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Telus profit slips; tops rivals on new wireless subscribers

A Telus store in Toronto's Beach neighbourhood is seen in this file photo.

Fred Lum/Fred Lum/The Globe and Mail

Telus Corp. says the temporary pain of lower profit as it spent heavily to attract the most new wireless customers in the second quarter will translate into future gains from smartphone-toting subscribers.

The Vancouver-based company said on Friday it added 99,000 new contract wireless customers in the period, far exceeding average analyst estimates of about 55,000. It also reported a record low rate of subscriber turnover at 0.79 per cent, well below the churn rates posted by rivals Rogers Communications Inc. and BCE Inc.

Profit took a hit – slipping 7.2 per cent to $386-million or 64 cents a share – as the company spent more on handset subsidies, but chief executive officer Darren Entwistle insists it will be worth it, touting the ever-growing "lifetime value" of the subscribers Telus signs up and hangs on to.

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He called the investment in costs associated with acquisition and retention "prudent," adding on a conference call with analysts that, "high-quality wireless loading leads to value creation for your wireless business prospectively." ("Loading" is an industry term for acquiring customers.)

The Canadian wireless market has enjoyed a significant surge in customers in recent quarters thanks to a combination of factors, including population growth from immigration, a stronger economy and customers in new age brackets – both younger and older – signing up for service for the first time, often using an older smartphone inherited from a relative.

Telus' results bring the total contract customers added by Canadian carriers in the second quarter to about 330,000, compared with 198,000 in the same period last year.

In addition to harnessing the trends lifting the industry as a whole, Telus has long focused on customer experience, which has led to a much lower rate of turnover than that of its competitors.

"It's not some overnight achievement," Mr. Entwistle said on Friday of the company's record-low churn rate in the quarter. "We embarked upon our 'customers first' strategy back in 2008 and we've been banging away at that year-in and year-out ever since, trying to do better by the customer [and] exceed expectations."

On an adjusted basis, Telus reported earnings per share of 68 cents, falling short of analyst estimates of 72 cents. Its shares closed down 73 cents on Friday at $44.82. But Several analysts agreed the "softer profitability" in the quarter as Telus spent more to win subscribers was a worthwhile investment for the company.

"The company suggests the loads were very high quality, smartphone-dominant this quarter, so we are inclined to believe the spending has high relative [return on invested capital] support," Macquarie Capital Markets analyst Greg MacDonald said.

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Desjardins Securities analysts Maher Yaghi called it an "investment in future profitability," adding the company is "doing well loading customers while the market is strong."

Telus reported 3.9-per-cent growth in revenue, which came in at $3.27-billion, beating estimates.

Meanwhile, EBITDA was flat at $1.19-billion (EBITDA represents earnings before interest, taxes, depreciation and amortization.) After excluding restructuring costs and one-time gains on a wireless licence sale and real estate investments that occurred in the second quarter of 2016, EBITDA increased by 3.6 per cent to $1.23-billion, still short of analyst estimates.

The company's wireless division reported 5-per-cent growth in revenue to $1.85-billion while EBITDA decreased by 1.3 per cent to $783-million amid higher equipment expenses and costs associated with Telus' acquisition of subscribers from Manitoba Telecom Services Inc. (part of BCE's deal to acquire MTS).

At its wireline business – which includes Internet and television services – Telus reported a 2.5-per-cent increase in revenue to $1.47-billion and EBITDA was up 3.8 per cent to $411-million. Telus added 17,000 new Internet customers, down from 18,000 in the same period last year, and 5,000 new television subscribers, a decline from 13,000 a year earlier.

Shaw Communications Inc., Telus's primary residential competitor in the West, has been aggressively promoting its own Internet and television services in recent months after introducing a new IP-based TV service.

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Canaccord Genuity's Aravinda Galappatthige said Telus's TV numbers were "slightly lighter than expected" but the company's investment in building fibre-optic service to customers' homes likely helped boost the Internet figure. "This is an important metric to watch closely given the elevated competitive activity that we see from Shaw."

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