of consolidated quarterly results and trends

 

 

 

 

5.3 Consolidated operations

 

 

 

 

5.4 Wireless segment

 

 

 

 

5.5 Wireline segment

6.

 

Changes in financial position

 

 

7.

 

Liquidity and capital resources

 

7.1 Overview

 

 

 

 

7.2 Cash provided by operating activities

 

 

 

 

7.3 Cash used by investing activities

 

 

 

 

7.4 Cash provided (used) by financing activities

 

 

 

 

7.5 Liquidity and capital resource measures

 

 

 

 

7.6 Credit facilities

 

 

 

 

7.7 Sale of trade receivables

 

 

 

 

7.8 Credit ratings

 

 

 

 

7.9 Financial instruments, commitments and contingent liabilities

 

 

 

 

7.10 Outstanding share information

 

 

 

 

7.11 Transactions between related parties

8.

 

Accounting matters

 

8.1 Critical accounting estimates

 

 

 

 

8.2 Accounting policy developments

9.

 

Update to general trends, outlook and assumptions, and regulatory developments and proceedings

 

9.1 Telecommunications industry regulatory developments and proceedings

10.

 

Risks and risk management

 

 

11.

 

Definitions and reconciliations

 

11.1 Non-GAAP and other financial measures

 

 

 

 

11.2 Operating indicators

 

 

5



 

1.              Introduction

 

The forward-looking statements in this section, including estimates regarding economic growth, are qualified by the Caution regarding forward-looking statements at the beginning of this Management’s discussion and analysis (MD&A).

 

1.1 Preparation of the MD&A

 

The following sections present a discussion of our consolidated financial position and performance for the three-month and six-month periods ended June 30, 2018, and should be read together with our June 30, 2018, condensed interim consolidated financial statements (interim consolidated financial statements). 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 interim consolidated financial statements comply with IFRS-IASB and Canadian GAAP and have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. In this MD&A, the term IFRS is used to refer to these standards. We adopted IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers on January 1, 2018, with retrospective application. See Section 5.2 Summary of consolidated quarterly results and trends, Section 5.4 Wireless segment and Section 5.5 Wireline segment of the MD&A, as well as Note 2(c) of the interim consolidated financial statements for reconciliations of results excluding IFRS 15 effects. 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 the nearest GAAP measures in Section 11.1. 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 (sedar.com). Our filings with the Securities and Exchange Commission in the United States, including Form 40-F, are available on EDGAR (sec.gov).

 

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 informed decisions can be made regarding appropriate public disclosure. This MD&A and the interim consolidated financial statements were reviewed by our Audit Committee and authorized by our Board of Directors (Board) for issuance on August 3, 2018.

 

In this MD&A, unless otherwise indicated, results for the second quarter of 2018 (three-month period ended June 30, 2018) and the six-month period ended June 30, 2018 are compared with results from the second quarter of 2017 (three-month period ended June 30, 2017) and the six-month period ended June 30, 2017, adjusted for the retrospective application of IFRS 9 and IFRS 15 (to the three-month period ended and six-month period ended June 30, 2017).

 

1.2 The environment in which we operate

 

The success of our business and the challenges we face can best be understood with reference to the environment in which we operate, including broader economic factors that affect our customers and us, and the competitive nature of our industry. Our estimates regarding our environment also form an important part of the assumptions on which our targets are based.

 

Economic growth

 

We currently estimate that the annual rate of economic growth in Canada in 2018 will be 2.1%, as updated in our first quarter 2018 MD&A, based on a composite of estimates from Canadian banks and other sources. For our incumbent local exchange carrier (ILEC) provinces in Western Canada, we currently estimate that annual rates of economic growth will be 2.5% in 2018 in British Columbia (B.C.) (unchanged from our 2017 annual MD&A), and 2.4% in Alberta (unchanged from our 2017 annual MD&A). The Bank of Canada’s July 2018 Monetary Policy Report estimated economic growth in Canada will be 2.0% in 2018. The extent to which these economic growth estimates affect us and the timing of their impact will depend upon the actual experience of specific sectors of the Canadian economy.

 

In respect of the national unemployment rate, Statistics Canada’s Labour Force Survey reported a rate of 6.0% for June 2018 (5.7% for December 2017 and 6.5% for June 2017). The unemployment rate for B.C. was 5.2% for June 2018 (4.6% for December 2017 and 5.1% for June 2017), while the unemployment rate for Alberta was 6.5% for June 2018 (6.9% for December 2017 and 7.4% for June 2017).

 

With respect to the pace of housing starts, Canada Mortgage and Housing Corporation reported the seasonally adjusted annual rate of housing starts in June 2018 of approximately 248,000 units, compared to the June 2017 rate of approximately 213,000 units.

 

 

6



 

1.3 Consolidated highlights

 

Our Board of Directors

 

At our 2018 annual general meeting held on May 10, 2018, the nominees listed in the TELUS 2018 information circular were elected as directors of TELUS. John Lacey, an independent director who has served as a TELUS director since 2000, retired from our Board on May 10, 2018.

 

Effective August 2, 2018, Christine Magee joined our Board. Christine is the Co-Founder and Co-Chair of Sleep Country Canada, the largest mattress retailer in Canada. From 1982 to 1994, Christine worked in the banking and financial services industry at the National Bank of Canada and Continental Bank of Canada. She is currently a member of the board of directors of Metro Inc., Woodbine Entertainment Group, Trillium Health Partners, Plan International Canada, and the Advisory Council of the Talent Fund. Christine has also taken on an active mentoring role for Women’s Executive Network. The recipient of numerous awards and other recognition, Christine has most recently received the Excellence Canada Special Recognition of Achievement Award in 2017, and was appointed to the Order of Canada on July 1, 2015. Christine holds an Honour’s Business and Administration Degree from the University of Western Ontario.

 

Long-term debt issue and early redemption of 2019 Notes

 

On June 12, 2018, we announced the closure of our offering of US$750 million of senior unsecured 4.60% 30-year notes, maturing on November 16, 2048. The net proceeds were used to repay outstanding indebtedness, including outstanding commercial paper, and for general corporate purposes. We have fully hedged the principal and interest obligations of the notes against fluctuations in the Canadian dollar foreign exchange rate for the entire term of the notes by entering into a foreign exchange derivative (a cross currency interest rate exchange agreement) which effectively converted the principal payments and interest obligations to Canadian dollar obligations with a fixed interest rate of 4.41% and an issued and outstanding amount of $974 million (reflecting a fixed exchange rate of $1.2985). Our average term to maturity of long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda.) Inc. credit facility) is approximately 11.9 years at June 30, 2018, increasing from approximately 10.7 years at December 31, 2017, and approximately 11.1 years at June 30, 2017. Our weighted average interest rate on long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda.) Inc. credit facility) was 4.24% at June 30, 2018, as compared to 4.18% at December 31, 2017 and 4.16% at June 30, 2017.

 

On June 28, 2018, we exercised our right to early redeem, on August 1, 2018, all of our 5.05%, Series CG Notes. The long-term debt prepayment premium has been recorded in the three-month period ending September 30, 2018, and was $34 million before income taxes. Subsequent to this early redemption, the average term to maturity of our long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda) Inc. credit facility) was approximately 12.7 years and our weighted average cost of long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda) Inc. credit facility) was 4.18%.

 

Business acquisition

 

Subsequent to the second quarter of 2018, on July 19, 2018, we acquired a health-related business complementary to our existing lines of healthcare business for consideration of approximately $147 million.

 

 

7



 

Consolidated highlights

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ millions, except footnotes and unless
noted otherwise)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted),
except as noted

 

 

 

Consolidated statements of income

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

3,453

 

3,280

 

5.3

%

6,830

 

6,463

 

5.7

%

Operating income

 

692

 

682

 

1.5

%

1,411

 

1,385

 

1.9

%

Income before income taxes

 

542

 

540

 

0.4

%

1,105

 

1,105

 

%

Net income

 

397

 

396

 

0.3

%

809

 

818

 

(1.1

)%

Net income attributable to Common Shares

 

390

 

389

 

0.3

%

800

 

803

 

(0.4

)%

Adjusted Net income1

 

414

 

412

 

0.5

%

849

 

830

 

2.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share (EPS) ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

0.66

 

0.66

 

%

1.34

 

1.36

 

(1.5

)%

Adjusted basic EPS1

 

0.70

 

0.70

 

%

1.42

 

1.41

 

0.7

%

Diluted EPS

 

0.66

 

0.66

 

%

1.34

 

1.36

 

(1.5

)%

Dividends declared per Common Share ($)

 

0.5250

 

0.4925

 

6.6

%

1.0300

 

0.9725

 

5.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average Common Shares outstanding (millions)

 

596

 

592

 

0.7

%

595

 

591

 

0.7

%

Consolidated statements of cash flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

1,206

 

1,126

 

7.1

%

2,044

 

1,835

 

11.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash used by investing activities

 

(795

)

(1,221

)

(34.9

)%

(1,727

)

(2,043

)

(15.5

)%

Acquisitions

 

(47

)

(466

)

(89.9

)%

(251

)

(478

)

(47.5

)%

Capital expenditures2

 

(791

)

(810

)

(2.3

)%

(1,441

)

(1,534

)

(6.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided (used) by financing activities

 

(143

)

(328

)

(56.4

)%

(143

)

147

 

n/m

 

Other highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriber connections3 (thousands)

 

 

 

 

 

 

 

13,124

 

12,810

 

2.5

%

Earnings before interest, income taxes, depreciation and amortization (EBITDA)1

 

1,251

 

1,208

 

3.6

%

2,520

 

2,443

 

3.1

%

Restructuring and other costs1

 

35

 

36

 

(2.8

)%

69

 

40

 

72.5

%

Adjusted EBITDA4

 

1,286

 

1,241

 

3.6

%

2,589

 

2,480

 

4.4

%

Adjusted EBITDA margin5 (%)

 

37.2

 

37.9

 

(0.7

) pts.

37.9

 

38.4

 

(0.5

) pts.

Free cash flow1

 

329

 

260

 

26.5

%

772

 

477

 

61.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt to EBITDA — excluding restructuring and other costs1,6 (times)

 

 

 

 

 

 

 

2.66

 

2.79

 

n/m

 

 


Notations used in MD&A: n/m — not meaningful; pts. — percentage points.

(1)         These are non-GAAP and other financial measures. See Section 11.1 Non-GAAP and other financial measures.

(2)         Capital expenditures include assets purchased, but not yet paid for, and consequently differ from Cash payments for capital assets, excluding spectrum licences, as reported on the condensed interim consolidated statements of cash flows.

(3)         The sum of active wireless subscribers, residential network access lines (NALs), high-speed Internet access subscribers and TELUS TV subscribers, measured at the end of the respective periods based on information in billing and other systems. Effective April 1, 2017, postpaid subscribers, total subscribers and associated operating statistics (gross additions, net additions, average billing per subscriber unit per month (ABPU), average revenue per subscriber unit per month (ARPU) and churn) were adjusted to include an estimated migration of 85,000 Manitoba Telecom Services Inc. (MTS) subscribers in the opening subscriber balances. Subsequent to this, on October 1, 2017, total subscribers and associated operating statistics were adjusted to reduce estimated migrations of MTS subscribers by 11,000 to 74,000. Effective April 1, 2018, and on a prospective basis, we have adjusted cumulative subscriber connections to remove approximately 68,000 TELUS TV subscribers as we have ceased marketing our Satellite TV product.

(4)         Adjusted EBITDA for all periods excludes restructuring and other costs (See Section 11.1 for restructuring and other cost amounts). Adjusted EBITDA for the second quarter and first six months of 2017 excludes net gains and equity income of $3 million in the second quarter of 2017 related to real estate joint venture developments.

(5)         Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues, where the calculation of Operating revenues excludes the second quarter of 2017 net gains and equity income related to real estate joint venture developments.

(6)         2017 amount excludes the effects of implementing IFRS 9 and IFRS 15. Had the 2018 amount excluded the effects of implementing IFRS 9 and IFRS 15, the 2018 amount would be 2.72. (See Section 7.5 Liquidity and capital resource measures.)

 

 

8



 

Operating highlights

 

·                  Consolidated operating revenues increased by $173 million in the second quarter of 2018 and $367 million in the first six months of 2018:

 

Service revenues increased by $143 million in the second quarter of 2018 and $267 million in the first six months of 2018, mainly due to growth in wireless network revenue and wireline data services revenue, partly offset by the ongoing decline in legacy wireline voice revenue.

 

Equipment revenues increased by $31 million in the second quarter of 2018 and $88 million in the first six months of 2018, largely due to higher wireless equipment revenue resulting from increases in postpaid gross additions as well as higher-value smartphones in the sales mix.

 

Other operating income was relatively flat in the second quarter of 2018 and increased by $12 million in the first six months of 2018. The increase in the first six months of 2018 was primarily due to higher net gains on sales of certain assets, and property, plant and equipment.

 

For additional details on operating revenues, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

·                  During the 12-month period ending June 30, 2018, our total subscriber connections increased by 314,000, reflecting a 4.6% increase in wireless postpaid subscribers, a 5.3% increase in high-speed Internet subscribers and excluding the Satellite TV subscriber adjustment, a 4.1% increase in TELUS TV subscribers, partly offset by a 5.6% decline in wireless prepaid subscribers and a 4.5% decline in residential NALs.

 

Our postpaid wireless subscriber net additions were 87,000 in the second quarter of 2018 and 135,000 in the first six months of 2018, down 12,000 and 8,000, respectively, from the same periods in 2017, due to continued net new demand from Canadian consumers and businesses offset by incremental deactivations from competitive intensity. Our average monthly postpaid subscriber churn rate was 0.83% in the second quarter of 2018 and 0.89% in the first six months of 2018, as compared to our record low churn rate of 0.79% in the second quarter of 2017 and 0.86% in the first six months of 2017. (See Section 5.4 Wireless segment for additional details.)

 

Net additions of high-speed Internet subscribers were 29,000 in the second quarter of 2018 and 51,000 in the first six months, up 12,000 and 10,000, respectively, from the same periods in 2017. The increases resulted from the increased demand for our high-speed broadband services, including fibre to the premises (FTTP), as well as improved churn reflecting our focus on executing customers first initiatives and retention programs. Net additions of TELUS TV subscribers were 15,000 in the second quarter of 2018 and 21,000 in the first six months of 2018, up 10,000 in the quarter and 9,000 in the six-month period. The increases reflect higher gross additions from our diverse product offerings and lower customer churn rate. Our continued focus on expanding our addressable high-speed Internet and Optik TV® footprint, connecting more homes and businesses directly to fibre, and bundling these services together contributed to combined Internet and TV subscriber growth of 135,000 or 4.9% over the last 12 months excluding the Satellite TV subscriber adjustment. (See Section 5.5 Wireline segment for additional details.)

 

·                  Operating income increased by $10 million in the second quarter of 2018 and $26 million in the first six months of 2018, reflecting wireless network revenue growth driven by a growing customer base, in addition to growth in data service revenues including revenues from business acquisitions. These increases were partly offset by increased costs associated with higher wireless gross loading and an increase in higher-value smartphones in the sales mix, increased administrative costs and increased customer support costs from growth in the customer base, incremental increases in compensation from an increase in the number of employees from business acquisitions primarily in our TELUS International (Cda) Inc. subsidiary, and higher depreciation and amortization due to growth in the asset base over the last 12 months resulting in part from business acquisitions.

 

EBITDA includes restructuring and other costs, as well as net gains and equity income related to real estate joint ventures recorded in the second quarter of 2017. EBITDA increased by $43 million or 3.6% in the second quarter of 2018, and increased by $77 million or 3.1% in the first six months of 2018.

 

Adjusted EBITDA excludes restructuring and other costs, as well as excludes net gains and equity income related to real estate joint ventures recorded in the second quarter of 2017. Adjusted EBITDA increased by $45 million or 3.6% in the second quarter of 2018 and increased by $109 million or 4.4% in the first six months of 2018. The increases reflect growth in wireless network revenues and increased wireline service revenues, partially offset by incremental increases in employee benefits expense from an increase in the number of employees from business acquisitions primarily in our TELUS International (Cda) Inc. subsidiary. (See Section 5.4 Wireless segment and Section 5.5 Wireline segment for additional details.)

 

 

9



 

·                  Income before income taxes was relatively flat in both the second quarter of 2018 and the first six months of 2018. Higher Operating income as noted above, was offset by an increase in Financing costs. The increase in Financing costs resulted primarily from higher average long-term debt outstanding and, for the first six months of 2018, lower foreign exchange gains. In the second quarter of 2018, there were higher foreign exchange gains. (See Financing costs in Section 5.3.)

 

·                  Income taxes were relatively flat in the second quarter of 2018 and increased by $9 million in the first six months of 2018, primarily due to an increase in the B.C. corporate income tax rate, in addition to an increase in adjustments for foreign tax.

 

·                  Net income attributable to Common Shares was relatively flat in the second quarter of 2018 and decreased by $3 million in the first six months of 2018. The decrease in the first six months of 2018 was driven by increases in Financing costs and Income taxes, partly offset by higher Operating income.

 

Adjusted Net income excludes the effects of restructuring and other costs, income-tax related adjustments and net gains and equity income related to real estate joint venture developments. Adjusted Net income was relatively flat in the second quarter of 2018 and increased by $19 million or 2.3% in the first six months of 2018.

 

Reconciliation of adjusted Net income

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Net income attributable to Common Shares

 

390

 

389

 

1

 

800

 

803

 

(3

)

Add back (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and other costs, after income taxes

 

25

 

26

 

(1

)

50

 

30

 

20

 

Favourable income tax-related adjustments

 

(1

)

(1

)

 

(1

)

(1

)

 

Net gains and equity income from real estate joint venture developments, after income taxes

 

 

(2

)

2

 

 

(2

)

2

 

Adjusted Net income

 

414

 

412

 

2

 

849

 

830

 

19

 

 

·                  Basic EPS was flat in the second quarter of 2018 and decreased by $0.02 or 1.5% in the first six months of 2018. The decrease in the first six months of 2018 was driven by increases in Financing costs and Income taxes, partly offset by higher Operating income.

 

Adjusted basic EPS excludes the effects of restructuring and other costs, income-tax related adjustments and net gains and equity income related to real estate joint venture developments. Adjusted basic EPS was flat in the second quarter of 2018 and increased by $0.01 or 0.7% in the first six months of 2018.

 

Reconciliation of adjusted basic EPS

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Basic EPS

 

0.66

 

0.66

 

 

1.34

 

1.36

 

(0.02

)

Add back (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and other costs, after income taxes, per share

 

0.04

 

0.04

 

 

0.08

 

0.05

 

0.03

 

Adjusted basic EPS

 

0.70

 

0.70

 

 

1.42

 

1.41

 

0.01

 

 

·                  Dividends declared per Common Share were $0.5250 in the second quarter of 2018 and $1.0300 in the first six months of 2018, reflecting increases of 6.6% from the second quarter of 2017 and 5.9% from the first six months of 2017. On August 2, 2018, the Board declared a third quarter dividend of $0.5250 per share on the issued and outstanding Common Shares, payable on October 1, 2018, to shareholders of record at the close of business on September 10, 2018. The third quarter dividend increased by $0.0325 per share or 6.6% from the $0.4925 per share dividend declared one year earlier, consistent with our multi-year dividend growth program described in Section 4.3 Liquidity and capital resources.

 

 

10



 

Liquidity and capital resource highlights

 

·                  Net debt to EBITDA — excluding restructuring and other costs was 2.66 times at June 30, 2018. Excluding the effects of implementing IFRS 9 and IFRS 15, the net debt to EBITDA — excluding restructuring and other costs ratio was 2.72 times at June 30, 2018, down from 2.79 times at June 30, 2017, as the growth in EBITDA — excluding restructuring and other costs exceeded the increase in net debt. (See Section 4.3 Liquidity and capital resources and Section 7.5 Liquidity and capital resource measures.)

 

·                  Cash provided by operating activities increased by $80 million in the second quarter of 2018 primarily due to growth in Adjusted EBITDA and other working capital changes. In the first six months of 2018, Cash provided by operating activities increased by $209 million resulting from growth in Adjusted EBITDA, lower income taxes paid, which reflected the reorganization of our legal structure in the third quarter of 2017 that impacted the timing of cash income tax payments, and higher restructuring and other costs paid in the first six months of 2017.

 

·                  Cash used by investing activities decreased by $426 million or 34.9% in the second quarter of 2018 and $316 million in the first six months of 2018 attributed to lower cash payments for business acquisitions. Acquisitions decreased by $419 million in the second quarter of 2018 and $227 million in the first six months of 2018 as we made larger cash payments for business acquisitions in the second quarter of 2017 including the MTS and Kroll Computer Systems Inc. transactions. Capital expenditures decreased by $19 million in the second quarter of 2018 and $93 million in the first six months of 2018, primarily due to increased wireless capital expenditures in 2017 from costs incurred to update our radio access network technology in Ontario and Quebec. (See Section 7.3 Cash used by investing activities.)

 

·                  Cash used by financing activities decreased by $185 million in the second quarter of 2018, reflecting increased issuances of long-term debt, net of redemptions. Cash provided by financing activities decreased by $290 million in the first six months of 2018 as there were lower issuances of long-term debt, net of redemptions. (See Section 7.4 Cash provided (used) by financing activities.)

 

·                  Free cash flow increased by $69 million in the second quarter of 2018 largely from higher Adjusted EBITDA and lower capital expenditures. Free cash flow increased by $295 million in the first six months of 2018, resulting primarily from lower capital expenditures, higher Adjusted EBITDA, lower income taxes paid and lower restructuring and other costs paid. (See calculation in Section 11.1 Non-GAAP and other financial measures.) The application of IFRS 15 reflects a non-cash accounting change. As such, the underlying economics and free cash flow generated by the business are not impacted by the change.

 

2.              Core business and strategy

 

Our core business and our strategic imperatives were described in our 2017 annual MD&A.

 

3.              Corporate priorities for 2018

 

Our annual corporate priorities are used to advance our long-term strategic imperatives and address near-term opportunities and challenges. The following table provides a discussion of activities and initiatives that relate to our 2018 corporate priorities.

 

Honouring our team, customers and social purpose by delivering on our brand promise

 

·                  On May 31, 2018, we announced that we are expanding our TELUS Mobility for Good program to Ontario with collaboration from the Children’s Aid Foundation of Canada. This program will assist up to 7,200 qualifying youth transitioning from care with a free smartphone and fully subsidized plan from TELUS for two years.

 

·                  In June 2018, we announced that we are expanding our TELUS Internet for Good program by participating in the federal government’s new Connecting Families initiative to help bridge the digital divide for Canadian families who may struggle to afford access to home Internet.

 

·                  Our Pik TV™ offering can now be accessed directly from an Internet browser or through our Android or iOS mobile applications, enabling streaming on computers, smartphones and tablets. Our Pik TV media box and its support for Google Play Store applications is now an optional, complementary component of the Pik TV experience.

 

Leveraging our broadband networks to drive TELUS’ growth

 

·                  In the J.D. Power 2018 Canadian Wireless Network Quality Study, TELUS was ranked “Highest Wireless Network Quality Performance” in Ontario, four years in a row; and in the West (including British Columbia, Alberta, Saskatchewan and Manitoba) three years in a row.

 

·                  We have won Ookla’s Mobile Speedtest Award for fastest mobile network in Canada for the second year in a row.

 

 

11



 

·                  We announced investments of $65 million and $45 million to connect homes and businesses of the cities of Delta, B.C., including Tilbury and Annacis Island, and the district of North Vancouver, B.C., respectively, to our TELUS PureFibre™ network, with the regions anticipated to be connected by the fall and by the end of the year, respectively. Additionally, we announced an investment of $110 million to connect the residents and businesses of Richmond, B.C., including Steveston, to our TELUS PureFibre network by the spring of 2019.

 

·                  In April 2018, we became the first provider in Canada to offer 4K HDR content, which is available on Optik TV via Netflix and On Demand. 4K HDR dramatically enhances the picture quality of existing 4K technology by improving the colour contrast range with millions of additional colour options to each individual pixel.

 

·                  In May 2018, we expanded our voice over LTE (VoLTE) coverage across the province of Manitoba.

 

·                  In July 2018, we launched Internet 300/300 over our TELUS PureFibre network offering customers 300 Mbps symmetrical upload and download speeds.

 

Driving emerging opportunities in TELUS Health and TELUS International

 

·                  In May 2018, we acquired the health division of Symbility Solutions Inc. for approximately $17 million.

 

·                  Further to our acquisition of 65% of Xavient Information Systems Inc., we have increased our ability to expand our global IT services offering with the addition of advanced, next-generation IT consulting and delivery capabilities, including Artificial Intelligence-powered Digital Transformation services, User Interface/User Experience design, Open Source Platform services, DevOps, and IT Lifecycle services, in order to provide a more comprehensive suite of services, positioning us for future growth.

 

4.              Capabilities

 

The forward-looking statements in this section, including statements regarding our dividend growth program and our financial objectives in Section 4.3, are qualified by the Caution regarding forward-looking statements at the beginning of this MD&A.

 

4.1 Principal markets addressed and competition

 

For a discussion of our principal markets and an overview of competition, refer to Section 4.1 of our 2017 annual MD&A.

 

4.2 Operational resources

 

Wireless

 

Churn is defined in Section 11.2 of this MD&A. Our monthly postpaid churn rate was 0.83% in the second quarter of 2018 and has now been below 1% for 19 of the past 20 quarters despite strong competitive and economic pressures. In the second quarter of 2018, we continued to deliver leading blended customer churn on a national basis. Our monthly blended churn rate was 1.01% in the second quarter of 2018, which represented our second-best second quarter churn rate since we became a national carrier 18 years ago. This further speaks to the success of our differentiated customers first culture, our ongoing focus on delivering an outstanding customer experience, combined with attractive new products and services, and our retention programs.

 

Since mid-2013, we have invested more than $3.6 billion to acquire wireless spectrum licences in spectrum auctions and other transactions, which has more than doubled our national spectrum holdings in support of our top corporate priority to put customers first. Wireless data consumption has been increasing rapidly and we have responded by investing to extend the capacity of our network to support the additional data consumption and growth in our wireless customer base. This includes investments in wireless small cells connected to our fibre technology to improve coverage and capacity and to prepare for a more efficient and timely evolution to 5G wireless services.

 

As at June 30, 2018, our 4G long-term evolution (LTE) technology covered 99% of Canada’s population, consistent with June 30, 2017. Furthermore, we have continued to invest in our LTE advanced network roll-out, which covered more than 91% of Canada’s population at June 30, 2018, up from more than 84% at June 30, 2017.

 

Wireline

 

We are continuing to invest in our incumbent local exchange carrier (ILEC) urban and rural communities with commitments to deliver broadband technology capabilities to as many Canadians as possible. We are expanding our fibre footprint by connecting more homes and businesses directly to fibre in communities across B.C., Alberta and Eastern Quebec. We have also increased broadband Internet speeds, expanded our IP TV video-on-demand library and high-definition content, including 4K TV and 4K HDR capabilities, and enhanced marketing of data products and bundles resulting in improved churn rates. Our fibre technology is also an essential component of our wireless access technology and will enable 5G deployment in the future as referenced above. Our TELUS SmartHome and Business Security integrates security and safety monitoring with smart devices.

 

 

12



 

As at June 30, 2018, our high-speed broadband footprint covered more than 3 million households and businesses in B.C., Alberta and Eastern Quebec, including approximately 1.65 million households and businesses (representing approximately 55% of our total high-speed broadband footprint), which provides these premises with immediate access to our gigabit-capable fibre-optic technology. This is up from approximately 1.26 million households and businesses in the second quarter of 2017, representing approximately 42% of households and businesses in our high-speed broadband footprint covered by fibre-optic cable.

 

4.3 Liquidity and capital resources

 

Capital structure financial policies

 

Our objective when managing capital is to maintain a flexible capital structure that optimizes the cost and availability of capital at acceptable risk.

 

In the management of capital and in its definition, we include Common Share equity (excluding Accumulated other comprehensive income), Long-term debt (including long-term credit facilities, commercial paper backstopped by long-term credit facilities and any hedging assets or liabilities associated with Long-term debt items, net of amounts recognized in Accumulated other comprehensive income), Cash and temporary investments, and short-term borrowings arising from securitized trade receivables.

 

We manage our capital structure and make adjustments to it in light of changes in economic conditions and the risk characteristics of our business. In order to maintain or adjust our capital structure, we may adjust the amount of dividends paid to holders of Common Shares, purchase Common Shares for cancellation pursuant to normal course issuer bid programs, issue new shares, issue new debt, issue new debt to replace existing debt with different characteristics, and/or increase or decrease the amount of trade receivables sold to an arm’s-length securitization trust.

 

We monitor capital utilizing a number of measures, including net debt to EBITDA — excluding restructuring and other costs ratio, coverage ratios and dividend payout ratios. (See definitions in Section 11.1 Non-GAAP and other financial measures.) Through the course of fiscal 2018, we will monitor these measures excluding the effects of implementing IFRS 9 and IFRS 15. (See Section 8.2 Accounting policy developments in our 2017 annual MD&A.)

 

Financing and capital structure management plans

 

Report on financing and capital structure management plans

 

Pay dividends to the holders of Common Shares under our multi-year dividend growth program

 

·                  In May 2016, we announced our intention to target ongoing semi-annual dividend increases, with the annual increase in the range of 7 to 10% from 2017 through to the end of 2019, thereby extending the policy first announced in May 2011. Notwithstanding this target, dividend decisions will continue to be subject to our Board’s assessment and the determination of our financial position and outlook on a quarterly basis. Our long-term dividend payout ratio guideline is 65 to 75% of prospective net earnings per share. (See Section 7.5 Liquidity and capital resource measures). There can be no assurance that we will maintain a dividend growth program or that it will be unchanged through 2019. (See Caution regarding forward-looking statements — Ability to sustain our dividend growth program through 2019 and Section 10.7 Financing, debt requirements and returning cash to shareholders in our 2017 annual MD&A.)

 

·                  On August 2, 2018, a third quarter dividend of $0.5250 per share was declared on our issued and outstanding Common Shares, payable on October 1, 2018, to shareholders on record at the close of business on September 10, 2018. The third quarter dividend for 2018 reflects a cumulative increase of $0.0325 per share or 6.6% from the $0.4925 per share dividend paid in October 2017.

 

·                  During the three-month and six-month periods ended June 30, 2018, our dividend reinvestment and share purchase plan trustee purchased from Treasury approximately 0.5 million dividend reinvestment Common Shares for $21 million, and approximately 0.9 million dividend reinvestment Common Shares for $41 million, respectively, with no discount applicable.

 

Purchase Common Shares

 

·                  During the three-month and six-month periods ended June 30, 2018, and up to the date of this MD&A, we did not repurchase or cancel any shares pursuant to our NCIB.

 

·                  In August 2018, we received approval from the Toronto Stock Exchange (TSX) (subject to receiving approval from Canadian securities regulators) to amend our normal course issuer bid (2018 NCIB) expiring on November 12, 2018, to permit TELUS Communications Inc., a direct wholly owned subsidiary of TELUS Corporation, to purchase Common Shares with an aggregate fair market value of up to $105 million for donation to a charitable foundation established by us. TELUS and TELUS Communications Inc. will purchase Common Shares only when and if they consider it advisable. All other terms of the 2018 NCIB remain unchanged except the maximum number of shares that can be purchased during the same trading day on the TSX is 238,480 shares (being 25% of the average daily trading volume for the six months ended July 31, 2018, which was equal to 953,922 shares), subject to certain exemptions for block purchases.

 

 

13



 

Use proceeds from securitized trade receivables (Short-term borrowings), bank facilities and commercial paper as needed, to supplement free cash flow and meet other cash requirements

 

·                  Our issued and outstanding commercial paper was $3 million at June 30, 2018, all of which was denominated in U.S. dollars (US$2 million), compared to $1,140 million (US$908 million) at December 31, 2017, and $1,032 million (US$794 million) at June 30, 2017.

 

·                  Our net draws on the TELUS International (Cda) Inc. credit facility were $439 million ($432 million net of unamortized issue costs) at June 30, 2018, compared to $346 million ($339 million net of unamortized issue costs) at December 31, 2017, and $294 million ($288 million net of unamortized issue costs) at June 30, 2017. The credit facility is non-recourse to TELUS Corporation.

 

·                  Proceeds from securitized trade receivables were $100 million at June 30, 2018, (December 31 and June 30, 2017 — $100 million).

 

Maintain compliance with financial objectives

 

·                  Maintain investment grade credit ratings in the range of BBB+ or the equivalent — On August 3, 2018, investment grade credit ratings from the four rating agencies that cover TELUS were in the desired range. (See Section 7.8 Credit ratings.)

 

·                  Net debt to EBITDA — excluding restructuring and other costs ratio of 2.00 to 2.50 times — As measured at June 30, 2018, the ratio was 2.66 times. Excluding the effects of implementing IFRS 9 and IFRS 15, the net debt to EBITDA — excluding restructuring and other costs ratio was 2.72 times at June 30, 2018, outside of the objective range, primarily due to the funding of spectrum licences acquired in wireless spectrum auctions held during 2014 and 2015, and the elevated strategic capital investments in our fibre-optic network. We expect these ratios to decline in 2018 and we continue to expect them to return to within the objective range in the medium term, consistent with our long-term strategy. See Long-term debt issue and early redemption of 2019 Notes under Section 1.3 Consolidated highlights for discussion on the early redemption of our Series CG Notes. (See also Section 7.5 Liquidity and capital resource measures.)

 

·                  Dividend payout ratio of 65 to 75% of net earnings per share on a prospective basis — Our objective range is on a prospective basis. The dividend payout ratio we present in this MD&A is a historical measure utilizing the last four quarters of dividends declared and earnings per share, and is disclosed for illustrative purposes in evaluating our target guideline. As at June 30, 2018, both the historical ratio and the adjusted historical ratio were 77%. Excluding the effects of implementing IFRS 9 and IFRS 15, the historical ratio of 82% and the adjusted historical ratio of 82% exceeded the objective range; however, we currently expect that we will be within our target guideline when considered on a prospective basis within the medium term. (See Section 7.5 Liquidity and capital resource measures.)

 

·                  Generally maintain a minimum of $1 billion in unutilized liquidity — As at June 30, 2018, our unutilized liquidity was approximately $2.2 billion. (See Section 7.6 Credit facilities.)

 

4.4 Changes in internal control over financial reporting

 

Disclosure controls and procedures

 

There were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

5.              Discussion of operations

 

This section contains forward-looking statements, including those with respect to average billing per subscriber unit per month (ABPU) and average revenue per subscriber unit per month (ARPU) growth, wireless trends regarding loading and retention spending, high-speed Internet subscriber growth, and various future trends. To support the transition to the new accounting standard, we believe ABPU provides management, investors and analysts with useful information to assess and evaluate our performance excluding the effects of implementing IFRS 15. ABPU represents the average monthly wireless network revenue derived from monthly service plan, roaming and usage charges, as well as monthly re-payments of the outstanding device balance owing from customers on contract (see Section 11.2 Operating indicators). There can be no assurance that we have accurately identified these trends based on past results or that these trends will continue. See Caution regarding forward-looking statements at the beginning of this MD&A.

 

5.1 General

 

A significant judgment we make is in respect of distinguishing between our wireless and wireline operations and cash flows (and this extends to allocations of both direct and indirect expenses and of capital expenditures). The clarity of such distinction has been increasingly affected by the convergence and integration of our wireless and wireline telecommunications infrastructure and technology. The continued build-out of our technology-agnostic fibre-optic infrastructure, in combination with converged edge technology, has significantly affected this judgment, as has the commercialization of fixed-wireless telecommunications solutions for customers and the consolidation of our non-customer facing operations. As a result, it has become increasingly impractical and difficult to objectively and clearly

 

 

14



 

distinguish between our wireless and wireline operations and cash flows. As we do not currently aggregate operating segments, our reportable segments as at June 30, 2018, are also wireless and wireline. Segmented information in Note 5 of the interim consolidated financial statements is regularly reported to our Chief Executive Officer (CEO) (our chief operating decision-maker).

 

We applied IFRS 9 and IFRS 15, both with a transition date of January 1, 2018, with retrospective application. Refer to Section 8.2 Accounting policy developments in this MD&A and Note 2 of the interim consolidated financial statements for further information. In the following table, results for the 2016 periods do not include the application of IFRS 9 or IFRS 15.

 

5.2 Summary of consolidated quarterly results and trends

 

Summary of quarterly results

 

 

 

2018 Q2

 

2018 Q1

 

2017 Q4

 

2017 Q3

 

2017 Q2

 

2017 Q1

 

2016 Q4

 

2016 Q3

 

($ millions, except per share amounts)

 

Applying IFRS 9 and IFRS 15

 

Excluding IFRS 9 and
IFRS 15

 

Operating revenues

 

3,453

 

3,377

 

3,541

 

3,404

 

3,280

 

3,183

 

3,305

 

3,238

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods and services purchased1

 

1,491

 

1,408

 

1,635

 

1,522

 

1,423

 

1,324

 

1,574

 

1,426

 

Employee benefits expense1

 

711

 

700

 

683

 

638

 

649

 

624

 

962

 

681

 

Depreciation and amortization

 

559

 

550

 

564

 

547

 

526

 

532

 

533

 

515

 

Total operating expenses

 

2,761

 

2,658

 

2,882

 

2,707

 

2,598

 

2,480

 

3,069

 

2,622

 

Operating income

 

692

 

719

 

659

 

697

 

682

 

703

 

236

 

616

 

Financing costs

 

150

 

156

 

144

 

149

 

142

 

138

 

134

 

129

 

Income before income taxes

 

542

 

563

 

515

 

548

 

540

 

565

 

102

 

487

 

Income taxes

 

145

 

151

 

161

 

142

 

144

 

143

 

15

 

132

 

Net income

 

397

 

412

 

354

 

406

 

396

 

422

 

87

 

355

 

Net income attributable to Common Shares

 

390

 

410

 

353

 

 

403

 

389

 

414

 

81

 

348

 

Net income per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (EPS)

 

0.66

 

0.69

 

0.59

 

0.68

 

0.66

 

0.70

 

0.14

 

0.59

 

Adjusted basic EPS2

 

0.70

 

0.73

 

0.66

 

0.70

 

0.70

 

0.71

 

0.53

 

0.65

 

Diluted EPS

 

0.66

 

0.69

 

0.59

 

0.68

 

0.66

 

0.70

 

0.14

 

0.59

 

Dividends declared per Common Share

 

0.5250

 

0.5050

 

0.5050

 

0.4925

 

0.4925

 

0.48

 

0.48

 

0.46

 

Additional information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA2

 

1,251

 

1,269

 

1,223

 

1,244

 

1,208

 

1,235

 

769

 

1,131

 

Restructuring and other costs2

 

35

 

34

 

54

 

23

 

36

 

4

 

348

 

60

 

(Net losses and equity losses) net gains and equity income from real estate joint venture developments

 

 

 

(2

)

 

3

 

 

7

 

10

 

MTS net recovery3

 

 

 

21

 

 

 

 

 

 

Adjusted EBITDA2 

 

1,286

 

1,303

 

1,258

 

1,267

 

1,241

 

1,239

 

1,110

 

1,181

 

Cash provided by operating activities

 

1,206

 

838

 

979

 

1,133

 

1,126

 

709

 

732

 

1,032

 

Free cash flow2

 

329

 

443

 

274

 

215

 

260

 

217

 

(191

)

98

 

 


(1)         Goods and services purchased and Employee benefits expense amounts include restructuring and other costs.

(2)         See Section 11.1 Non-GAAP and other financial measures.

(3)         Refer to our 2017 annual MD&A for definition.

 

Trends

 

The trend of year-over-year increases in consolidated revenue reflects: (i) wireless network revenue generated from growth in our subscriber base and historical ARPU growth; (ii) growth in wireline data service revenue, including customer care and business services (CCBS) contracting (formerly business process outsourcing), Internet and enhanced data, TELUS TV services and TELUS Health revenues. Increased CCBS contracting revenues and TELUS SmartHome and Business Security revenues includes revenues from business acquisitions. Increased Internet and TV service revenues are being generated by subscriber growth and higher Internet revenue per customer. Year-over-year wireless equipment revenues generally increased from greater postpaid gross additions and higher-value smartphones in the sales mix. For additional information on wireless and wireline revenue and subscriber trends, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

The trend of year-over-year increases in Goods and services purchased expense reflects higher equipment expenses associated with a general increase in postpaid gross additions and retention volumes and increases in higher-

 

 

15



 

value smartphones in the sales mix, increasing wireless and wireline customer service, roaming, and external labour expenses to support growth in our subscriber base; and increased wireline TV costs of sales associated with a growing subscriber base.

 

The general trend of year-over-year increases in net Employee benefits expense reflects increases in the number of employees resulting from business acquisitions supporting CCBS contracting revenue growth and expansion of our TELUS Health offerings. This was partly offset by moderating wages and salaries expense resulting from reductions in the number of full-time equivalent (FTE) domestic employees associated with cost efficiency and effectiveness programs.

 

The trend of year-over-year increases in Depreciation and amortization reflects increases due to growth in capital assets, which is supporting the expansion of our broadband footprint and enhanced long-term evolution (LTE) network coverage, and growth in business acquisitions. The investments in our fibre-optic technology also support our small-cell technology strategy to improve coverage and capacity while preparing for a more efficient and timely evolution to 5G.

 

The trend of year-over-year increases in Financing costs reflects an increase in long-term debt outstanding, mainly associated with our generational investments in fibre to homes and businesses and our wireless technology, and our increased level of business acquisitions. Financing costs are net of capitalized interest, which was related to spectrum licences acquired during the wireless spectrum licence auctions. Capitalization of interest ceased in the first quarter of 2017, as cell sites are now capable of utilizing the purchased frequencies. Financing costs also include Interest accretion on provisions and Employee defined benefit plans net interest expense. Additionally, for the eight periods shown, Financing costs include varying amounts of foreign exchange gains or losses and varying amounts of interest income.

 

The trend in Net income reflects the items noted above, as well as non-cash adjustments arising from legislated income tax changes and adjustments recognized in the current periods for income taxes of prior periods, including any related after-tax interest on reassessments. Historically, the trend in basic EPS has been impacted by the same trends as Net income and has also been impacted by share purchases under our normal course issuer bid programs. While a 12-month program which commenced in November 2017 is currently in place, there have been no such purchases under the program. See Section 4.3 Financing and capital structure management plans.

 

The general trend of year-over-year increases in Cash provided by operating activities reflects generally higher consolidated Adjusted EBITDA and a historical decrease in year-over-year income tax payments in 2017 and into the first quarter of 2018, consistent with our assumption described in Section 9.3 of our 2017 annual MD&A. This trend was reduced by increased interest payments arising from increases in debt outstanding, offset by historically lower fixed-term interest rates. The trend of year-over-year increases in free cash flow reflects the above factors affecting Cash provided by operating activities. Free cash flow was impacted by the increases in capital expenditures in 2017 as we connected more homes and businesses directly to fibre and have now reached 55% of our Optik TV footprint at the end of the second quarter of 2018. For further discussion on these trends, see Section 5.4 Wireless segment and Section 5.5 Wireline segment.

 

The following table provides a reconciliation of consolidated EBITDA results to consolidated results excluding the effects of implementing IFRS 15.

 

EBITDA — Reconciliation of consolidated IFRS 15 impacts

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

($ in millions)

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

EBITDA

 

1,251

 

1,208

 

3.6

%

2,520

 

2,443

 

3.1

%

Effects of contract asset, acquisition and fulfilment

 

4

 

(14

)

(128.6

)%

22

 

12

 

83.3

%

EBITDA — excluding IFRS 15 impacts

 

1,255

 

1,194

 

5.1

%

2,542

 

2,455

 

3.5

%

Add back restructuring and other costs — excluding IFRS 15 impacts

 

35

 

39

 

(10.3

)%

73

 

43

 

69.8

%

Deduct net gains and equity income from real estate joint venture developments

 

 

(3

)

(100.0

)%

 

(3

)

(100.0

)%

Adjusted EBITDA1 — excluding IFRS 15 impacts

 

1,290

 

1,230

 

5.0

%

2,615

 

2,495

 

4.8

%

 


(1)         See description under EBITDA in Section 11.1 Non-GAAP and other financial measures.

 

See Section 5.4 Wireless segment and Section 5.5 Wireline segment for additional details.

 

5.3 Consolidated operations

 

The following is a discussion of our consolidated financial performance. Segment information in Note 5 of the interim consolidated financial statements is regularly reported to our CEO. We discuss the performance of our segments in Section 5.4 Wireless segment, Section 5.5 Wireline segment and Section 7.3 Cash used by investing activities.

 

 

16



 

Operating revenues

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Service

 

2,953

 

2,810

 

5.1

%

5,839

 

5,572

 

4.8

%

Equipment

 

487

 

456

 

6.8

%

952

 

864

 

10.2

%

Revenues arising from contracts with customers

 

3,440

 

3,266

 

5.3

%

6,791

 

6,436

 

5.5

%

Other operating income

 

13

 

14

 

(7.1

)%

39

 

27

 

44.4

%

Operating revenues

 

3,453

 

3,280

 

5.3

%

6,830

 

6,463

 

5.7

%

 

Consolidated operating revenues increased by $173 million in the second quarter of 2018 and $367 million in the first six months of 2018.

 

·                  Service revenues increased by $ 143 million in the second quarter of 2018 and $267 million in the first six months of 2018, reflecting growth in CCBS contracting revenue, wireless network revenue and wireline data services, partly offset by the continuing decline in wireline voice revenues. Wireless network revenue reflects a growing wireless subscriber base. The increase in wireline service revenue reflects increased CCBS contracting revenue growth including the growth in business volumes from recent business acquisitions, as well as increases in Internet and enhanced data service, TELUS Health revenues, TELUS TV revenue and revenue from our TELUS SmartHome and Business Security line of business. Internet and TV revenues increased due to subscriber growth, as well as higher Internet revenue per customer.

 

·                  Equipment revenues increased by $31 million in the second quarter of 2018 and $88 million in the first six months of 2018, primarily due to increased wireless revenue mainly from increases in postpaid gross additions as well as higher-value smartphones in the sales mix. Excluding the effects of implementing IFRS 15, equipment revenues would have increased by $18 million or 10.7% in the second quarter of 2018, and $37 million or 11.3% in the first six months of 2018. See Note 2(c) of the interim consolidated financial statements.

 

·                  Other operating income was relatively flat in the second quarter of 2018 and increased by $12 million in the first six months of 2018, primarily due to higher net gains in the first six months than in the comparable period from the sale of certain assets, as well as property, plant and equipment.

 

Operating expenses

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Goods and services purchased

 

1,491

 

1,423

 

4.8

%

2,899

 

2,747

 

5.5

%

Employee benefits expense

 

711

 

649

 

9.6

%

1,411

 

1,273

 

10.8

%

Depreciation

 

411

 

391

 

5.1

%

822

 

793

 

3.7

%

Amortization of intangible assets

 

148

 

135

 

9.6

%

287

 

265

 

8.3

%

Operating expenses

 

2,761

 

2,598

 

6.3

%

5,419

 

5,078

 

6.7

%

 

Consolidated operating expenses increased by $163 million in the second quarter of 2018 and $341 million in the first six months of 2018.

 

·                  Goods and services purchased increased by $68 million in the second quarter of 2018 and $152 million in the first six months of 2018, reflecting incremental increases in wireline external labour, employee-related and other costs associated with business acquisitions primarily in our TELUS International (Cda) Inc. subsidiary, higher wireline product costs associated with equipment sales, costs associated with higher wireless gross loading, higher handset costs, increased roaming costs, and higher non-labour restructuring and other costs.

 

·                  Employee benefits expense increased by $62 million in the second quarter of 2018 and $138 million in the first six months of 2018, due to higher compensation and benefits from an increase in the number of employees from business acquisitions supporting the business growth of TELUS International, as well as higher employee-related restructuring and other costs driven by efficiency initiatives in the quarter. This was partly offset by lower compensation and benefit costs from a decrease in the number of domestic FTEs, excluding business acquisitions, and higher capitalized labour costs.

 

·                  Depreciation increased by $20 million in the second quarter of 2018 and $29 million in the first six months of 2018 due to increased expenditures associated with capital assets over the last 12 months, including those arising from our fibre investment and business acquisitions.

 

 

17



 

·                  Amortization of intangible assets increased by $13 million in the second quarter of 2018 and $22 million in the first six months of 2018, reflecting increased expenditures associated with the intangible asset base, including those arising from business acquisitions.

 

Adjusted EBITDA

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Wireless Adjusted EBITDA (See Section 5.4)

 

851

 

823

 

3.3

%

1,697

 

1,621

 

4.6

%

Wireline Adjusted EBITDA (See Section 5.5)

 

435

 

418

 

4.0

%

892

 

859

 

3.9

%

Adjusted EBITDA

 

1,286

 

1,241

 

3.6

%

2,589

 

2,480

 

4.4

%

 

Adjusted EBITDA increased by $45 million or 3.6% in the second quarter of 2018 and $109 million or 4.4% in the first six months of 2018. The increases reflects growth in wireless network revenues and increased wireline service revenues, partially offset by incremental increases in employee benefits expense primarily from an increase in the number of employees from business acquisitions primarily in our TELUS International (Cda) Inc. subsidiary.

 

Operating income

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Wireless EBITDA (See Section 5.4)

 

844

 

800

 

5.5

%

1,680

 

1,597

 

5.2

%

Wireline EBITDA (See Section 5.5)

 

407

 

408

 

(0.2

)%

840

 

846

 

(0.7

)%

EBITDA

 

1,251

 

1,208

 

3.6

%

2,520

 

2,443

 

3.1

%

Depreciation and amortization (discussed above)

 

(559

)

(526

)

6.3

%

(1,109

)

(1,058

)

4.8

%

Operating income

 

692

 

682

 

1.5

%

1,411

 

1,385

 

1.9

%

 

Operating income increased by $10 million in the second quarter of 2018 and $26 million in the first six months of 2018, while EBITDA increased by $43 million in the second quarter of 2018 and $77 million in the first six months of 2018. These increases reflect wireless network revenue growth driven by a growing customer base, in addition to growth in wireline data service margins, which was partly offset by increased costs associated with higher wireless gross loading, and higher wireline restructuring and other costs from efficiency initiatives.

 

Financing costs

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Interest expense

 

156

 

144

 

8.3

%

306

 

286

 

7.0

%

Employee defined benefit plans net interest

 

3

 

2

 

50.0

%

7

 

3

 

n/m

 

Foreign exchange gains

 

(6

)

(3

)

100.0

%

(2

)

(8

)

(75.0

)%

Interest income

 

(3

)

(1

)

n/m

 

 (5

)

(1

)

n/m

 

Financing costs

 

150

 

142

 

5.6

%

306

 

280

 

9.3

%

 

Financing costs increased by $8 million in the second quarter of 2018 and $26 million in the first six months of 2018, mainly due to the following factors:

 

·                  Interest expense increased by $12 million in the second quarter of 2018 and $20 million in the first six months of 2018, primarily due to the following:

 

·                  The increase in average long-term debt balances outstanding, in addition to an increase in the effective interest rate. Our weighted average interest rate on long-term debt (excluding commercial paper and the revolving component of the TELUS International (Cda) Inc. credit facility) was 4.24% at June 30, 2018, as compared to 4.16% one year earlier. (See Long-term debt issues and repayments in Section 7.4.)

 

·                  Interest accretion on provisions increased by $3 million in the second quarter of 2018 and $4 million in the first six months of 2018, resulting from written put options in respect of business acquisitions.

 

·                  Employee defined benefit plans net interest was relatively flat in the second quarter of 2018 and increased by $4 million in the first six months of 2018, primarily due to the increase in the defined benefit plan deficit at December 31, 2017, to $334 million, from $79 million one year earlier, partly offset by a decrease in the discount rate.

 

 

18



 

·                  Foreign exchange gains have fluctuated as a result of relevant movement of the Canadian dollar relative to the U.S. dollar.

 

·                  Interest income was relatively flat in the second quarter of 2018 and increased by $4 million in the first six months of 2018.

 

Income taxes

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ millions, except tax rates)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Income tax computed at applicable statutory rates

 

147

 

145

 

1.4

%

299

 

295

 

1.4

%

Adjustments recognized in the current period for income taxes of prior periods

 

 

(1

)

(100.0

)%

 

(1

)

(100.0

)%

Other

 

(2

)

 

n/m

 

(3

)

(7

)

(57.1

)%

Income taxes

 

145

 

144

 

0.7

%

296

 

287

 

3.1

%

Income taxes computed at applicable statutory rates (%)

 

27.2

 

26.9

 

0.3

pts.

27.1

 

26.7

 

0.4

pts.

Effective tax rate (%)

 

26.7

 

26.7

 

pts.

26.7

 

25.9

 

0.8

pts.

 

Total income tax expense was relatively flat in the second quarter of 2018 and increased by $9 million in the first six months of 2018, primarily due to an increase in the B.C. corporate income tax rate, in addition to an increase in adjustments for foreign tax.

 

Comprehensive income

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Net income

 

397

 

396

 

0.3

%

809

 

818

 

(1.1

)%

Other comprehensive income (loss) (net of income taxes):

 

 

 

 

 

 

 

 

 

 

 

 

 

Items that may be subsequently reclassified to income

 

(39

)

19

 

n/m

 

(50

)

13

 

n/m

 

Items never subsequently reclassified to income

 

105

 

20

 

n/m

 

62

 

86

 

(27.9

)%

Comprehensive income

 

463

 

435

 

6.4

%

821

 

917

 

(10.5

)%

 

Comprehensive income increased by $28 million in the second quarter of 2018 and decreased by $96 million in the first six months of 2018, primarily due to changes in employee defined benefit plans re-measurement amounts and changes in foreign currency translation adjustments arising from translating financial statements of foreign operations. Items that may be subsequently reclassified to income are composed of changes in the unrealized fair value of derivatives designated as cash flow hedges and foreign currency translation adjustments arising from translating financial statements of foreign operations. Items never subsequently reclassified to income are composed of changes in the measurement of investment financial assets and employee defined benefit plans re-measurement amounts.

 

5.4 Wireless segment

 

Wireless trends and seasonality

 

The historical trend over the last eight quarters in wireless network revenue reflects growth in our subscriber base and historical ARPU growth. This growth was coupled with higher-value smartphones in the sales mix. There has been a general year-over-year increase in equipment revenues from greater postpaid gross additions and higher-value smartphones in the sales mix. The general trend of year-over-year increases in subscriber net additions resulted from the success of our promotions, including marketing efforts focused on higher-value postpaid loading, coupled with the effects of market growth arising from a growing population, changing population demographics and an increasing number of customers with multiple activated devices. Although there have historically been significant third and fourth quarter seasonal effects that result in increased loading, competitive intensity in both the consumer and business markets may impact subscriber addition results and trends for future periods.

 

Wireless ABPU increased due to an emphasis on marketing and increased mix of higher-rate plans and a higher mix of data share plans, which are at higher rates in addition to a higher proportion of higher-value postpaid customers in the subscriber mix in 2018. This was partly offset by competitive pressures driving larger allotments of data provided in rate plans, inclusion of data sharing and international data roaming features and plans, consumer behavioural response to increased frequency of customer data usage notifications, and offloading of data traffic to increasingly available Wi-Fi

 

 

19



 

hotspots. The level of ABPU reflects continued consumer and business demand for our high-quality wireless service experience offset by competitive pressures, including promotional activity and resulting reactions to those pressures and promotions. The economic environment, consumer behaviour, the regulatory environment, device selection and other factors also impact ABPU, and as a consequence, there cannot be assurance that ABPU growth will continue to materialize.

 

Wireless ABPU has historically experienced seasonal sequential increases in the second and third quarters, reflecting higher levels of usage and roaming in the spring and summer, followed by historical seasonal sequential declines in the fourth and first quarters. This seasonal effect on ABPU has moderated, as unlimited nationwide voice plans have become more prevalent and chargeable voice and long distance usage spikes have become less pronounced. In addition, customers are opting for higher-capacity data plans with higher base prices and are benefiting from flexible data top-up features, resulting in less variability in chargeable data usage but higher monthly recurring revenue. Historically, the third and fourth quarter seasonal effects described above have reflected higher wireless subscriber additions, an increase in related acquisition incentives and equipment sales, and higher retention incentives due to contract renewals in those quarters. Retention incentives have historically increased during periods of heightened marketing activity and have coincided with the maturation of contracts that reflect seasonal subscriber additions and renewals in previous periods. These impacts can be more pronounced around popular device launches and seasonal promotional events, such as back to school, Black Friday and the Christmas holiday season. Subscriber additions have generally been lowest in the first quarter.

 

The trend of our continually low average monthly postpaid subscriber churn rate reflects our customers first efforts and our retention programs and our focus on building and maintaining our high-quality network. We may experience pressure on our postpaid subscriber churn if the level of competitive intensity increases, in part due to increased promotional activity, if there is an increase in customers on expired contracts, or if there is an increase in customers bringing their own devices and therefore not entering into new contracts. Accordingly, our wireless segment historical operating results and trends may not be reflective of results and trends for future periods.

 

Wireless operating indicators

 

As at June 30

 

2018

 

2017

 

Change

 

Subscribers1 (000s):

 

 

 

 

 

 

 

Postpaid

 

8,113

 

7,753

 

4.6

%

Prepaid

 

894

 

947

 

(5.6

)%

Total

 

9,007

 

8,700

 

3.5

%

Postpaid proportion of subscriber base (%)

 

90.1

 

89.1

 

1.0

pt.

HSPA+ population coverage2 (millions)

 

37.0

 

36.7

 

0.8

%

LTE population coverage2 (millions)

 

36.8

 

36.5

 

0.8

%

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Subscriber gross additions1 (000s):

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid

 

278

 

262

 

6.1

%

522

 

487

 

7.2

%

Prepaid

 

84

 

80

 

5.0

%

148

 

150

 

(1.3

)%

Total

 

362

 

342

 

5.8

%

670

 

637

 

5.2

%

Subscriber net additions1 (000s):

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid

 

87

 

99

 

(12.1

)%

135

 

143

 

(5.6

)%

Prepaid

 

4

 

(16

)

n/m

 

(39

)

(69

)

43.5

%

Total

 

91

 

83

 

9.6

%

96

 

74

 

29.7

%

ABPU, per month1,3 ($)

 

67.24

 

66.87

 

0.6

%

66.88

 

66.20

 

1.0

%

ARPU, per month1,3 ($)

 

56.18

 

56.55

 

(0.7

)%

55.87

 

56.03

 

(0.3

)%

Churn, per month1,2 (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Blended

 

1.01

 

1.00

 

0.01

pts.

1.07

 

1.09

 

(0.02

) pts.

Postpaid

 

0.83

 

0.79

 

0.04

pts.

0.89

 

0.86

 

0.03

pts.

 


(1)         Effective April 1, 2017, postpaid subscribers, total subscribers and associated operating statistics (gross additions, net additions, ABPU, ARPU and churn) were adjusted to include an estimated migration of 85,000 MTS subscribers in the opening subscriber balances. Subsequent to this, on October 1, 2017, total subscribers and associated operating statistics were adjusted to reduce estimated migrations of MTS subscribers by 11,000 to 74,000.

(2)         Including network access agreements with other Canadian carriers.

(3)         See Section 11.2 Operating indicators. These are industry measures useful in assessing operating performance of a wireless company, but are not measures defined under IFRS-IASB.

 

 

20



 

Operating revenues — Wireless segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Network revenue

 

1,497

 

1,457

 

2.7

%

2,969

 

2,872

 

3.4

%

Equipment and other service revenues

 

424

 

408

 

3.9

%

835

 

763

 

9.4

%

Revenues arising from contracts with customers

 

1,921

 

1,865

 

3.0

%

3,804

 

3,635

 

4.6

%

Other operating income (loss)

 

8

 

(2

)

n/m

 

15

 

 

n/m

 

External operating revenues

 

1,929

 

1,863

 

3.5

%

3,819

 

3,635

 

5.1

%

Intersegment revenues

 

12

 

11

 

9.1

%

23

 

22

 

4.5

%

Wireless operating revenues

 

1,941

 

1,874

 

3.6

%

3,842

 

3,657

 

5.1

%

 

Total wireless operating revenues increased by $67 million in the second quarter of 2018 and $185 million in the first six months of 2018.

 

Network revenue from external customers increased by $40 million in the second quarter of 2018 or 2.7% and $97 million in the first six months of 2018 or 3.4%, reflecting: (i) growth in the subscriber base; and (ii) a larger proportion of customers selecting plans with larger data buckets or periodically topping up their data buckets. These were partly offset by declining chargeable data usage and the competitive environment putting pressure on rate plan prices. Monthly ABPU was $67.24 in the second quarter of 2018 and $66.88 in the first six months of 2018, reflecting increases of $0.37 or 0.6% for the quarter and $0.68 or 1.0% for the six-month period. The increases reflect a higher proportion of higher-value postpaid and smartphone customers in the subscriber mix and our leading network quality. Monthly ARPU was $56.18 in the second quarter of 2018 and $55.87 in the first six months of 2018, reflecting decreases of $0.37 or 0.7% for the quarter and $0.16 or 0.3% for the six-month period, as declines in chargeable data usage more than offset growth from customers selecting plans with larger data buckets.

 

·                  Gross subscriber additions were 362,000 in the second quarter of 2018 and 670,000 for the first six months of 2018, reflecting increases of 20,000 for the quarter and 33,000 for the six-month period. Postpaid gross additions increased by 16,000 for the quarter and 35,000 for the first six months due to the success of promotions and our marketing efforts focused on higher-value postpaid and smartphone loading, and demographic shifts as the Canadian population grows, partly offset by competitive intensity. Prepaid gross activations increased by 4,000 for the quarter, mainly from successful promotions, and decreased by 2,000 for the first six months.

 

·                  Our monthly postpaid subscriber churn rate was 0.83% in the second quarter of 2018 and 0.89% in the first six months of 2018, as compared to 0.79% and 0.86%, respectively, in the comparative periods of 2017. The continuing low postpaid subscriber churn rate during 2018 reflects our focus on executing customers first initiatives and retention programs and our leading network quality, partly offset by incremental deactivations from competitive intensity. Our blended monthly subscriber churn rate was 1.01% in the second quarter of 2018 and 1.07% in the first six months of 2018, as compared to 1.00% and 1.09%, respectively, in the comparable periods of 2017. The marginal increase in our blended subscriber churn rate in the second quarter of 2018 reflects higher postpaid churn due to competitive intensity. The improvement in our blended subscriber churn rate in the first six months of 2018 reflects improvements in prepaid churn rates, as well as an increase in the mix of postpaid subscribers versus prepaid subscribers in our subscriber base.

 

·                  Net subscriber additions reflect postpaid net additions of 87,000 in the second quarter of 2018 and 135,000 in the first six months of 2018, compared to 99,000 and 143,000, respectively, in the comparable periods of 2017. The decline is attributed to the factors affecting postpaid churn as described above. Our prepaid subscriber base increased by 4,000 in the second quarter of 2018 due to successful promotions, as compared to a decrease of 16,000 in the second quarter of 2017. In the first six months of 2018, our prepaid subscriber base decreased by 39,000, as compared to a decrease of 69,000 in the comparable period of 2017. Total prepaid and postpaid net subscriber additions were 91,000 in the second quarter of 2018 and 96,000 in the first six months of 2018, reflecting year-over-year improvements of 8,000 for the quarter and 22,000 for the first six months of 2017.

 

 

21



 

Equipment and other service revenues increased by $16 million in the second quarter of 2018 due to higher postpaid gross additions and more higher-valued smartphones in the sales mix, partly offset by lower retention volumes. In the first six months of 2018, Equipment and other service revenues increased by $72 million, mainly due to higher postpaid gross additions and retention volumes, as well as an increase in higher-valued smartphones in the sales mix. With the implementation of IFRS 15, equipment revenues are allocated a much larger portion of bundle revenues, particularly for our wireless segment, as, in contrast to the accounting principles that were superseded, IFRS 15 does not constrain the measurement of equipment revenue in bundled arrangements to amounts that are received at the time of activation of handsets. The measurement of equipment revenue and service revenue is determined by allocating the minimum transaction price (the “minimum spend” amount required in a contract with a customer) based upon the stand-alone selling prices of the contracted equipment and services included in the minimum transaction price. For clarity, the application of IFRS 15 does not affect our cash flows from operations or the underlying economics of our relationships with customers. See Note 2(a), (c) of the interim consolidated financial statements.

 

Other operating income (loss) increased by $10 million in the second quarter of 2018 and $15 million in the first six months of 2018, mainly due to higher net gains from the sale of property, plant and equipment.

 

Intersegment revenues represent network services that are eliminated upon consolidation along with the associated wireline expenses.

 

Operating expenses — Wireless segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Goods and services purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales expenses

 

423

 

408

 

3.7

%

841

 

774

 

8.7

%

Network operating expenses

 

207

 

201

 

3.0

%

407

 

397

 

2.5

%

Marketing expenses

 

99

 

92

 

7.6

%

182

 

176

 

3.4

%

Other1

 

199

 

209

 

(4.8

)%

392

 

389

 

0.8

%

Employee benefits expense1

 

169

 

164

 

3.0

%

340

 

324

 

4.9

%

Wireless operating expenses

 

1,097

 

1,074

 

2.1

%

2,162

 

2,060

 

5.0

%

 


(1)         Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures.

 

Wireless operating expenses increased by $23 million in the second quarter of 2018 and $102 million in the first six months of 2018.

 

Equipment sales expenses increased by $15 million in the second quarter of 2018 and $67 million in the first six months of 2018, reflecting an increase in postpaid gross additions, an increase in higher-value smartphones in the sales mix and increasing handset costs.

 

Network operating expenses increased by $6 million in the second quarter of 2018 and $10 million in the first six months of 2018, mainly due to increased roaming expenses.

 

Marketing expenses increased by $7 million in the second quarter of 2018 and $6 million in the first six months of 2018, primarily due to higher commissions associated with growing loading volumes and higher advertising spend.

 

Other goods and services purchased decreased by $10 million in the second quarter of 2018 from non-recurrence of 2017 non-labour restructuring costs, including those associated with the migration of subscribers from MTS and customer support costs related to acquired MTS subscribers. In the first six months of 2018, other goods and services purchased increased by $3 million, primarily due to an increase in administrative costs supporting the higher customer base and higher external labour, partly offset by the aforementioned non-recurrence of 2017 non-labour restructuring costs.

 

Employee benefits expense increased by $5 million in the second quarter of 2018 and $16 million in the first six months of 2018, primarily due to higher compensation rates and higher labour-related restructuring costs from efficiency initiatives.

 

 

22



 

EBITDA — Wireless segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions, except margins)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

EBITDA

 

844

 

800

 

5.5

%

1,680

 

1,597

 

5.2

%

Add back restructuring and other costs included in EBITDA

 

7

 

24

 

(70.8

)%

17

 

25

 

(32.0

)%

Deduct net gains and equity income from real estate joint venture developments

 

 

(1

)

(100.0

)%

 

(1

)

(100.0

)%

Adjusted EBITDA1

 

851

 

823

 

3.3

%

1,697

 

1,621

 

4.6

%

EBITDA margin (%)

 

43.5

 

42.8

 

0.7

 pts.

43.7

 

43.7

 

 pts.

Adjusted EBITDA margin2 (%)

 

43.8

 

44.0

 

(0.2

) pts.

44.2

 

44.4

 

(0.2

) pts.

 


(1)         See description under EBITDA in Section 11.1 Non-GAAP and other financial measures.

(2)         Adjusted EBITDA margin is Adjusted EBITDA divided by Operating revenues, where the calculation of Operating revenues excludes the second quarter of 2017 net gains and equity income related to real estate joint venture developments.

 

Wireless EBITDA increased by $44 million or 5.5% in the second quarter of 2018 and $83 million or 5.2% in the first six months of 2018. Wireless Adjusted EBITDA increased by $28 million or 3.3% in the second quarter of 2018 and $76 million or 4.6% in the first six months of 2018, reflecting network revenue growth driven by a larger customer base and an improvement in equipment margins, partly offset by higher administrative costs and increased customer support costs due to growth in the subscriber base and increased network operating expenses.

 

The following table provides a reconciliation of wireless EBITDA results to wireless results excluding the effects of implementing IFRS 15.

 

EBITDA — Wireless segment — Reconciliation of IFRS 15 impacts

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

($ in millions)

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

EBITDA

 

844

 

800

 

5.5

%

1,680

 

1,597

 

5.2

%

Effects of contract asset, acquisition and fulfilment

 

9

 

(17

)

(152.9

)%

24

 

6

 

n/m

 

EBITDA — excluding IFRS 15 impacts

 

853

 

783

 

8.9

%

1,704

 

1,603

 

6.3

%

Add back restructuring and other costs — excluding IFRS 15 impacts

 

7

 

27

 

(74.1

)%

21

 

28

 

(25.0

)%

Deduct net gains and equity income from real estate joint venture developments

 

 

(1

)

(100.0

)%

 

(1

)

(100.0

)%

Adjusted EBITDA1 — excluding IFRS 15 impacts

 

860

 

809

 

6.4

%

1,725

 

1,630

 

5.8

%

 


(1)         See description under EBITDA in Section 11.1 Non-GAAP and other financial measures.

 

For the second quarter of 2018 and the first six months of 2018, EBITDA growth including the effects of IFRS 15 was lower than that without. Lower retention costs would be associated with lower retention volumes and without IFRS 15, lower retention costs per subscriber unit would have a more favourable impact on EBITDA. Under IFRS 15, lower retention volumes would have a more muted impact on EBITDA. We believe that with the implementation of IFRS 15, the free cash flow metric should be closely monitored, as the current EBITDA result may not reflect the underlying cash economics under the new accounting standard in periods related to high promotional activity. Although an entity’s EBITDA results may look favourable in periods of strong loading, the cash costs of that loading (cost of acquisition and retention spend) need to be identified so as to determine what the trade-off was between current equipment revenue and future network revenue (and related ARPU).

 

5.5 Wireline segment

 

Wireline trends

 

The trend over the last eight quarters of increasing wireline service revenue reflects growth in high-speed Internet and enhanced data services, CCBS contracting services, TELUS TV revenues, TELUS Health revenues and TELUS SmartHome and Business Security revenues, and is partly offset by declining wireline voice revenues and equipment revenues and inherently lower margins within some of our newer business products and services offerings. The increases in Internet and TV service revenues are being generated by subscriber growth and higher Internet revenue per customer resulting from upgrades to faster speeds and larger data usage rate plans. We expect growth rates of CCBS contracting and TELUS SmartHome and Business Security revenues to increase from business acquisition growth and organic growth. The general trend of increasing TELUS Health revenues has been driven by organic growth and through business acquisitions. The trend of declining wireline voice revenues is due to technological substitution, greater use of

 

 

23



 

inclusive long distance coupled with lower long distance minutes used, and historical intensification of competition in the small and medium-sized business market, as well as impacts of the economic slowdown in previous quarters, particularly in Alberta, which were more prominent in the business markets for voice.

 

We expect continued high-speed Internet subscriber base growth as the economy grows 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 changing consumer habits, the high rate of market penetration and increased competitive intensity, including from over-the-top (OTT) services. Residential network access line (NAL) losses continue to reflect the ongoing trend of substitution to wireless and Internet-based services and has been partly mitigated by the success of our bundles service offerings.

 

Wireline operating indicators

 

At June 30 (000s)

 

 

 

 

 

 

 

2018

 

2017

 

Change

 

Subscriber connections:

 

 

 

 

 

 

 

 

 

 

 

 

 

High-speed Internet subscribers

 

 

 

 

 

 

 

1,794

 

1,703

 

5.3

%

TELUS TV subscribers1

 

 

 

 

 

 

 

1,051

 

1,075

 

(2.2

)%

Residential NALs

 

 

 

 

 

 

 

1,272

 

1,332

 

(4.5

)%

Total wireline subscriber connections1

 

 

 

 

 

 

 

4,117

 

4,110

 

0.2

%

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

(000s)

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Subscriber connection net additions (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

High-speed Internet

 

29

 

17

 

70.6

%

51

 

41

 

24.4

%

TELUS TV

 

15

 

5

 

n/m

 

21

 

12

 

75.0

%

Residential NALs

 

(10

)

(19

)

47.4

%

(26

)

(42

)

38.1

%

Total wireline subscriber connection net additions

 

34

 

3

 

n/m

 

46

 

11

 

n/m

 

 


(1)         Effective April 1, 2018, and on a prospective basis, we have adjusted cumulative subscriber connections to remove approximately 68,000 TELUS TV subscribers as we have ceased marketing our Satellite TV product.

 

Operating revenues — Wireline segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Data services

 

1,131

 

1,001

 

13.0

%

2,220

 

1,993

 

11.4

%

Voice services

 

277

 

308

 

(10.1

)%

558

 

624

 

(10.6

)%

Other services and equipment

 

111

 

92

 

20.7

%

209

 

184

 

13.6

%

Revenues arising from contracts with customers

 

1,519

 

1,401

 

8.4

%

2,987

 

2,801

 

6.6

%

Other operating income

 

5

 

16

 

(68.8

)%

24

 

27

 

(11.1

)%

External operating revenues

 

1,524

 

1,417

 

7.6

%

3,011

 

2,828

 

6.5

%

Intersegment revenues

 

50

 

52

 

(3.8

)%

102

 

104

 

(1.9

)%

Wireline operating revenues

 

1,574

 

1,469

 

7.1

%

3,113

 

2,932

 

6.2

%

 

Total wireline operating revenues increased by $105 million in the second quarter of 2018 and $181 million in the first six months of 2018.

 

·                  Data services revenues increased by $130 million in the second quarter of 2018 and $227 million in the first six months of 2018. The increase was primarily due to: (i) growth in CCBS contracting revenues primarily due to growth in business volumes from recent business acquisitions; (ii) increased Internet and enhanced data service revenues resulting from a 5.3% increase in our high-speed Internet subscribers over the last 12 months, higher revenue per customer from upgrades to faster Internet speeds and larger data usage Internet rate plans, and certain rate changes; (iii) increased TELUS Health revenues driven by organic growth through additional professional services and support revenue, and through business acquisitions; (iv) revenue from our TELUS SmartHome and Business Security line of business; and (v) increased TELUS TV revenues resulting from a 4.1% subscriber growth over the last 12 months excluding the Satellite TV subscriber adjustment and certain rate changes. This growth was partly offset by the ongoing decline in legacy data services.

 

 

24



 

·                  Voice services revenues decreased by $31 million in the second quarter of 2018 and $66 million in the first six months of 2018. The decrease reflects the ongoing decline in legacy revenues from technological substitution, greater use of inclusive long distance plans and price plan changes. We experienced a 4.5% decline in residential NALs over the last 12 months.

 

·                  Other services and equipment revenues increased by $19 million in the second quarter of 2018 and $25 million in the first six months of 2018, mainly due to higher data and voice equipment sales.

 

·                  Wireline subscriber connection net additions were 34,000 in the second quarter of 2018 and 46,000 in the first six months of 2018, reflecting increases of 31,000 and 35,000, respectively, compared to the net additions in the same periods of 2017.

 

·                  Net additions of high-speed Internet subscribers were 29,000 in the second quarter of 2018 and 51,000 in the first six months, reflecting increases of 12,000 for the quarter and 10,000 for the six-month period compared to the net additions in the respective periods in 2017, due to increased customer demand for our high-speed broadband services, including fibre to the premises, as well as improved churn reflecting our focus on executing customers first initiatives and retention programs. Our continued focus on connecting more homes and businesses directly to fibre (as we reached 55% of our current Optik TV footprint), expanding and enhancing our addressable high-speed Internet and Optik TV footprint, and bundling these services together contributed to combined Internet and TV subscriber growth of 135,000 over the last 12 months excluding the Satellite TV subscriber adjustment.

 

·                  Net additions of TELUS TV subscribers were 15,000 in the second quarter of 2018 and 21,000 in the first six months of 2018, reflecting increases of 10,000 for the quarter and 9,000 for the six-month period compared to the net additions in the respective periods in 2017. The increases reflect higher gross additions from our diverse product offerings and a lower customer churn rate from stronger retention efforts.

 

·                  Residential NAL losses were 10,000 in the second quarter of 2018 and 26,000 in the first six months of 2018, as compared to NAL losses of 19,000 and 42,000, respectively, in the same periods in 2017. The residential NAL losses continue to reflect the trend of substitution to wireless and Internet-based services, partially mitigated by the success of our stronger retention efforts.

 

Other operating income decreased by $11 million in the second quarter of 2018, mainly due to the non-recurrence of 2017 gains on the sale of investments, lower gains and equity income related to real estate joint venture developments, and a decrease in amounts recognized from the regulatory price cap deferral account for provisioning broadband Internet services to eligible rural and remote communities. In the first six months of 2018, other operating income decreased by $3 million due to the aforementioned decrease in the second quarter of 2018, partly offset by higher net gains on sales of certain assets.

 

Intersegment revenues represent services provided to the wireless segment. Such revenue is eliminated upon consolidation together with the associated expenses in wireless.

 

Operating expenses — Wireline segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Goods and services purchased1

 

625

 

576

 

8.5

%

1,202

 

1,137

 

5.7

%

Employee benefits expense1

 

542

 

485

 

11.8

%

1,071

 

949

 

12.9

%

Wireline operating expenses

 

1,167

 

1,061

 

10.0

%

2,273

 

2,086

 

9.0

%

 


(1)              Includes restructuring and other costs. See Section 11.1 Non-GAAP and other financial measures.

 

Total wireline operating expenses increased by $106 million in the second quarter of 2018 and $187 million in the first six months of 2018.

 

Goods and services purchased increased by $49 million in the second quarter of 2018 and $65 million in the first six months of 2018, primarily due to incremental increases in external labour, employee-related and other costs associated with business acquisitions, higher product costs associated with equipment sales and higher TV content costs mainly driven by our growing TV subscriber base.

 

Employee benefits expense increased by $57 million in the second quarter of 2018 and $122 million in the first six months of 2018, mainly due to incremental increases in compensation and benefits from an increase in the number of employees from business acquisitions supporting the business growth of TELUS International, and higher labour-related restructuring costs from efficiency initiatives in the quarter. These increases were partly offset by a decrease in the

 

 

25



 

number of domestic FTEs, excluding business acquisitions, and higher capitalized labour costs, including contract acquisition and fulfilment costs.

 

EBITDA — Wireline segment

 

 

 

Second quarters ended June 30

 

Six-month periods ended June 30

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

($ in millions, except margins)

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

Applying IFRS 9 and
IFRS 15 (2017 adjusted)

 

 

 

EBITDA

 

407

 

408

 

(0.2

)%

840

 

846

 

(0.7

)%

Add back restructuring and other costs included in EBITDA

 

28

 

12

 

133.3

%

52

 

15

 

n/m

 

Deduct net gains and equity income from real estate joint venture developments

 

 

(2

)

(100.0

)%

 

(2

)

(100.0

)%

Adjusted EBITDA1

 

435

 

418

 

4.0