TELUS Corporation (T:CA) Q3 2025 Earnings Call Transcript

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Overview

TELUS shows strong strategic initiatives with EBITDA growth, stable CapEx, and plans for cash flow expansion. The Terrion partnership and AI revenue growth strategy are positive indicators. Despite slight ARPU challenges, TELUS is leveraging AI and bundling to counteract pressure. The Q&A reveals a proactive approach to market dynamics and financial management, including effective lease restructuring. Overall, the earnings call reflects a positive outlook, with strategic growth in health services and internet expansion, likely leading to a stock price increase.

Key Financial Performance

Customer Growth TELUS achieved 288,000 total mobile and fixed customer additions, reflecting a 5% year-over-year growth in customer connections. This growth is attributed to the company's focus on bundled services and PureFibre connectivity.

Postpaid Mobile Phone Churn The churn rate was 0.91%, maintaining a 12-year streak below 1%. This low churn rate is a result of exceptional client experiences and customer loyalty.

TTech EBITDA Growth TTech EBITDA grew by 3% year-over-year, driven by profitable margin-accretive customer growth and industry-leading customer lifetime revenue.

Mobile Phone Net Additions 82,000 net additions were achieved, supported by a focus on profitable customer growth.

Connected Device Net Additions 169,000 net additions were achieved, reflecting strong performance in connected devices.

Wireline Customer Additions 40,000 Internet net additions were achieved, supported by the PureFibre offering. TELUS has consistently delivered positive wireline net additions for 15 years.

TELUS Health Revenue and EBITDA Growth Revenue grew by 18% and adjusted EBITDA by 24% year-over-year. Growth was driven by global acquisitions, product innovation, cross-selling, and cost optimization.

LifeWorks Synergies $417 million in annualized synergies were achieved, including $329 million from cost efficiencies and $88 million from cross-selling strategies, nearly 3x the initial target.

AI Revenue AI-enabling capabilities generated $800 million in revenue in 2025, with an expected annualized growth rate of over 30% to reach $2 billion by 2028. Growth is driven by AI and digital solutions.

Mobile Network Revenue Decreased by 0.6% year-over-year due to lower ARPU, despite a 9% increase in IoT revenue and subscriber growth.

ARPU (Average Revenue Per User) Declined by 2.8% year-over-year, but showed a 50 basis point sequential improvement due to efforts in activations, rate plan changes, and renewals.

Fixed Data Revenue Grew by 1% year-over-year, marking the 19th consecutive quarter of positive growth, driven by residential Internet revenue and higher ARPU.

TTech Adjusted EBITDA Margin Expanded by 210 basis points to 43.4%, driven by profitable growth, cost reduction, and adoption of TELUS Digital solutions.

TELUS Health Adjusted EBITDA Margin Expanded by 60 basis points to 17.1%, driven by acquisitions and organic growth in payer and provider solutions.

TELUS Digital Revenue Grew by 5% year-over-year, with strong performance in AI and digital solutions, despite profitability pressures.

Net Income $431 million, up 68% year-over-year, driven by gains on long-term debt purchases. Adjusted net income was $370 million, down 10%.

EPS (Earnings Per Share) $0.32, up 68% year-over-year. Adjusted EPS was $0.24, down 14%.

Capital Expenditures Declined by $16 million (2%) year-over-year, driven by project completions and investments in AI.

Capital Intensity Improved to 12% from 13% in the prior year, leading the industry.

Free Cash Flow Increased by 8% year-over-year to $611 million, driven by EBITDA growth, lower capital expenditures, and lower wireless volumes.

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Operating Highlights

TELUS PureFibre connectivity: Strategic rollout to homes and businesses nationwide, empowering Canadians with transformative digital experiences.

AI-powered smart home energy solutions: Revolutionizing productivity and enhancing quality of life for customers.

TELUS Health: Global growth strategy with revenue and adjusted EBITDA growth of 18% and 24%, respectively. Extended reach to over 160 million lives worldwide. Expanded global reach to over 160 million lives, leveraging strategic investments and product innovation.

TELUS Digital: Acquisition completed, expected to generate $150-$200 million in annualized cash synergies by 2026, driven by operational efficiencies. Privatization completed, enhancing data and AI competencies, and establishing leadership in AI with Canada's first sovereign AI factory.

AI-enabling capabilities: Approaching $800 million in revenue in 2025, expected to grow to $2 billion by 2028 with an annualized growth rate above 30%.

IoT and 5G solutions: Market leader in Canada, with a strong cybersecurity practice.

Customer growth: Achieved 288,000 total mobile and fixed customer additions, reflecting 5% growth year-over-year.

Customer loyalty: Industry-best postpaid mobile phone churn of 0.91%, maintaining a 12-year streak below 1%.

LifeWorks integration: Delivered $417 million in annualized synergies, nearly 3x the initial target.

Capital expenditures: Declined by 2%, with a focus on wireless and fiber networks and AI investments.

TELUS Digital privatization: Expected to generate $150-$200 million in annualized cash synergies by 2026, focusing on digital and AI transformation.

AI leadership: Launched Canada's first sovereign AI factory, partnering with NVIDIA and others to support AI deployment.

Terrion partnership: Established Canada's largest dedicated wireless tower operator, enhancing connectivity and accelerating deleveraging.

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Risk or Challenges

Mobile ARPU (Average Revenue Per User): ARPU declined by 2.8% in the quarter, reflecting ongoing network revenue pressures. This could impact profitability and revenue growth.

TELUS Digital Profitability: TELUS Digital's adjusted EBITDA margin was 11.1%, indicating persistent profitability pressures. This could affect the financial performance of this segment.

Debt Leverage: The leverage ratio stands at 3.5x, with plans to reduce it to 3x by 2027. High leverage could pose financial risks, especially in a rising interest rate environment.

Integration of TELUS Digital: The integration of TELUS Digital is expected to generate synergies, but near-term challenges include operational efficiencies and cost management.

Economic Variability in Business Segment: Fixed data revenue in the business segment declined due to year-over-year events and customer contract changes, indicating variability and potential revenue instability.

Global Acquisitions and Integration: Post-acquisition integration work, such as with Workplace Options, is ongoing and could lead to short-term operational and financial challenges.

Capital Expenditures: Capital expenditures remain high, driven by investments in wireless, fiber networks, and AI. This could strain free cash flow if not managed effectively.

TELUS Health Integration: While TELUS Health shows growth, integration efforts and achieving synergies could pose challenges in the short term.

Market Competition: TELUS faces competitive pressures in mobile and fixed services, which could impact customer acquisition and retention.

Economic Uncertainty: Broader economic conditions and variability in customer spending could affect revenue and operational performance.

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Guidance & Outlook

Revenue Growth: TELUS targets TTech operating revenue growth, including the Health segment, at the lower end of the 2% to 4% range for 2025, with variability expected in mobile handset equipment revenue during the high-volume fourth quarter.

AI Revenue Growth: TELUS expects AI-enabling capabilities revenue to grow from $800 million in 2025 to approximately $2 billion by 2028, representing an annualized growth rate exceeding 30%.

TELUS Digital Integration Synergies: The integration of TELUS Digital is expected to generate $150 million to $200 million in annualized cash synergies by 2026, primarily through operational efficiencies.

Leverage Ratio: TELUS aims to achieve a leverage ratio of approximately 3x by the end of 2027, supported by deleveraging initiatives and asset monetization programs.

Capital Intensity: Capital intensity is expected to moderate to 10% as TELUS progresses through its investment cycle.

Dividend Growth: TELUS increased its quarterly dividend by 4% to $0.4184 and plans to step down and eliminate the discount on its dividend reinvestment program by the end of 2027.

TELUS Health and Agriculture Asset Monetization: TELUS plans to secure partners for TELUS Health and TELUS Agriculture to drive shareholder value in 2025 and beyond.

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Shareholder Return Plan

Quarterly Dividend Increase: Increased quarterly dividend at a moderated rate of 4% to $0.4184.

Dividend Reinvestment Plan: Stepping down and eliminating the discount dividend reinvestment plan by 2027.

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Key Q&A

Q:What needs to happen to return to growth on the ARPU front and what is the outlook for churn?

A:ARPU growth requires continued efforts on step-ups, pricing on new acquisitions, and better device subsidy. However, aggressive specials during Black Friday and Christmas could slow progress. Churn is low but slightly increasing, driven by market behavior. Management is focusing on reducing unit cost to serve and leveraging AI technology to improve efficiency. Product bundling is also seen as a way to counter ARPU pressure.

Q:What are the capital needs for Terrion and how will cash flows be accounted for?

A:Terrion is looking to acquire towers through purchases or partnerships and will continue building new colocation towers. Cash flow from Terrion will account for CapEx, and distributions will be net of that CapEx. The financial impact will be transparent, and Terrion's contributions will be consolidated into the company's books.

Q:What are the financial implications of the partner build model?

A:The partner build model involves leasing fiber or taking over communities as they are built. The economics are similar to third-party fiber lease arrangements, with fair market value leases. The goal is to achieve equal or better economic returns compared to historical fiber builds, leveraging greater scale, better technology, and a broader product portfolio.

Q:What is the strategy for AI-enabled revenue growth from $800 million to $2 billion?

A:AI-enabled revenue growth will come from SaaS solutions, cloud solutions, Gen AI applications, data annotation, and sovereign AI GPU compute solutions. TELUS controls the entire AI compute ecosystem, which is unique and advantageous. The modular build approach allows for leveraging next-gen technology and managing CapEx responsibly. Revenue sources include government, enterprises, startups, and research opportunities. Margins are attractive due to in-house capabilities.

Q:What is the CapEx requirement for the sovereign AI factories and does it fit within the 10% CI target?

A:The CapEx requirement for sovereign AI factories is manageable and fits within the 10% CI target. TELUS already has the necessary land and data center infrastructure. The modular build approach allows for recycling margins from GPU utilization to fund further investments. Partnerships may also be explored to expand beyond existing data centers.

Q:Why did lease principal payments decrease by 20% year-over-year?

A:Lease principal payments decreased due to restructuring of leases, which was aimed at managing cash flow more effectively. This change is unrelated to Terrion or tower leases.

Q:Where will the revenue from sovereign AI factories be reported?

A:Revenue from sovereign AI factories will be reported within TELUS Business Solutions and TELUS Digital. Additional ad hoc disclosure will be provided for clarity on the progress and yield from the AI factories.

Q:What is the strategy for Internet and product portfolio growth in Eastern Canada?

A:TELUS is seeing good loading in both Eastern and Western Canada, with small business contributing to Internet loads. Bundling is more prevalent in the West but gaining momentum in the East. The focus is on leveraging product superiority and bundling to compete effectively.

Q:What is TELUS' strategy on device financing and its impact on TTech service revenue?

A:Device financing impacts the balance sheet over a two-year period. The P&L impact depends on handset subsidies, which are allocated between upfront hits and ARPU. Lower handset financing positively impacts cash flow, and the financials reflect the margin or subsidy provided.

Q:What is the financial profile of TELUS' MVNO partnership with Cogeco and Bell's fiber expansion in the West?

A:The MVNO partnership with Cogeco generates roaming revenue at a wholesale rate, which will grow with Cogeco's volume. Bell's fiber expansion in the West provides high-margin wholesale revenue without success-based capital, benefiting TELUS' P&L and reducing capital pressure. These customers are seen as net benefits to TELUS.

Q:What is the outlook for TELUS Health and its growth drivers?

A:TELUS Health is experiencing strong growth, with operating revenue up 18% in Q3. Growth is driven by strong sales bookings, improved churn, and margin expansion from the Workplace Options integration. The global footprint and market demand for well-being services, mental health capabilities, and data analytics are expected to drive future growth.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer on the exact free cash flow calculation for Terrion distributions, stating that it is still being assessed but will be made transparent. Additionally, specific pricing details for the sovereign AI GPU compute solutions were not disclosed.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

TU Transcript

TELUS Corporation (T:CA) Q3 2025 Earnings Call Transcript

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