Manitoba Telecom Services Inc. reports third-quarter 2014 results

Learn more about Manitoba Telecom Services Inc.'s Q3 2014 results by visiting www.mtsallstream.com/investors/financials.

Consolidated

• Earnings per share ("EPS") of $0.47
• Revenues of $402.4 million, EBITDA of $140.1 million and free cash flow of $27.6 million
• Achieved annualized cost reductions of $26.1 million, meeting 2014 target range of $20 million to $30 million
• Confirmation of implementation agreement for Supreme Court ruling on pension plan lawsuit
• CEO search on schedule
• Board of Directors declares $0.425 per share Q4 2014 cash dividend

MTS

• Wireless data revenues up 17.9%, subscriber growth of 1.7% and industry-leading post-paid churn of 0.98%; wireless subscriber revenues up 1.9%
• Internet revenues up 7.9% and IPTV revenues up 6.0%; high-speed Internet subscribers up 5.4% and IPTV subscribers up 5.3%
• Customers with bundled services up 6.0%; 57.9% of bundled customers choose four-, five-, or six-service bundles

Allstream

• Fourth consecutive quarter of year-over-year growth in converged Internet Protocol ("IP") revenues with IP revenues up 10.1%
• Q3 and year-to-date IP sales wins up 4.9% and 4.7%, respectively
• Added 53 buildings to IP fibre network, now totalling 3,167 buildings Canada-wide
• EBITDA margin of 15.5%; year-to-date free cash flow up $8.7 million

WINNIPEG, Nov. 5, 2014 /CNW/ - (TSX:MBT) Manitoba Telecom Services Inc. ("the Company"), including its two primary operating subsidiaries, MTS Inc. ("MTS") and Allstream Inc. ("Allstream"), today reported results for the period ended September 30, 2014.

"MTS Allstream generated solid free cash flow in the third-quarter on the strength of broadband growth at MTS and double-digit IP growth at Allstream. We also proved the resiliency of our Manitoba wireless franchise, as we delivered very low churn and maintained industry-leading market share against aggressive pricing by competitors. We are on track to open our new Winnipeg-based 64,000-square-foot data centre in mid-2015. This facility will enable us to offer unique capabilities to our customers and has a capacity that equates to nearly $30 million in annualized revenues. At Allstream, we've signed national customers such as Canadian Tire, Yellow Pages and the Heart & Stroke Foundation. These wins build on the momentum of four consecutive quarters of year-over-year IP growth, partially offsetting declines in legacy and demonstrating that we are continuing to make good progress on the IP transformation. We are also pleased to have come to a pension plan agreement that is equitable and fair for all parties involved," said Pierre Blouin, Chief Executive Officer.

Consolidated
The Company's third-quarter financial performance reflects strategic focus on delivering solid cash flows by leveraging investments in MTS's wireless and broadband networks in Manitoba, and Allstream's IP fibre network nationally. Allstream is returning to past performance levels, driven by IP momentum, offset by legacy declines. MTS's results reflect solid performance in Internet, television and wireline segments, while maintaining wireless market share and growing subscribers in a competitive four-player wireless market in Manitoba.

¹ The Company defines EBITDA as "earnings before interest, taxes, depreciation and amortization, and other income (expense)". See the "Notes" section of this news release for further information.
² EPS is based on weighted average shares outstanding of 77.7 million for the three months ended September 30, 2014, 77.4 million for the three months ended June 30, 2014; 77.1 million for the three months ended March 31, 2014; 70.3 million for the three months ended December 31, 2013; and 67.7 million for the three months ended September 30, 2013. The increase in the number of weighted average shares outstanding is due to the December 2013 issuance of 8,855,000 common shares and participation in the Company's dividend re-investment program. EPS excludes Q4 2013 pension plan decision-related costs of $1.48 and Q3 2013 IFRS-required Allstream impairment loss of $0.24.
³ The Company defines free cash flow as "cash flows from operating activities less capital expenditures, and excluding changes in working capital, pre-funded pension solvency payments, spectrum costs and non-cash taxes". See the "Notes" section of this news release for further information.

• Revenues: $402.4 million, down $6.0 million or 1.5% from Q3 2013. This was mostly due to Allstream legacy revenue declines, along with wireless wholesale declines and lower wireless voice revenues, partly offset by strong revenue growth from converged IP, broadband, wireless data and EPIC Information Solutions ("EPIC").
• EBITDA: $140.1 million, down $2.6 million or 1.8% from Q3 2013. Declines in Allstream legacy services, lower wireless wholesale and voice revenues and an unexpected one-time $2.4-million charge resulting from a CRTC decision on the local contribution subsidy were partly offset by reduced restructuring costs and 5.8% growth in strategic lines of business.
• Earnings per share ("EPS"): $0.47, down $0.15 from Q3 2013, excluding the Q3 2013 Allstream impairment loss. EPS were impacted by increased depreciation and amortization expense due to Allstream being held for sale in 2013 ($0.24), partly offset by the scientific research and experimental development investment tax credits ("SR&ED ITC") final asset allocations to which the ITCs relate recorded in Q3 2014 ($0.11).
• Free cash flow: $27.6 million, down $17.8 million from Q3 2013, mostly due to an increase in capital expenditures related to the timing of capital projects.
• Capital expenditures: $84.7 million, up $16.1 million over Q3 2013, resulting from the timing of capital projects.
• Annualized cost savings: $26.1 million in Q3 2014, resulting from current year operational efficiency initiatives, meeting the Company's annual target range of $20 million to $30 million.

Guidance update
Consolidated revenues and EBITDA are trending approximately $10 million below the low end of the 2014 financial guidance provided on November 7, 2013, which was $1,620 million and $580 million, respectively. EPS, free cash flow and capital intensity ratio continue to be in line with the Company's original 2014 financial guidance.

MTS had faster than expected declines in wholesale wireless revenues and unanticipated short-term softness in the wireless pricing environment in Manitoba, which will impact 2014 results. MTS is expected to return to solid performance once these short-term wireless impacts have ended, based on solid post-paid subscriber growth of 2.7% and wireless price increases recently implemented in the Manitoba market. MTS is approximately one-third of the way through the transition of three-year contracts in its customer base to lower-priced two-year contracts and remaining CDMA roaming revenues are only expected to be $9 million in 2014. Additionally, given the 2015 opening of MTS's new data centre and continuing strong broadband revenue growth, MTS is expected to continue to generate the solid performance and strong cash flows seen in the past.

With strong IP revenue growth at 10.1% in Q3 2014 and 42% of total revenue now coming from IP-based services, Allstream is continuing its transition to an IP-based company. Offsetting this positive momentum, Allstream had higher than expected declines in legacy revenues. These declines will negatively impact 2014 results and delay the expected improvements in EBITDA and free cash flow. Allstream expects to be close to free cash flow neutral in 2014, with minimal impact on consolidated free cash flow.

MTS
MTS delivered overall growth in revenues from strategic services (wireless, broadband and converged IP, and information solutions), up 4.1% over Q3 2013, which was offset by declines in legacy lines of business. Internet, television and wireline segments are performing well, providing some of the best operating metrics in Canada. Despite a competitive four-player wireless market, MTS has performed strongly and is maintaining its market share. MTS's strong wireless data revenues, post-paid subscriber growth and very low churn reflect the underlying strength of its competitive market position in facing some of the most aggressive wireless price competition in Canada, along with a decline in wireless wholesale revenues.

MTS added 10,875 post-paid wireless subscribers, 10,996 high-speed Internet subscribers and 5,402 IPTV customers since Q3 2013. This strong growth in subscribers is reflected in MTS's increased number of customers with bundled services, which grew 6.0%, to 104,463 since Q3 2013. MTS launched unique five- and six-service bundles in July 2014 to improve customer experience and retention. 57.9% of MTS's bundle mix is made up of four-, five-, or six-service bundles. The strength of MTS's bundle offering also resulted in a net gain in new home phone subscribers from cable over six of the nine months ended September 30, 2014.

* not applicable

• Wireless subscriber revenues: $91.0 million, up $1.7 million over Q3 2013, benefiting from a 17.9% increase in wireless data revenues, partly offset by a decline in voice revenues driven by competitive pricing pressure in Manitoba. Currently, 73.1% of MTS's growing post-paid subscriber base now has data plans, driven by increasing demand for smartphones and data usage. Since Q3 2013, subscribers with data plans increased by almost 43,000, reflecting the value of MTS's feature-rich data plan offering and contributing to industry-leading post-paid churn of 0.98%. Q3 2014 also saw a 2.7% increase in wireless post-paid subscribers since Q3 2013.
• Wireless wholesale revenues: Down as expected, as other carriers move their customers from MTS's legacy CDMA network to their own networks. Revenues from CDMA roaming were $16.7 million in 2013 and are expected to be about $9 million in 2014.
• Wireless network: Year to date, MTS added 15 LTE locations in Manitoba, reaching over 75% of Manitobans. By the end of 2014, MTS expects to add 40 LTE locations, expanding its LTE coverage to 80% of Manitobans. MTS's blazing-fast LTE wireless network retained its title as "the fastest and most reliable LTE network in Winnipeg" for the second year in a row according to PCMag.com.

• Internet revenues: $32.7 million, up 2.4 million over Q3 2013, resulting from a 5.4% increase in the high-speed Internet subscriber base and 6.1% residential high-speed average revenue per user growth, which reflects the increasing popularity of MTS's competitive Internet offering and demand for premium high-speed service.
• IPTV revenues: $21.3 million, up 1.2 million over Q3 2013, driven by strong IPTV subscriber growth of 5.3%, reflecting the quality of MTS's feature-rich television offering. As at September 30, 2014, 89.6% of MTS's increasing IPTV subscriber base subscribed to its premium IPTV service - MTS Ultimate TV^®.
• Converged IP revenues: $6.9 million, down $0.8 million from Q3 2013, due to lower one-time installation revenues, partially offset by continued demand for IP services from Manitoba's business community and migration from legacy data services.

* not applicable

• EPIC revenues: $6.3 million. EPIC was acquired in September 2013 and provides a new source of revenue for MTS and a trusted source for IT services for its customers. EPIC services include IT infrastructure, application development, managed services, networking services and unified cloud services, and will operate MTS's new data centre in Manitoba.
• Data centre update: Construction of MTS's new $53-million data centre is on track with the expected opening mid-2015. The external structure of the 64,000-square-foot building is nearing completion with installation of power systems and environmental control equipment being the next major step. This facility is unique, being the first and only commercial Tier 3 data centre in the province, providing IT solutions and cloud services to Manitoba businesses as well as organizations across North America. Sales efforts are continuing with strong interest from prospective customers, indicating high demand for data centre services, as expected. It is anticipated that data centre and cloud services will provide a new and important growth opportunity for MTS over the next several years.

Unified communications, security and monitoring: $9.6 million, up $1.2 million over Q3 2013.

• Unified communications revenues: $6.2 million, up $1.0 million or 19.2% over Q3 2013, driven by greater hardware sales.
• Security and monitoring revenues: $3.4 million, up $0.2 million over Q3 2013, reflecting increased alarm monitoring revenue and security system installation revenue.

Local access

• Local access revenues: $58.7 million, down $5.3 million from Q3 2013, due to line losses, mostly resulting from wireless substitution. The success of MTS's bundle continues to be a factor in retaining more local access lines than do MTS's competitors, as demonstrated by a net gain in new home phone subscribers from cable over six of the nine months ended September 30, 2014.

Long distance and legacy data

• Long distance and legacy data revenues: $16.4 million, down $1.3 million from Q3 2013.
• Long distance revenues: $9.3 million, down $0.9 million or 8.8% from Q3 2013, mainly due to decreased long distance rates and customers replacing long distance calling with email, text messaging and social networking.
• Legacy data revenues: $7.1 million, down $0.4 million or 5.3% from Q3 2013, as a result of customers continuing to migrate towards converged IP services.

Allstream
Allstream's Q3 2014 performance reflects its continuing transition to an IP-based company, with strong growth in IP revenues, offset by declining legacy services revenues. Revenues from IP services in Q3 2014 were up 10.1% and IP sales wins were up 4.9% over Q3 2013. IP revenues now represent 42% of Allstream's total operating revenues. Allstream remains on track to deliver high single-digit IP revenue growth in 2014. IP growth, benefits of past cost reductions and lower restructuring costs contributed to Allstream's steady EBITDA margin of 15.5% in Q3 2014. On a year-to-date basis, Allstream free cash flow was basically neutral at negative $1.5 million, an improvement of $8.7 million over the same period last year.

Converged IP

• Converged IP revenues: $66.4 million, up $6.1 million or 10.1% over Q3 2013. Revenues from converged IP services are continuing to grow, building on the momentum of sales efforts and installation progress. Solid IP sales contributed to a 4.9% increase in Q3 2014 sales wins, as compared to Q3 2013. Revenues from these new contracts will provide continued momentum for IP growth in 2015. Shared Services Canada circuit installations are nearly 80% complete, with an expected second-quarter 2015 completion. To-date this year, the Shared Services Canada contract has contributed $4.9 million in revenues, and will eventually represent $1.4 million of monthly recurring revenues once all circuits are fully installed.
• National IP network expansion: Added 53 buildings to Allstream's national IP fibre network in Q3 2014, which totaled 3,167 fibre-fed buildings as at September 30, 2014, an increase of 214 buildings over Q3 2013. Allstream also achieved an increase in installations pertaining to subsequent sales into already-connected buildings, which were up by 23.9% over Q3 2013.

Unified communications, hosting and security

• Unified communications, hosting and security revenues: $18.9 million, up $1.6 million over Q3 2013, mainly due to increased one-time product sales and service contracts.

Legacy services

• Local access revenues: $32.5 million, down $5.2 million from Q3 2013, partly due to Allstream's decision to exit from low-margin resold business lines.
• Long distance and legacy data revenues: $32.0 million, down $6.1 million from Q3 2013.
• Long distance revenues: $16.4 million, down $2.5 million or 13.2% from Q3 2013, mainly due to decreased volumes as customers replace long distance calling with alternative forms of communication, and often migrating to IP-based services.
• Legacy data revenues: $15.6 million, down $3.6 million or 18.8% from Q3 2013, largely due to a combination of churn and customer migration to IP-based services.

Corporate updates
On August 12, 2014, the Company announced that Pierre Blouin plans to retire as the Company's Chief Executive Officer later this year. The Company's Board of Directors has commenced a CEO search and expects to announce Mr. Blouin's successor in advance of Mr. Blouin's retirement date in order to ensure a seamless and orderly transition. The search for Mr. Blouin's successor is progressing and is on schedule.

On September 17, 2014, the Company announced that Barbara Fraser had been appointed to the Company's Board of Directors. Jocelyne M. Côté-O'Hara has retired after 17 years of service.

Pensions
On September 24, 2014, the Company announced it had reached a settlement agreement with its unions and retirees in regards to an implementation plan for distribution of the initial pension surplus following the Company's privatization in 1997 to certain stakeholders in the Manitoba Telecom Services Inc. and Participating Subsidiaries Employee Pension Plan (the "MTS Pension Plan").

The settlement agreement provides for total enhanced benefits and payments of approximately $140 million as of June 30, 2014. Thereafter the amount grew at the rate of 2% per annum until court approval, which was obtained on November 3, 2014.

Of this amount, $28 million will be paid by the Company directly to MTS employees who are members of the MTS Pension Plan. The remaining balance of $112 million will be distributed from the MTS Pension Plan, to retirees and other persons with interests in the MTS Pension Plan, after paying certain expenses associated with the settlement. The amount to be distributed from the MTS Pension Plan forms part of the Company's total solvency deficit, estimated at $206 million at January 1, 2014 (after removing the $28 million noted above), and will be funded by MTS over time in accordance with the solvency funding requirements of the federal pension regulations. This settlement will not be effective until the end of any applicable appeal periods. Distributions are expected to commence in late 2014 and continue into early 2015.

Dividend
The Company's Board of Directors declared a quarterly cash dividend of $0.425 per share for the fourth quarter of 2014, payable on January 15, 2015 to shareholders of record at the close of business on December 15, 2014.

The fourth-quarter dividend is designated an "eligible" dividend under the Income Tax Act (Canada) and any corresponding provincial legislation. Under this legislation, individuals resident in Canada may be entitled to enhanced dividend tax credits that reduce income tax otherwise payable.

Investment community conference call
MTS will hold its third-quarter 2014 results conference call with the investment community on Wednesday, November 5 at 5 p.m. (Eastern Time). Participants include Pierre Blouin, Chief Executive Officer and Wayne Demkey, Chief Financial Officer.

To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available until November 12, 2014 by dialing 1-855-859-2056 and entering passcode 98953245.

Investors, media and the public are invited to participate on a listen-only basis by logging into the live audio webcast of the conference call on the Company's website (www.mtsallstream.com/investors) or by entering http://event.on24.com/r.htm?e=847216&s=1&k=BD515138C24875C9534F29330A7194FF.

A replay of the conference call will be available on the Company's website for one year.

Notes

* not applicable

* not applicable

Forward-looking statements disclaimer
This news release includes forward-looking statements and information (collectively, "statements") including, but not limited to, statements pertaining to the Company's corporate direction, business opportunities, operations, financial objectives, future financial results and performance, 4G LTE wireless network expansion, fibre-to-the-home deployment, national IP fibre network expansion, pension funding, the outcome of the negotiations, the time, method, quantum and implementation of any payment obligations, the Company's future cash flows, liquidity, credit ratings and profitability, as well as other statements that are not historical facts. 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. All forward-looking statements are made pursuant to the safe harbour provisions of applicable Canadian securities legislation.

Forward-looking statements are subject to risks, uncertainties and assumptions. As a consequence, actual results in the future may differ materially from any forward-looking conclusion, forecast or projection, whether expressed or implied. Therefore, forward-looking statements should be considered carefully and undue reliance should not be placed on them.

Please note that forward-looking statements in this news release reflect Management's expectations as at November 5, 2014, and thus are subject to change thereafter. The Company disclaims 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 news release and the financial information contained herein have been reviewed by the Company's Audit Committee and approved by the Company's Board of Directors.

Factors that could cause anticipated opportunities and actual results to differ materially include, but are not limited  to, matters identified in the "Risks and uncertainties" section and elsewhere in the Company's 2013 annual MD&A, which is available on the Company's website at www.mtsallstream.com/investors and on the SEDAR website.

About Manitoba Telecom Services Inc. (MTS Allstream)
MTS Allstream is one of Canada's leading national communication solutions companies, providing innovative communications for the way Canadians live and work today. The company has more than 100 years of experience, with approximately 5,000 employees across Canada. MTS Allstream's business is dynamic and consists of two operating divisions. In Manitoba, MTS is the leading full-service telecommunications provider for residential and business customers.

MTS's suite of services includes the latest in wireless technology, broadband services, IPTV, voice services, home security, and an extensive range of business solutions. Across Canada, Allstream is a leader in IP communications and is the only national provider that focuses exclusively on the business telecommunications market. MTS Allstream has nearly two million customer connections spanning business customers across Canada and residential consumers throughout the province of Manitoba. The Company's extensive national fibre optic network spans more than 30,000 kilometres. MTS Allstream has spent 13 consecutive years on the Jantzi Social Index for leadership in social responsibility and is the recipient of the 2014 Best Overall Governance Award by the Canadian Society of Corporate Secretaries, recognizing a high level of effectiveness across the three pillars of governance, risk and compliance, and the 2011 Governance Gavel Award from the Canadian Coalition for Good Governance, recognizing clear and effective public disclosure and leading governance practices.

MTS Allstream's common shares are listed on the TSX (trading symbol: MBT). Customers, stakeholders and investors who want to learn more about MTS Allstream are encouraged to visit: www.mtsallstream.com.

For more information about MTS's products and services, please visit www.mts.ca. For more information about Allstream's products and services, please visit www.allstream.com. 

SOURCE Manitoba Telecom Services Inc.