Why TELUS’s Net Profit Skyrocketed

Canada’s telecom companies continue to post impressive results.

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by Gaurav Seetharam

Telus released their third quarter earnings on Friday and it got me thinking. All investors are aware that earnings presentations are designed to highlight a company’s successes over their shortcomings. That’s not a surprise. But what does that actually look like? At what point does the communications strategy begin to eclipse the fundamentals of a company? Was the small bump to Telus’s share price based on strong fundamentals or a really convincing sales pitch?

The quarterly numbers
Owners of Telus’s common stock saw their earnings per share jump 14% to $0.56 from $0.44 in the same quarter last year. Higher wireless revenue led the gains as both smartphone subscribers and data consumption continued to grow.

Year-over-year, the average (data) revenue per postpaid unit (ARPU) rose a whopping 13.1%. That’s an important metric for wireless providers because it indicates a growing appetite for data consumption. In terms of subscriber growth, Telus attracted 106,000 new postpaid wireless customers; 34,000 TV viewers; and 19,000 internet users.

Net profit went up 10.2% to $356 million from $323 million one year ago.

Behind the numbers
Telus’ great quarter can be attributed to the evolution in how people are using their smartphones. For more and more people, having unrestrained mobile access to the internet is a necessity rather than a luxury. The societal impacts of that aside, it’s been a boon to the telecommunications industry.

Last month, Rogers Communications also declared higher ARPU due to increased smartphone adoption and usage of data services. However, meeting that demand may prove a challenge. Earlier in the year, Industry Canada blocked a bid by Telus to acquire Mobilicity, depriving the company of some much needed spectrum.

The coming auction in January 2014 of 700 MHz spectrum offers Telus a chance to expand their LTE coverage across more of rural Canada. No foreign competitors have stated an intent to bid, but it is still expected to be competitive. Twelve companies total, including Telus, BCE, and Rogers are contending for what will amount to leverage in the coming telecom wars.

The Foolish bottom line
Management has generally been proactive. So far they’ve kept true to their program of at least 10% annual growth in dividends. But it’s the restructuring that will prove most useful in the long run. The Harper government expressed a sincere commitment — only strengthened by their trade deal with the EU — to increase the competitiveness of Canada’s telecom industry. If Telus is going to defend its market share, it makes sense to trim the fat on the company. They spent five times as much on restructuring costs this quarter than they did a year ago. Year-over-year EBITDA rose 4.6% but that number moves up to 5.7% when non-recurring costs are excluded. That Telus has been able to consolidate expenses while still pulling in double digit growth is a testament to its leadership. All in all, it was a genuinely good quarter for the company and the quarterly earnings were a real cause for optimism.

The telecom sector is a favourite of dividend loving Canadian investors.  However, with the government intent on altering the competitive dynamics of this space, these companies may not be as safe as they appear.  To help diversify your stream of dividend cheques, click here now and download our special FREE report “13 High-Yielding Stocks to Buy Today”.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Guarev Seetharam does not own shares of any companies mentioned.  The Motley Fool has no positions in the stocks mentioned above at this time.

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