Telus Corp T.T

RBC

[retiredcf]

November 4, 2022

TELUS Corporation
Solid Q3/22 Results Slightly Above Our Forecast; Updated 2022 Guidance NAV Neutral

TSX: T | CAD 28.06 | Outperform | Price Target CAD 33.00

Sentiment: Neutral

Our view

Solid Q3/22 results were slightly above our forecast with strong subscriber growth across the board. We view updated 2022 guidance as NAV neutral, with the quarter and updated outlook neutral to a modest positive for the shares.

First impression

• Q3/22 results slightly above our forecast. Revenues and adjusted EBITDA (excluding unusuals) were $4,671MM (+9.9% YoY) and $1,724MM (+10.6%), respectively, versus our estimates of $4,642MM and $1,708MM (consensus is $4,667MM and $1,698MM). The modest positive adjusted EBITDA variance to our estimate was due to both TTech and TELUS International. Adjusted EBITDA margins of 36.9% (+23bps YoY) were in line with our estimate of 36.8%. Adjusted EPS was $0.34 versus our estimate of $0.35 (consensus is $0.32). The quarterly dividend increased +7.2% on a YoY basis to $0.3511 per share (in line with expectations). See Exhibit 1 for a summary of Q3/22 results versus our expectations.

• Updating 2022 guidance to reflect LifeWorks, lower equipment revenue and an updated TELUS International outlook. For TELUS: (i) operating revenue growth to +8% YoY versus +8%-10% previously and our estimate of +9.1%; (ii) adjusted EBITDA to +9%-10% versus +8%-10% previously and our estimate of +10.0% (which already includes LifeWorks); (iii) consolidated capex to be $3.5B versus $3.4B previously and our estimate of $3.5B; and (iv) free cash flow to be $1.3B versus $1.0B-$1.2B previously and our estimate of $1.2B.

• Strong loading across TELUS Technology Solutions (TTech). TTech revenues and adjusted EBITDA (excluding unusuals) were $4,004MM (+9.3% YoY) and $1,524MM (+8.1%), respectively, versus our estimates of $3,931MM and $1,513MM. Adjusted EBITDA margins were 38.1% (-42bps YoY), slightly below our 38.5% estimate. Key wireless metrics: (i) mobile network revenue growth was +6.8% YoY versus our estimate of +6.7% and consensus of +6.7%; (ii) mobile phone net additions were +150k versus our estimate of +139k and consensus of +134k; and (iii) mobile phone ARPU growth was +2.3% versus our estimate of +2.3% and consensus of +2.0%. Wireline loading was also strong: (i) Internet net additions of +36k versus our estimate of +35k (consensus is +41k); (ii) TV net additions of +18k versus our estimate of +10k (consensus is +11k); (iii) security net additions of +25k versus our estimate of +20k (consensus is +23k); and (iv) connected devices net additions of +124k versus our estimate of +50k (consensus is +88k). Churn-wise, mobile phone, Internet, TV, security and telephony were each below 1% with postpaid mobile phone churn of 0.76%.

• Mixed TELUS International results versus our forecast. TELUS International revenues and adjusted EBITDA were $667MM (+13.6% YoY) and $200MM (+34.2%), respectively, versus our estimates of $711MM and $196MM. Adjusted EBITDA margins of 30.0% (+460bps YoY) exceeded our estimate of +27.5%. TELUS International provided updated guidance to reflect macro uncertainty: (i) revenues to be +11.7%-13.5% or +16%-18% on a constant currency basis (versus +16.2%-18.5% or +18%-20% on a constant currency basis previously); (ii) adjusted EBITDA margins of 24.4%-24.6% (versus 24% previously); and (iii) adjusted EPS of $1.18-$1.23 was reiterated.

• Other notables. (i) importantly, management reiterated the $1B YoY reduction in capex expected for 2023; (ii) FTTH migration has been substantially completed (versus 7% of Internet and TV subscribers within the FTTH footprint still on copper in Q2/22 and 10% in Q1/22); (iii) FTTH coverage reached 2.9MM households/businesses in BC, AB and eastern QC versus 2.6MM in Q3/21; and (iv) LifeWorks synergies are now expected to be $200MM or more over the next 3-5 years inclusive of revenue synergies and ~$50MM in nearer-term cost synergies (versus ~$170MM-$200MM previously).

• What to look for on the 12:00pm ET conference call (#1-855-353-9183 CC: 53762#). (i) an update on the competitive environments for wireless and wireline; and (ii) the extent to which rising macro headwinds are having an impact.