Nov. 5, 2009 (Canada NewsWire Group) --
WINNIPEG, Nov. 5 /CNW/ -- Manitoba Telecom Services Inc., including its principal operating subsidiary MTS Allstream Inc. (herein collectively referred to as either the "Company" or "MTS Allstream") today reported its third quarter 2009 financial performance and operational results. While the Company's reported results reflect current economic conditions, the increased prominence of strategic growth services in its overall business mix and the achieved cost reductions are consistent with the Company's longer-term strategy.
"Our third quarter results reflect the continued impact of economic challenges facing Canada's business market as well as our success in key product lines for our future. While economic pressures continue to impact our enterprise legacy portfolio and unified communications services, our results also highlight our success in strategic product lines that will define our long-term success, such as wireless, high-speed Internet, television and converged IP, which all grew strongly," said Pierre Blouin, Chief Executive Officer. "In addition, our Manitoba operations once again delivered solid growth and some of the best margins and overall performance in the industry. We are also pursuing the transformation of our business processes, with a focus on our Enterprise Solutions division, to realign our cost structure and improve service with $51.4 million in annualized savings achieved to date."
Results from continuing operations(1) for the third quarter of 2009 were consistent with the Company's updated financial outlook and the analysts' consensus forecast. Revenue declined 3.5%, EBITDA(2) declined 5.0%, and EPS(3) was 9.5% lower than the third quarter of 2008.
The Company's growth services portfolio, which includes wireless, digital television, high-speed Internet, converged Internet protocol ("IP"), unified communications, professional services and security, delivered solid performance in the third quarter, growing by 2.4%. Revenues from these services continued to increase their prominence in the overall revenue mix of the business, rising to 47% of total revenues.
QUARTERLY FINANCIAL HIGHLIGHTS *
*From continuing operations
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2009 2008
(in millions $, except EPS)
Q3 Q2 Q1 Q4 Q3
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Growth services revenues 218.2 216.7 227.2 212.5 213.1
Legacy services revenues 244.7 247.6 255.7 263.9 266.8
Revenue 462.9 464.3 482.9 476.4 479.9
EBITDA 156.9 159.3 163.2 156.7 165.1
Free cash flow(4) 62.0 59.9 68.7 39.4 70.8
EPS 0.67 0.67 0.71 0.59 0.74
Capital expenditures/revenue 15% 14% 12% 19% 14%
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Free cash flow of $62.0 million provided sufficient funds to cover the dividend and operating needs. The Company continued to maintain a very strong balance sheet through the third quarter, with a debt ratio that is one of the lowest in the industry at 41%.
"Our balance sheet has not been impacted materially by the difficult economic conditions and continues to be one of the strongest in the industry," said Wayne Demkey, Chief Financial Officer.
The Company's Board of Directors declared a cash dividend of $0.65 per share for the fourth quarter of 2009, which is payable on January 15, 2010 to shareholders of record on December 15, 2009.
DIVISIONAL HIGHLIGHTS*
*From Continuing Operations
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Three months Nine months
ended ended
(in millions of $) September 30 change September 30 change
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2009 2008 2009 2008
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Consumer Markets division ("CMD")
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CMD growth
services revenue 108.0 100.8 7.1% 313.3 289.5 8.2%
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CMD legacy
services revenue 100.6 107.4 (6.3%) 307.2 323.3 (5.0%)
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CMD total revenue 208.6 208.2 0.2% 620.5 612.8 1.3%
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CMD EBITDA 107.9 104.9 2.9% 322.3 312.7 3.1%
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Enterprise Solutions division ("ESD")
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ESD growth
services revenue 110.2 112.3 (1.9%) 348.8 343.4 1.6%
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ESD legacy
services revenue 144.1 159.4 (9.6%) 440.8 488.9 (9.8%)
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ESD total revenue 254.3 271.7 (6.4%) 789.6 832.3 (5.1%)
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ESD EBITDA 49.0 60.1 (18.5%) 156.7 190.7 (17.8%)
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MTS Allstream totals
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Revenue 462.9 479.9 (3.5%) 1,410.1 1,445.1 (2.4%)
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EBITDA(5) 156.9 165.1 (5.0%) 479.4 505.1 (5.1%)
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Consumer Markets division
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Once again, the Company's Consumer Markets division delivered solid margins, revenue and EBITDA growth and strong cash flow. The division continues to benefit from exposure to the resilient economy of Manitoba and a business strategy that has combined unmatched product bundles with the capabilities of MTS Allstream's advanced networks to offer tremendous value to customers.
The division's three major consumer growth products delivered solid revenue growth through the third quarter. Wireless revenues increased 7.3%, Internet revenues increased 4.8% and digital television revenues climbed 9.6%. The Company has continued to deploy its new HDTV product, MTS Ultimate TV, the most advanced television viewing experience in Canada, with 3,624 new sales in the third quarter. The service is currently available to over half the households in Winnipeg and is expected to reach 70% by year end. Overall the TV subscriber base grew by 2.3%, reaching 84,200 subscribers as at September 30, 2009. The new service is expected to drive subscriber growth as it becomes more established in Winnipeg and Brandon, the second largest market in Manitoba, where it was recently launched.
"Our products and strategies continue to deliver solid performance," said Kelvin Shepherd, President Consumer Markets division. "We are well-positioned to face the competitive environment in Manitoba, and we continue to introduce strong and innovative products like our market-leading Whole Home PVR and our MiFi portable wireless router. We expect to benefit from HSPA wireless and further advanced broadband capabilities, which are positioning our business for success now and in the long-term."
Enterprise Solutions division
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The recession and the slow pace of the economic recovery affected the performance of certain business lines within the Enterprise Solutions division. Converged IP, the division's flagship strategic growth product, continued to be successful, with growth of 12.2% in the third quarter as compared to the same period of 2008. The division's national sales team won $88.3 million in new contracts in the third quarter of 2009, including announced contracts with Stella-Jones, WestJet and Vicwest Income Fund.
"We are positioning the Enterprise Solutions division to benefit once the economy recovers and business spending resumes," said Dean Prevost, President Enterprise Solutions division. "We are making progress on realigning our cost structure to ensure it reflects the realities of the market and the requirements of our customers. As we continue to transition our business toward our IP-based products, we are building long-term value for the Company."
2010 OUTLOOK
The Company announced today that the release of its Financial and Operating Outlook for 2010 is expected to be provided in February of 2010 to be consistent with the timing of its peers. Based on the Company's stable sequential performance over the past two quarters, and assuming that current economic conditions do not worsen, no significant change in the performance of the business is expected between now and that time.
OTHER DEVELOPMENTS
The following are various announcements made recently by the Company.
Corporate announcements
- On November 2, 2009, MTS Allstream announced it was named as one of
Manitoba's Top 25 Employers for 2010. This annual competition,
announced by the Winnipeg Free Press, recognizes Manitoba's best
places to work.
- On October 22, 2009, MTS Allstream celebrated the official opening of
the Allstream Centre. After many months of construction, the
Allstream Centre, Canada's newest and greenest conference facility,
located at Exhibition Place in Toronto, is fully-equipped with unique
and innovative Allstream-branded communications solutions.
- On October 19, 2009, the Company announced the establishment of a
$500 million medium term note program. Under this program, the
Company may issue medium term notes periodically up to an amount of
$500 million over the next 25 months.
- On October 8, 2009, MTS Allstream announced it was named as one of
Canada's Top 100 Employers for 2010. This annual competition,
announced by Maclean's magazine, recognizes Canada's best places to
work and aims to identify the companies and organizations that lead
their industries in attracting and retaining employees.
- On October 7, 2009, the Company updated its financial outlook for
2009.
- On September 29, 2009, MTS Allstream announced it acquired VisionIP
Technologies Inc. ("VisionIP"), a Montreal-based provider of IT
solutions and services. As a Cisco Silver Partner in Canada, with
specializations in advanced security, advanced wireless, and advanced
unified communications, VisionIP strengthens MTS Allstream's
competitive position by expanding its unified communications
solutions delivery and service capabilities in the province of Quebec
where VisionIP has established a great depth of expertise and
experience in supporting a key business market.
- On September 17, 2009, MTS Allstream welcomed an announcement by the
Federal Government that the Canadian Radio-television and
Telecommunications Commission ("CRTC") should consider the views of
the public when it comes to the issue of Fee-For-Carriage, which
would see service providers pay broadcasters a fee to provide
customers with television signals that are currently available free
of charge over the airwaves.
- On September 16, 2009, MTS Allstream filed a submission with the CRTC
opposing Fee-For-Carriage, which would see service providers pay
broadcasters a fee to provide customers with television signals that
are available free of charge over the airwaves. The submission was
made in preparation for a CRTC hearing on broadcast issues expected
to take place in November.
- On September 11, 2009, the Company confirmed that its previously
announced agreement with Rogers, that will see both companies share
the cost to deploy a high-speed packet access ("HSPA") wireless
network across the existing MTS Allstream regional wireless
footprint, received the required regulatory approvals and will
proceed.
- On September 10, 2009, MTS Allstream, the Canadian Association of
Internet Service Providers, the Canadian Federation of Independent
Businesses and nearly two dozen individual companies from across
Canada launched an Internet-based campaign to convince the Federal
Government to correct a CRTC decision that is harmful to competition
in broadband Internet, Ethernet and other next generation
communications services.
- On August 21, 2009, MTS Allstream received top honours at Manitoba's
first annual Commuter Friendly Workplace Awards. The award recognizes
the Company's achievements in encouraging green commuting year-round
through facility improvements, and outstanding management and staff
support.
- On August 11, 2009, Cindy Klassen, Canada's all-time most decorated
Olympian and MTS Allstream-sponsored athlete, participated in one of
Manitoba's premier community festivals, the Morden Corn & Apple
Festival on Saturday, August 22, 2009. MTS Allstream is a proud
sponsor of both Cindy Klassen and the Morden Corn & Apple Festival.
Consumer Markets division announcements
- On October 19, 2009, MTS Allstream announced it launched Canada's
first Whole Home personal video recorder ("PVR"). This new and more
advanced PVR is capable of recording up to three programs at the same
time and playing back programs from any connected TV in the home.
This is the only service of its kind in Canada and exclusive to MTS
Ultimate TV Service customers.
- On October 16, 2009, MTS Allstream became the first wireless provider
to launch the Novatel Wireless MiFi(TM) 2200 Intelligent Mobile
Hotspot in Manitoba. The MiFi wirelessly accesses the Internet
anywhere MTS 1X/EVDO wireless coverage is available with any WiFi-
enabled device. Able to support up to five users or devices
simultaneously, customers can share their wireless high-speed
connection with friends, family members and co-workers.
- On October 9, 2009, MTS Allstream announced that TSN2 was available
to its MTS TV subscribers. Each year, TSN2 delivers hundreds of
exclusive live sporting events and encore telecasts of key sporting
events, including marquee NHL and NBA games.
- On October 2, 2009, MTS TV premiered a new line-up of
locally-produced programming exclusively on Winnipeg On Demand.
Winnipeg on Demand provides access to local filmmakers and community
producers to express themselves through their stories. The result is
a new and growing library of programs featuring Winnipeg people,
music, history, arts, culture and lifestyle.
- On September 25, 2009, MTS Allstream launched MTS Ultimate TV Service
to residents in Brandon. MTS Ultimate TV Service is the next
generation of high definition television that combines technology
from Alcatel-Lucent Canada Inc. and the award-winning Microsoft
Mediaroom Internet Protocol television software platform.
- On September 18, 2009, MTS Allstream introduced two new residential
high-speed Internet plans - Lightning Bolt and Lightning Super MAX.
These plans offer MTS Allstream's fastest consumer speeds yet and are
great for gaming, for downloading multiple files from multiple URLs
at once, and for when multiple users are accessing the Internet at
the same time.
- On August 27, 2009, MTS Allstream announced its continued support of
community festivals and organizations in Western Manitoba through
financial, in kind, and volunteer contributions. Through a payroll
deduction and corporate match program, MTS employees and retirees
contribute more than $20,000 to charitable organizations in Western
Manitoba every year. MTS Allstream employees and retirees also
contribute more than 8,000 hours to community organizations and
events in Western Manitoba every year through the MTS Volunteers
organization.
- On August 12, 2009, MTS Allstream launched Wireless Hewlett Packard
Mini Notebook Packages. The Wireless HP Mini Notebook Packages
combine an MTS Internet Express Stick and an HP Mini Notebook
computer to provide access to the Internet anywhere 1xEVDO coverage
exists in Manitoba, using Manitoba's widest wireless network, as well
as throughout the rest of Canada and the U.S.
Enterprise Solutions division announcements
- On October 20, 2009, MTS Allstream announced a contract to provide
Vulcan County Alberta with a wireless solution assessment that will
see leading-edge technologies, an information system network, and
other communications infrastructure installed throughout the county.
- On October 14, 2009, MTS Allstream announced it had achieved Cisco
Managed Services Master Channel Partner worldwide status for unified
communications managed services and managed business IP. As MTS
Allstream continues to deliver advanced business communication
solutions to its customers, this designation recognizes the Company's
continued investment in the personnel, processes and tools needed to
meet the growing demand for highly-sophisticated managed services
practices.
- On October 13, 2009, MTS Allstream announced that guests of the 2009
Allstream Global Forum will be the first in Canada to hear former
U.S. Vice-President Al Gore share his new and compelling vision of
how business can play a pivotal role in ensuring changes for the
better through innovation and investment in new technology. Proceeds
from the event, which will take place on November 24, 2009, at the
Allstream Centre in Toronto, go to the David Suzuki Foundation and
its efforts to help transform the Canadian economy in ways that are
consistent with a sustainable future.
- On October 5, 2009, MTS Allstream announced the renewal of a two-year
contract with WestJet, to continue servicing their global MPLS
network to all domestic and international locations; maintain and
support all local, long distance, and toll-free services; support
Internet services for e-commerce Web bookings; and maintain all
domestic phone switches.
- On October 1, 2009, MTS Allstream selected Concrete Design
Communications as its agency-of-record for marketing the Company's
enterprise networking solutions offered under the Allstream brand.
- On September 30, 2009, MTS Allstream was selected by Vicwest Income
Fund to design a fully-managed MPLS network for 18 of its locations
throughout Canada and one location in the U.S.
- On September 15, 2009, MTS Allstream and Ciena announced a strategic
partnership that will see MTS Allstream launch the next generation of
managed wavelength services to its business customers across Canada
that require resilient network solutions for mission critical
applications. MTS Allstream also joined Ciena's BizConnect global
partner program as a designated Managed Services Provider partner.
- On September 4, 2009, MTS Allstream announced it was selected by
Stella-Jones Inc., a leading North American producer and marketer of
industrial pressure-treated wood products, specializing in the
production of railway ties, timbers, and wood poles, for the
installation of an MPLS network and managed hosting solution to eight
facilities across Canada.
- On September 3, 2009, AAA Alarm Systems Ltd. announced it had
signed a five-year alarm monitoring contract with Loblaws for its 670
corporate stores across Canada. Certain franchise stores may, at
their option, also choose to receive monitoring under the terms of
the contract.
Quarterly Conference Call
MTS Allstream's third quarter 2009 conference call with the investment community is scheduled for 9:00 a.m. (Eastern time) on November 5, 2008. Investors are invited to listen to the conference call. The dial-in number is 1-800-732-1073. A live audio Webcast of the investor conference call can be accessed by visiting the Investors section of the MTS Allstream Web site (www.mtsallstream.com). A replay of the conference call will be available until midnight (Eastern time) on November 14, 2009, and can be accessed by dialing 1-877-289-8525 or 1-416-640-1917 (access code 4167928 followed by the number sign).
Note
MTS Allstream's interim Management's Discussion and Analysis ("MD&A") for the nine months ended September 30, 2009 and supplementary financial information are available in the Investors section of the MTS Allstream Web site at www.mtsallstream.com.
About Manitoba Telecom Services Inc.
Manitoba Telecom Services Inc., through its wholly owned subsidiary MTS Allstream Inc., is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians want to live and work today. The Company has more than 100 years of experience, with 6,000 employees across Canada dedicated to a mission of delivering true value as seen through the eyes of our customers. In 2008, MTS Allstream had nearly two million total customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national broadband and fibre optic network spans almost 30,000 kilometres. MTS Allstream is a proud sponsor of Cindy Klassen, 2006 World Champion and Canada's greatest Olympian, and a proud contributor to the Canadian Museum for Human Rights. Manitoba Telecom Services Inc.'s common shares are listed on the Toronto Stock Exchange (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream services, markets, community commitments and record of creating shareholder value are encouraged to visit: www.mtsallstream.com.
Forward-looking Statements Disclaimer
This news release includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives, and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Forward-looking statements reflect our expectations as at November 4, 2009. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, the intensity of competitive activity from both traditional and new competitors (competitive conditions); the ability to retain major customers (customer relationships); decisions by the federal regulator that affect our ability to compete effectively or to enter into new business opportunities (developments in federal regulation); general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services (market conditions and economic fluctuations); fluctuations in pension plan funding requirements (pension solvency funding); the ability to manage labour relations effectively (collective agreements); the ability to anticipate, and respond to, changes in technology (technology); and other risk factors listed from time to time in our comprehensive public disclosure documents, including our 2008 annual MD&A and in other filings with the Canadian securities regulatory authorities. Unless otherwise stated, all amounts are expressed in Canadian dollars. For further information, refer to the "Risks and Uncertainties" sections in our 2008 annual MD&A and our interim MD&A for the third quarter of 2009.
Additional information relating to our Company, including our Annual Information Form, is available on SEDAR at www.sedar.com. This news release and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.
(1) Refer to MTS Allstream's third quarter 2009 interim MD&A for the
definition of continuing operations.
(2) EBITDA is earnings before interest, taxes, amortization, and other
income. EBITDA should not be construed as an alternative to operating
income or to cash flows from operating activities (as determined in
accordance with Canadian generally accepted accounting principles) as
a measure of liquidity.
(3) EPS is earnings per share.
(4) Refer to MTS Allstream's third quarter 2009 interim MD&A for the
definition of free cash flow.
(5) Includes other EBITDA of nil in the third quarter of 2009 as compared
to $0.1 million in the third quarter of 2008. Also includes other
EBITDA of $0.4 million in the first nine months of 2009 as compared
to $1.7 million in the first nine months of 2008.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Unless otherwise indicated, this Management's Discussion and Analysis ("MD&A") of our financial results for the interim period ended September 30, 2009 is as at November 4, 2009. In this MD&A, "we", "our", and "us" refer to Manitoba Telecom Services Inc. ("MTS"). This interim MD&A should be read in conjunction with our interim consolidated financial statements and the discussion and analysis that accompanies our audited consolidated financial statements for the year ended December 31, 2008. This interim MD&A for the nine months ended September 30, 2009 updates the information contained in our interim MD&As for the first and second quarters of 2009, and our 2008 annual MD&A. Unless otherwise stated, all amounts are expressed in Canadian dollars.
Disclaimer Regarding Forward-Looking Statements
This interim MD&A includes forward-looking statements and information (collectively, the "statements") about our corporate direction, business opportunities, operating and dispute resolution activities, financial objectives and future financial results and performance that are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any conclusion, forecast or projection in such forward-looking statements. Examples of statements that constitute forward-looking information may be identified by words such as "believe", "expect", "project", "should", "anticipate", "could", "target", "forecast", "intend", "plan", "outlook", "see", "set", "pending", and other similar terms.
Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited to, the intensity of competitive activity from both traditional and new competitors (competitive conditions); the ability to retain major customers (customer relationships); decisions by the federal regulator that affect our ability to compete effectively or to enter into new business opportunities (developments in federal regulation); general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services (market conditions and economic fluctuations); fluctuations in pension plan funding requirements (pension solvency funding); the ability to manage labour relations effectively (collective agreements); the ability to anticipate, and respond to, changes in technology (technology); and other risk factors listed from time to time in our comprehensive public disclosure documents, including our 2008 annual MD&A and in other filings with the Canadian securities regulatory authorities.
For further information, please refer to the "Risks and Uncertainties" section in this interim MD&A, our interim MD&As for the first and second quarters of 2009, our 2008 annual MD&A, and our Annual Information Form, all of which are available on SEDAR at www.sedar.com.
Please note that forward-looking statements reflect our expectations as at November 4, 2009. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. This interim MD&A and the financial information contained herein have been reviewed by our Audit Committee and approved by our Board of Directors.
NON-GAAP MEASURES OF PERFORMANCE
--------------------------------
In this MD&A, we provide information concerning continuing operations, EBITDA and free cash flow because we believe investors use them as measures of our financial performance. These measures do not have a standardized meaning as prescribed by Canadian generally accepted accounting principles ("GAAP"), and are not necessarily comparable to similarly titled measures used by other companies.
- Continuing Operations - We provide information that refers to our
performance from continuing operations to assist investors in
understanding the performance of our company.
In the first nine months of 2009, continuing operations excludes
restructuring costs; the costs to transition certain wireless service
requirements away from Bell Mobility to new suppliers and to our
wireless platform; costs related to our high-speed packet access
("HSPA") deployment and related billing implementation; costs related
to certain regulatory proceedings; certain costs associated with our
transition from Canadian GAAP to International Financial Reporting
Standards ("IFRS"); a rebate related to Use of deferral account funds
to improve access to telecommunications services for persons with
disabilities and to expand broadband services to rural and remote
communities, Telecom Decision CRTC 2008-1 ("Decision 2008-1"); and
solvency funding to our pension plans.
In the first nine months of 2008, continuing operations excluded the
costs of transitioning certain wireless service requirements away
from Bell Mobility to new suppliers and to our wireless platform as
well as costs associated with the advanced wireless services ("AWS")
spectrum auction; restructuring and integration costs; the impact of
changes in income tax rates on our tax asset; and solvency funding to
our pension plans.
- EBITDA - We define EBITDA as earnings before interest, taxes,
amortization and other income. EBITDA should not be construed as an
alternative to operating income or to cash flows from operating
activities (as determined in accordance with Canadian GAAP) as a
measure of liquidity.
- Free Cash Flow - We define free cash flow as cash flow from operating
activities, less capital expenditures, and excluding changes in
working capital. Free cash flow is the amount of discretionary cash
flow that we have for purchasing additional assets beyond our annual
capital expenditure program, paying dividends, buying back shares
and/or retiring debt.
OVERVIEW
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MTS is a leading national communications provider in Canada and the market leader in Manitoba. We are organized into two reportable operating segments, the Consumer Markets division ("CMD") and the Enterprise Solutions division ("ESD"). Our common shares are listed on the Toronto Stock Exchange (trading symbol: MBT). Our website is www.mtsallstream.com.
Consumer Markets division
The Consumer Markets division leads every telecommunications market segment in Manitoba, delivering a full suite of wireless, high-speed Internet and data, digital television and wireline voice services under the MTS brand, as well as security and alarm monitoring services through AAA Alarm Systems Ltd., a subsidiary of MTS. This complete range of products is unmatched by any other provider in Manitoba. In addition, the Consumer Markets division is an important service provider in the national small business telecommunications market, providing customers in targeted major Canadian centres with a range of innovative business Internet, data and voice services under the Allstream brand.
Enterprise Solutions division
The Enterprise Solutions division, which operates under the Allstream brand nationally and under the MTS Allstream brand in Manitoba, is a leading competitor in the national business and wholesale markets. This division's main customer base is medium and large businesses and government organizations and its key products are Internet protocol ("IP")-based communications, unified communications, voice and data connectivity, and professional services. The Enterprise Solutions division operates an extensive national broadband fibre optic network that spans almost 30,000 kilometres, and provides international connections through strategic alliances and interconnection agreements with other international service providers.
STRATEGIC PRIORITIES UPDATE
---------------------------
In summary, during the first nine months of 2009, we made the following progress on five core priorities:
1. Focus on profitable growth
Our Consumer Markets division's growth services revenues increased by
8.2%, and our Enterprise Solutions division's growth services
revenues increased by 1.6%. EBITDA from our growth services, across
the company, was up 9.0%.
2. Improve the customer experience and gain market share
Our wireless services revenues climbed by 9.0% year-over-year on
customer growth of 7.4%. Our consumer high-speed Internet revenues
were up 8.4%, with subscribers growing by 3.4%. Driven in part by the
success of our newly introduced high definition television ("HDTV")
product, MTS Ultimate TV Service, late in the first quarter of 2009,
our digital television revenues were up 8.1% on subscriber growth of
2.3%. Revenues from our converged IP enterprise data products
delivered 12.0% growth. We have maintained our market share in most
of our major product lines.
3. Align cost structure to new market realities
Our revised and increased target for 2009 is to generate $50 million
to $60 million in annualized cost savings. We met our 2009 target,
having achieved $51.4 million in annualized cost savings from these
initiatives in the first nine months of the year, and we continue to
pursue additional cost saving opportunities.
4. Drive the transition from legacy to growth services
Growth services accounted for 47.0% of our total revenue from
continuing operations in the first three quarters of 2009, up from
43.8% a year earlier.
5. Determine HSPA deployment plan in Manitoba and national wireless
strategy
On July 28, 2009, we made a significant announcement regarding our
wireless strategy going forward for both divisions of the company.
We entered into a strategic wireless arrangement with Rogers Wireless
Partnership ("Rogers Wireless") that will see both companies share
the cost to deploy an HSPA wireless network across Manitoba. The
agreement also allows us to leverage Rogers Wireless's purchasing
scope and scale to gain cost effective access to the new network
technology and leading-edge HSPA handsets. Our customers will have
access to the best national and international roaming capabilities
with Rogers Wireless as our roaming partner, and both companies will
share roaming revenues from the HSPA network in Manitoba.
The agreement also provides us with the opportunity to launch a
national wireless business offering under the Allstream brand through
a competitive wholesale arrangement. We are continuing our analysis
of the opportunity and will provide more information to stakeholders
when available.
2009 OUTLOOK UPDATE
-------------------
This outlook and the financial information contained herein have been reviewed by our Audit Committee and should be read in conjunction with the "Disclaimer Regarding Forward-Looking Statements" and the "Risks and Uncertainties" sections in this interim MD&A, as well as similar sections of our interim MD&As for the first and second quarters of 2009, our 2008 annual MD&A and our 2008 Annual Information Form.
On October 7, 2009, we updated our 2009 financial outlook by issuing a press release, a copy of which has been made available on www.sedar.com. Our current 2009 financial outlook is detailed in the following table:
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2009 Financial Outlook - Continuing Operations
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Revenues $1.855 billion to $1.900 billion
EBITDA $625 million to $645 million
EPS $2.60 to $2.90
Free cash flow $230 million to $250 million
Capital expenditures 13% to 15% of revenues
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Our updated outlook reflects the impact the recession and the slow pace of economic recovery are having principally on our Enterprise Solutions division, and primarily reflects a sharper than expected decline in our legacy long distance and data services portfolio, as well as a decline in revenues from our unified communications line of business.
Through the third quarter and first nine months of the year, our Consumer Markets division continued to deliver strong results and growth, as well as benefit from exposure to Manitoba's resilient economy. Converged IP services, the largest and fastest growing product line within our Enterprise Solutions division, also continued to deliver solid growth.
Our growth businesses that will define our long-term success, such as wireless, digital television, high-speed Internet and converged IP, are continuing to perform well despite the economy, and we expect the positive trends in these lines of business to continue. We remain on track to achieve our targeted cost reductions, which are expected to achieve $50 million to $60 million of annualized savings in 2009.
Material Assumptions
We have made a number of assumptions in preparing our updated financial outlook and making certain other forward-looking statements, which include, but are not limited to, the following assumptions:
Market Assumptions
As competition in the overall marketplace continues, the broad market segment trends that have taken shape in 2008 and 2009 will continue to persist through the balance of 2009.
Growth for our Consumer Markets division in such services as Internet and digital television is expected to continue at similar levels in the fourth quarter of 2009 as it has through the first nine months of the year. We are assuming that there will not be any material changes to the continued growth of wireless services in 2009, notwithstanding anticipated changes to relationships and market dynamics. In addition, we continue to expect there will be no meaningful new competitor in wireless services in Manitoba in 2009 and competitive pressures to continue upon local and long distance services. Although we expect competition from an incumbent cable operator to continue in the Manitoba residential market, we are confident that we have prudently prepared our operations and strategies to counter these threats. Through our broadband network initiative, our bundling leadership, and our residential service offerings, which include wireless, Internet, digital television, local, long distance and home security services, we believe that we are well- positioned to compete successfully.
With respect to our Enterprise Solutions division, we expect our converged IP services to continue to deliver strong growth in the fourth quarter of 2009 as compared to the same period in 2008. In addition, the competitive pressure experienced in traditional legacy services, which include data connectivity, local and long distance services, will continue in similar trends as it did in 2008. Likewise, we anticipate that customer demand will continue to migrate to IP-based services. To face the continued competition in the enterprise markets through 2009, we have been refining our market focus, creating innovative IP solutions, reducing our cost structure, and investing selectively in higher-margin opportunities.
Economic Assumptions
Through the third quarter and first nine months of the year, our Consumer Markets division continued to deliver strong results and to benefit from exposure to the resilient Manitoba economy, which is expected to outperform the national economy for the balance of the year.
Our Enterprise Solutions division is affected by the national economy, which deteriorated sharply towards the end of 2008. While some economists have begun to see indications of a very slight economic improvement in the second half of 2009, we have yet to see the effect of this improvement on our enterprise business and do not expect to through the fourth quarter of 2009.
Financial and Operational Assumptions
Our financial and operational assumptions for the balance of 2009 are discussed above.
Cost Reduction Assumptions
For the first nine months of the year, we have achieved $51.4 million in annualized cost savings. Our initial target for 2009 was to generate $35 million to $45 million in cost savings. In the second quarter, we increased the range to $50 million to $60 million. This increase will result in our restructuring costs for 2009 to be approximately $25 million to $35 million as compared to our initial estimate of $10 million to $20 million. These restructuring costs are not included in our 2009 financial outlook from continuing operations. For the first nine months of 2009, our restructuring costs are $27.8 million dollars.
Liquidity and Capital Resources Assumptions
Our operations historically have delivered strong cash flows, and we expect this trend to continue in 2009. We continue to invest in our core operations with a focus on our growth products and services to ensure success in the markets in which we operate. We have adopted a prudent expenditure and investment strategy that is scalable and provides flexibility to adjust the pace of investment according to economic conditions. For example, during the first nine months of this year, we have been scaling back our capital expenditures in light of the impact the economy is having on our Enterprise Solutions division and continues to do so. In 2009, our capital program is expected to be 13% to 15% of our revenues from continuing operations, with the majority spent on growth services.
Our cash requirements for 2009 include two non-recurring obligations of approximately $35 million to $40 million for restructuring programs; and $14.4 million for wireless transition costs. We expect our pension solvency funding requirement to be approximately $35 million, which is lower than our original expected range of $40 million to $50 million.
The cost of our regional HSPA network upgrade is expected to be up to $70 million ending in early 2011, approximately $20 million of which will be funded by our existing capital envelope. In conjunction with our HSPA roll-out in Manitoba, we will be implementing a new integrated billing platform with the capability for multiple services, creating the opportunity for significant future cost savings. Wireless customers will be the first to be served over our new billing platform, and the cost to build this new platform is approximately $40 million over the next three years.
Tax Assumptions
We have been able to reduce our taxable income by utilizing our substantial capital cost allowance ("CCA") pools and available tax losses. By utilizing our deferred CCA deductions, we project that we will not pay cash taxes before 2015.
The present value of our tax asset is approximately $360 million. On March 26, 2009, the province of Ontario announced plans to reduce its corporate tax rate from the current rate of 14% to 10% by 2013. When the new rates are substantively enacted, the effect will be to reduce the book value of our future tax asset by $17.5 million.
RESULTS OF OPERATIONS
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Operating Revenues
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(in millions $) Q3/09 Q3/08 % change
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Revenue (continuing operations) 462.9 479.9 (3.5)
Deferral account rebate (13.5) - n.m.
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Revenue 449.4 479.9 (6.4)
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(in millions $) YTD/09 YTD/08 % change
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Revenue (continuing operations) 1,410.1 1,445.1 (2.4)
Deferral account rebate (13.5) - n.m.
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Revenue 1,396.6 1,445.1 (3.4)
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2009 2008
(in millions $, except EPS)* Q3 Q2 Q1 Q4 Q3
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Growth services revenues 218.2 216.7 227.2 212.5 213.1
Legacy services revenues 244.7 247.6 255.7 263.9 266.8
Revenue 462.9 464.3 482.9 476.4 479.9
EBITDA 156.9 159.3 163.2 156.7 165.1
Free cash flow 62.0 59.9 68.7 39.4 70.8
EPS 0.67 0.67 0.71 0.59 0.74
Capital expenditures/revenue 15% 14% 12% 19% 14%
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* All financial metrics in this table are from continuing operations.
Through the third quarter, our growth and legacy services continued to be negatively affected by the impact of the recession and slow pace of economic recovery. This contributed to the year-over-year decline in the key metrics listed in the table above.
REVENUES
By Segment (continuing operations)
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(in millions $) Q3/09 Q3/08 % change
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Revenues 462.9 479.9 (3.5)
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CMD growth services revenues 108.0 100.8 7.1
ESD growth services revenues 110.2 112.3 (1.9)
Total growth services revenues 218.2 213.1 2.4
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CMD legacy services revenues 100.6 107.4 (6.3)
ESD legacy services revenues 144.1 159.4 (9.6)
Total legacy services revenues 244.7 266.8 (8.3)
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(in millions $) YTD/09 YTD/08 % change
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Revenues 1,410.1 1,445.1 (2.4)
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CMD growth services revenues 313.3 289.5 8.2
ESD growth services revenues 348.8 343.4 1.6
Total growth services revenues 662.1 632.9 4.6
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CMD legacy services revenues 307.2 323.3 (5.0)
ESD legacy services revenues 440.8 488.9 (9.8)
Total legacy services revenues 748.0 812.2 (7.9)
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Summary
Overall improvement in our growth services revenues, which include our wireless, consumer high-speed Internet, digital television, converged IP, unified communications, security and professional services, and alarm services business, continued in the third quarter and the first nine months of 2009. While sluggishness in the economy has persisted throughout the third quarter, we continue to see strong demand for the converged IP products that our Enterprise Solutions division offers in its growth services portfolio. We believe that it will be our key growth services, such as wireless, digital television, high-speed Internet and converged IP, that will define our long- term success and continue to perform well despite the economy.
Growth Services Revenues
Revenues from our growth services increased 2.4% or $5.1 million and 4.6% or $29.2 million in the three and nine months ended September 30, 2009, respectively, as compared to the same periods last year. These increases are a reflection of the continued solid demand for the majority of our products offered within in our growth services portfolio. Contributing to this performance are higher, often market-leading, year-over-year revenue growth from converged IP, consumer Internet, wireless and digital television services on a quarterly and year to date basis, which were partially offset by lower revenues from unified communications, and security and professional services.
Legacy Services Revenues
Legacy services revenues include our local, long distance and legacy data services. As we continue to see the impact of declining revenues from legacy services contracts with Rogers Communications Inc. ("Rogers") and AT&T Corp. ("AT&T"), we are also experiencing the effects of re-pricing and lower volumes in the enterprise legacy market and competitive losses in the consumer market. In addition, a decline in legacy services revenues related to the slowing economy as some of our enterprise customers who are based or have operations in the U.S. are reducing their business volumes.
The expected migration of communications traffic by Rogers and AT&T to their own respective networks has continued, which resulted in revenues from these customers decreasing to $16.5 million in the third quarter and $51.7 million year to date as compared to $23.1 million and $74.4 million in the same periods last year, respectively. For the three and nine months ended September 30, 2009, our legacy services revenues declined by 8.3% and 7.9%, respectively.
