TELUS Corporation (NYSE:TU) Q4 2023 Earnings Call Transcript February 9, 2024
TELUS Corporation beats earnings expectations. Reported EPS is $0.18, expectations were $0.17.
Operator: Good day and welcome to the TELUS 2023 Q4 Earnings Conference Call. I would like to introduce your speaker, Robert Mitchell. Please go ahead.
Robert Mitchell: Hello, everyone. Thank you for joining us today. Our fourth quarter 2023 results news release, MD&A, financial statements and supplemental investor information were posted on our website this morning. On our call today, we’ll begin with remarks by Darren and Doug. For the Q&A portion, we will be joined by other members of our executive leadership team. Briefly, prepared remarks, slides and answers to questions contain forward-looking statements. Actual results could vary materially from these statements, the assumptions on which they are based and the material risks that could cause them to differ are outlined in our public filings with Securities Commissions in Canada and the U.S., including in our fourth quarter annual 2023 MD&A. With that, over to you, Darren.
Darren Entwistle: Thanks, Randy, and hello, everyone. Throughout 2023, our team successfully navigated a highly competitive industry and overcame a challenging macroeconomic landscape and dynamic regulatory environment to achieve strong operational and financial results across our business. Indeed, our results for the year demonstrate execution strength in our TTech business segment, characterized by the potent combination of leading customer growth and strong operational and financial results enhanced by our significant and ongoing focus on cost efficiency. These results were buttressed by improving a resilient fourth quarter profitability from our DLCX segment, despite the continuing challenging macroeconomic operating environment faced by TELUS International.
Robust performance in our core telecom business is underpinned by our globally leading broadband networks and superior customer’s first culture. This enabled our strongest fourth quarter customer growth on record with industry leading total net additions of 404,000. This represented an increase of 34% year-over-year, driven by strong demand for our leading portfolio of bundled services across mobility and fixed. The fourth quarter capped off a record setting year for industry best customer net additions of close to $1.3 million surpassing our previous record high achieved in 2022 by more than 21%. Notably, 2023 marked the second consecutive year our team delivered more than 1 million new customer additions. This robust performance included strong fixed subscriber growth of 259,000, our highest mobile phone net additions since 2010 with 443,000 net new customers and all time record connected device additions of 564,000.
TELUS’ industry leading growth reflects the consistent potency of our operational execution and our unmatched bundled product offerings across mobile and home. Our team’s passion for delivering customer service excellence contributed to strong loyalty across our key product lines and we of course have done this on a continued basis. Looking at our consolidated performance for the full year, operating revenue growth of 9.4% essentially met the lower end of our updated guidance range, reflecting the exogenous challenges we encountered, which we will discuss further on our call today. Despite these challenges, we drove EBITDA growth 7.6% for the year, just above the midpoint of our public guidance expectations. Moreover, we achieved strong free cash flow of approximately $1.8 billion representing industry leading growth of 38% for the year.
Let’s now turn to take a look at the fourth quarter. TELUS once again achieved resilient operating revenues and strong EBITDA growth of 2.6% and 9.4% respectively. Looking at our TTech mobile results, TELUS realized robust customer growth of $329,000 net additions in the fourth quarter. This included healthy mobile phone net additions of $126,000 representing a year-over-year increase of 13% and notably surpassing the 10 million mobile phone customer milestone. This strength was driven alongside our continued focus on profitable and margin accretive customer growth. Indeed this consistent and disciplined approach will continue throughout 2024 and beyond to ensure our mobile customer growth drives EBITDA and cash flow accretion. It also included an all-time quarterly record for connected device net additions of 203,000 close to double compared to the prior year.
This reflects continued strong momentum with respect to our 5G an IoT B2B solutions that are so essential for our successful future. Importantly, our team delivered another quarter of industry best loyalty results, which continues to be the hallmark of the TELUS organization and is emblematic of our customer’s first culture in action by our team. While blended mobile phone churn of 1.4% was up against the backdrop of heightened competitive activity and not at a level where we are content, it represented an industry best result by a rather substantial margin. Notably postpaid mobile phone churn of 0.87% for the full year marks our 10th consecutive year at less than 1%. Not many companies can make that claim on a global basis. One key factor behind this consistent industry performance is the superiority of our world leading networks.
In this regard, in 2023 TELUS once again earned numerous accolades for network reliability, network expansiveness, speed and superiority. This included multiyear recognition from independent third-party organizations such as OpenSignal and PCMag. TELUS has been recognized as Canada’s most awarded network by OpenSignal over 6 consecutive years now. Moreover, PCMag named TELUS Canada’s Best Mobile Carrier and Best Mobile Carrier for Business in their annual Readers Choice Awards. The close on mobile, fourth quarter ARPU of $58.50 was down slightly year-over-year as a result of intense promotional market activity and heightened activity in particular in the flanker space. This was mitigated however by our longstanding focus on AMPU-accretive loading driven by our team’s passion for winning and retaining profitable customers, whilst remaining highly disciplined in respect of device subsidies.
Furthermore, connected devices and IoT will increasingly be an important contributor to network revenue, ARPU and AMPU growth in the quarters ahead. Indeed, our solid and resilient ARPU, which was up 1.2% in 2023 alongside our leading churn continued to drive our industry best mobile phone lifetime revenue. We consistently exceed our national peers in this regard by a considerable margin of up to more than 60% in 2023. This leadership is reflective of the combination of our continued focus on high quality customer growth and leading client loyalty. Now let’s take a look at our TTech fixed operating results where TELUS delivered another quarter of industry best wireline customer growth. Indeed, our team achieved strong fourth quarter internet net additions of 36,000.
We also continue to drive healthy growth in our TV product line with industry-leading net additions of 23,000, up 35% over the prior year, despite modestly higher churn. Modest residential voice losses of 7,000 again represented an industry best result. Strong and leading security net additions of 23,000 further reflect the momentum with respect to our successful multi product penetration strategy. Overall, our industry leading external fixed net additions of 75,000 demonstrate the strength of our unique and highly attractive bundled offers across our unmatched portfolio of products and services combined with our customer service excellence. These are buttressed by our ever-expanding broadband networks, our leading customer centricity approach, as well as our strong and highly differentiated social capitalism attributes that truly underpin the strength of the TELUS brand and culture in action in respect of our go-to-market activities.
Notably, PCMag recognized TELUS as the fastest internet service provider in Canada for the fourth consecutive year in 2023. The accolades that we have won for the superiority of our broadband networks across both mobile and fixed illustrate the TELUS team’s steadfast commitment to connecting Canadians to the people and to the information that matter most. Furthermore, the generational broadband network investments that TELUS has prudently made over the last decade will continue to drive extensive socioeconomic benefits for Canadians in communities from coast-to-coast, while underpinning the continued advancement of our operational and financial performance at the TELUS organization. Let’s turn now and look at TELUS Business Solutions or TBS which continues to contribute meaningfully to the success of the wider TELUS organization.
TBS once again delivered another strong quarter with continued revenue and EBITDA growth. Impressively, TBS achieved its highest Q4 year-over-year EBITDA growth over the past three years. During the quarter, TBS continued its strong momentum in SMB and secured several notable wins with commercial and public sector organizations across Canada, accelerating the growth of both our core services and monetizing 5G through private wireless networks, connected worker, fleet and IoT connectivity management solutions. TELUS Agriculture & Consumer Goods or TAC has recently delivered the best back-to-back sales quarters on record in over three years in consumer goods and also realized the best quarter on record for digital animal agriculture. As we move into 2024, we are looking to build upon this positive momentum and drive accelerated financial contributions on a consolidated basis.
To support the next chapter of our winning growth strategy and reflective of our commitment to use our technology and data services to lead the world in social capitalism, we recently moved our TELUS Health business into TBS. Similar to our earlier integration of TAC into TBS, this better positions our health business to leverage the expertise, the experience and high performance culture and talent of our broader B2B teams. Looking now at our TELUS Health business, we achieved fourth quarter revenues of $432 million alongside 24% year-over-year EBITDA growth and delivered total annual revenues of $1.7 billion in 2023. We continue to execute on our global growth strategy and demonstrate our progress towards our goal to be the most trusted well-being company in the world.
And this includes our healthcare services and programs now covering 70 million lives around the world, an increase of almost 2 million on a year-over-year basis. This includes supporting health outcomes on 610 million digital health transactions during 2023, up 5% over last year. And this includes increasing our virtual care membership to 5.6 million, up more than 24% over the prior year. Since acquiring LifeWorks in 2022, our team is committed to driving $427 million in annualized synergies by the end of 2025. This includes $327 million expected to be realized through operating cost synergies from continued integration and optimizing our organizational structure, our systems and our real estate portfolio. In addition, we continue to anticipate $100 million or more from longer term revenue synergies driven by cross selling health services products within our TELUS Health customer base and throughout our TELUS portfolio of assets, including TELUS Business Solutions, TELUS Partner Solutions, TELUS Agriculture and Consumer Goods and obviously TELUS International.
To date, we’ve achieved $233 million in combined annualized synergies towards our overall objective of $427 million. These synergies will allow us to reinvest in the growth of our business and improve our profitability whilst we focus on delivering efficient, secure and best-in-class health and wellness solutions to our customers across the globe. Now let’s take a look at TELUS International. Earlier today, TI reported its fourth quarter and full year 2023 results with solid revenue growth notwithstanding a continued challenging operating environment. Importantly, TI delivered on its commitment to improve profitability in the second half of the year, exiting the year with a strong margin profile more aligned with its historical trend. Our synergistic relationship offered incrementally more opportunities to partner with TI.
Alongside continued momentum fueled by the AI solutions that TI provides to companies like Google, its second largest client offsetting an otherwise softer demand environment. The improvement in TI’s profitability also reflected meaningful cost efficiency efforts implemented during the year, realigning its cost base to better meet the near-term demand environment. Over the longer term, TI remains a compelling growth story with meaningful opportunities driven by digital transformation underpinned by robust and highly differentiated AI capabilities. Doug is going to provide further commentary on both TTech and TELUS International’s results in just a moment. Our team’s ability to consistently drive profitable growth over the longer term on the back of our differentiated asset base, best-in-class customer experience and world leading networks alongside our unique growth businesses provides us with confidence in the robust outlook for our business and delivering on the annual target that we’ve announced for 2024.
These include TTech operating revenues and adjusted EBITDA increases of 2% to 4% and 5.5% to 7.5% respectively. It includes consolidated CapEx of approximately $2.6 billion and it includes consolidated free cash flow of approximately $2.3 billion, up circa 30% over 2023 supported by strong EBITDA growth and stable capital investments. On a consolidated basis, our 2024 performance will be supported by the annual targets TI announced this morning. This includes revenue and EBITDA growth of 3% to 5% and 7% to 10% respectively, supporting robust profitability and leading free cash flow yield in line with TI’s historical average. Combining our outlook for TTech and TI, we expect consolidated operating revenues and adjusted EBITDA growth rates similar to those that were outlined for the TTech segment.
Furthermore, the unparalleled skill innovation and of course the execution excellence of our team on our consistent and winning strategy underpins our industry leading multiyear dividend growth program now in its 14th year through to the end of 2025 and we look forward to communicating our multiyear dividend growth program at our AGM in May. To further buttress the sustainability of our consistently strong performance against the backdrop of the rapid transformation in our industry due to the evolving regulatory, competitive and macroeconomic environment, we continue to focus on executing extensive efficiency and effectiveness initiatives across the TELUS organization. Importantly, the transformational investments we have prudently made over the course of more than a decade and building the best culture and supporting industry leading customer experiences over our globally leading wireless and PureFiber broadband networks are enabling the progression of our accelerated plans to digitally revolutionize our business and further streamline our operating costs, because this organization leads on digital and this organization has a unique asset in TI.
Our team’s grit, resilience and ability to embrace change and continuously evolve the way that we operate have enabled us to achieve our targeted team member reductions in 2023 with the full run rate of annualized cost savings expected to be realized in the second quarter of 2024. Furthermore, our intensified focus on cost efficiency is continuing into 2024, targeting restructuring investments of approximately $300 million over the course of the year. While these come with many difficult decisions, we continue to leverage our decade’s long track record of successfully navigating exogenous factors in order to rise to the current challenges and future proof our business and deliver industry leading operational, financial and value creation results.
Against the backdrop of these ongoing challenges, our TELUS family continues to bring our caring culture to life. Last year, our team members and retirees logged an unprecedented 1.5 million hours of volunteerism in communities across the globe. This is an unparalleled accomplishment that is more than any other company in the world. Due in part to our team’s unsurpassed dedication to putting both our communities and customers first, the TELUS brand has increased in value from $10.3 billion in 2023 to circa $11.5 billion today as ranked in the Brand Finance 2024 Global Report. Notably, TELUS moved up two places to become the most valuable telco brand in Canada and the 8th most valuable brand nationally, and to think this brand was worth $600 million back in 2000.
Myself and our entire leadership team as well as the TELUS Board of Directors remain exceedingly grateful for our team’s passionate efforts to support our global communities, as we strive to deliver outstanding results for all of our stakeholders. And on that note, I’ll turn the call over to Uncle Doug.
Doug French: Thank you, Darren, and hello, everyone. In the fourth quarter, our team achieved strong operational and financial results, supported by our long standing commitment to drive profitable customer growth, our product diversity, execution, excellence our leading customer service and our ongoing focus on efficiency and effectiveness. In mobility, continued mobile phone and connected device subscriber additions drove network revenue higher by 3.8%, along with the moderating roaming revenue growth. We expect the highly competitive environment will continue to pressurize ARPU along with the lapping of the reforming recovery that we experienced in the first half of 2023. Importantly, we continue to focus on AMPU to drive the right economic outcomes.
Our ongoing focus on efficiency and effectiveness will help drive sustainable EBITDA growth and margin accretion. Our strong AMPU performance is further evidenced by our mobility direct margin contribution increasing by nearly 5% in the quarter. Fixed data services grew 3.6% year-over-year, driven by strong customer growth across internet, security, TV and higher but moderating revenue per customer. Health services revenue increased by 5.1% over the prior period, primarily driven by demand for our products and services and continued adoption of our virtual care solutions. At the segment level, TTech operating revenues were up 2.6%, while TTech adjusted EBITDA increased 8% and adjusted EBITDA margin expanded 190 basis points supported through our efficiency program flow through.
In DLCX, operating revenues from our existing customers were higher by 6.8% year-over-year, primarily from growth in our tech and games, e-commerce, fintech and other clients arising from additional services provided to existing customers and new customers added since the prior year, including those from the acquisition of WillowTree. A strengthening both the European, euro and U.S. dollar against the Canadian dollar also benefited in the period. During the fourth quarter, our TELUS International team continued to execute against its significant efficiency plans and meaningful of rightsizing to its cost structure. Notably, DLCX adjusted EBITDA was up 19% or closer to 6% when excluding the 1x earn-out adjustment, while margins improved 120 basis points year-over-year.
Heading into 2024, TI’s focus on efficiency and organic growth will continue as we address some of the continued macroeconomic pressures. Overall, consolidated operating revenues increased by 2.6% year-over-year and adjusted EBITDA grew by 9.4%. Consolidated net income was up 17% year-over-year, while basic EPS was up 18%. On adjusted basis, net income was slightly up by just under 1% while EPS was relatively flat. Free cash flow of $590 million in the fourth quarter increased by $267 million, driven by increased EBITDA growth, lower capital expenditures and taxes paid, partially offset by an increase in interest payments and higher restructuring disbursements. For the full year, free cash flow of approximately $1.8 billion came in higher than our updated target of $1.5 billion.
The result was higher primarily for two items. The increase in restructuring reserve that we had deferred until 2024 of payments, which will flow into the first quarter and partially the second quarter. In addition, the second was the handset financing of approximately $75 million where promotions in the period were more focused on rate plans instead of device plans. Looking forward to our financial targets for 2024 and leading off the period, as Darren highlighted, our TTech revenue growth, it will go by 2% to 4% and TTech adjusted growth of EBITDA of 5.5% to 7.5%. Our financial outlook reflects continued healthy growth, while our core TTech business as we maintain our consistent focus on profitable growth, driven by continued demand for period bundled offerings over our leading networks.
Our strategic focus to drive increased efficiency and effectiveness will also contribute to our financial outlook. Furthermore, in 2024, we anticipate improving financial contributions from TELUS International as well as TELUS Health and our TELUS Agriculture and Consumer Goods. Consolidated capital expenditures are targeted to remain stable at $2.6 billion representing a consolidated capital intensity ratio of 13%, which is a historic low for TELUS. In addition, we have embarked $100 million earmarked — sorry, $100 million for capital for real estate development initiatives similar to 2023 as we progress our copper decommissioning program and work towards delivering our strategy and co-developing certain surplus real estate assets within our footprint.
Lastly, consolidated free cash flow for 2024 is forecasted to be $2.3 billion driven by higher EBITDA and stable CapEx. The strong growth includes higher cash restructuring payments related to our efforts undertaken in 2023 as discussed earlier, as well as incremental restructuring targeted in 2024. Putting it all together, our combined and combined with TI’s outlook announced earlier today, on a consolidated basis, we expect operating revenues and adjusted EBITDA to grow similar to that of TTech. As we progress through 2024, we anticipate our adjusted EBITDA growth to build as the year progresses. A detailed list of our assumptions for 2024 set out in our annual MD&A release today. Overall, we remain bullish on our ability to continue generating strong free cash flow for the years to come, benefiting from our industry leading growth profile that consistently showcases our superior asset mix, our leading customer service and our operational execution excellence effectors.
The strong position further supports our industry leading dividend growth program in place through 2025 and beyond. Along with the delevering of our balance sheet, while continuing to take to make key strategic investments and continuing advancing our winning growth strategy. With that, Robert, back to you.
Robert Mitchell : Thanks, Doug. Mihai, let’s please proceed with questions.
To continue reading the Q&A session, please click here.