WINNIPEG — With restructuring of its Allstream subsidiary largely complete, Manitoba Telecom Services Inc. says it plans to look for a buyer for Allstream in the second half of this year. The announcement was made Thursday when MTS released its financial results for the second quarter of 2015.
Among the financial highlights, MTS announced its consolidated free cash flow in Q2 2015 was $45.4 million, an increase of $13.2 million (41%) from Q2 2014.
“The new strategies for MTS and Allstream have been readily embraced by the two organizations, and we have begun to see some encouraging initiatives and early progress as a result,” Jay Forbes, MTS Allstream’s CEO, said in a press release.
“In this last quarter, Allstream has been able to deliver double-digit IP revenue growth, a 6.5% increase in EBITDA before restructuring costs and $8.7 million in free cash flow, all the while maintaining the level of customer service that has historically set it apart from its competitors. Within MTS, we have identified opportunities to be more efficient and to become more customer-focused, and will launch corresponding initiatives to capture these opportunities in the third quarter,” Forbes said.
As part of its restructuring, Allstream is reducing its headcount by 25% or approximately 500 employees, which should generate $50 million in annual cost savings, MTS said. The company expects that 379 employees will have departed Allstream by the end of 2015.
In addition, Allstream’s more rigorous capital investment discipline has lowered its capital intensity from 17.9% in Q2 2014 to 10.7% for this past quarter, MTS said. By streamlining operations and improving capital investment decision-making, Allstream generated $8.7 million in free cash flow in the second quarter of 2015 compared to $5.8 million in Q2 2014. For the full year, Allstream is expected to be free cash flow positive, according to MTS.
“We enter the second half of the year with a solid, stable operating platform that is beginning to deliver the financial results we all believed Allstream was capable of generating,” Forbes said.
Now that Allstream’s restructuring is almost complete, MTS announced it is shifting its focus “to manage a fully-planned exit of this business”. To that end, MTS has retained advisors and is looking for prospective purchasers, who it plans to engage with in the second half of this year, the company said.
As part of the ongoing re-alignment at MTS Allstream, the company announced on June 29 the impending retirement of Kelvin Shepherd, president of MTS, and the departure of Wayne Demkey, chief financial officer. With the retirement of Shepherd later this year, CEO Forbes will assume the MTS president responsibilities. Effective August 1, Paul Cadieux will assume the CFO role. Also in the second quarter, Marvin Boakye was hired as chief human resources officer.
Turning to the company’s financial results for the second quarter, MTS Allstream’s consolidated revenues were $398.3 million in Q2 2015, a decrease of $5 million (1.2%) from Q2 2014. This was primarily due to Allstream’s revenues decreasing by $7.1 million compared to Q2 2014, due to declines in local, long distance and other data revenues, partly offset by strong growth in converged IP revenues (which were up by $6.6 million or 10.3%).
MTS Allstream’s consolidated operations expense fell slightly in Q2 2015 to $256.8 million, down 1.5% from $260.8 million in Q2 2014. As Allstream’s cost reduction efforts came into play, Allstream’s operations expense decreased by $8.7 million in Q2 2015 compared to Q2 2014, mainly due to savings from headcount reductions, lower cost of goods sold and other cost reduction initiatives. MTS operations expense increased by $3.1 million in the second quarter compared to Q2 2014, mainly the result of increased cost of goods sold (driven by higher equipment sales of $1.7 million) and pension expense ($2.0 million).
The company’s consolidated EBITDA before restructuring costs decreased 0.7% from $142.5 million in Q2 2014 to $141.5 million in Q2 2015. During the second quarter 2015, MTS EBITDA before restructuring costs was down 2.2% due mainly to an increase in cost of goods sold and pension expense. However, for the full year, the company expects MTS EBITDA before restructuring to be higher than the previous year. Allstream’s EBITDA before restructuring costs increased by $1.6 million or 6.5%, due to the early impacts from its restructuring activities.
Late Q1 2015 efforts at Allstream, coupled with more recent changes at MTS, saw consolidated capital expenditures decline significantly, to $62.1 million in Q2 2015 from $78.2 million in Q2 2014, representing a 20.6% decrease in capital expenditure.
All told, in Q2 2015, MTS Allstream reported reduced net income and decreased earnings per share (EPS). Consolidated net income for Q2 2015 was $10.4 million, down $18.4 million (63.9%) from Q2 2014. Earnings per share were $0.13 in Q2 2015, a decrease of $0.24 (64.9%) compared to Q2 2014. The declines in net income and EPS were due largely to increased restructuring costs and increased depreciation and amortization expense that was accelerated in Q2 2015 to reflect the change in government policy on three-year wireless contracts.
As of June 3, a large cohort of MTS wireless customers were eligible to exit out of their contracts and the number of post-paid customers without contracts increased significantly, which will likely create a period of heightened competition through the balance of 2015, MTS said. To mitigate potential customer churn, MTS said it has plans in place to increase the percentage of customers on contract, while managing impacts on its deferred wireless costs, leveraging both two-year contract renewals with device subsidy and one-year contract extensions with no device subsidy.
Furthermore, MTS has fully amortized any outstanding deferred wireless costs related to the now invalid three-year contracts. With this accelerated amortization, MTS recognized $9.9 million of additional expense in the second quarter, of which $8.4 million would have otherwise been expensed in Q3 and Q4 2015, with the remaining $1.5 million expensed in 2016.
To view MTS Allstream’s consolidated financial results for the second quarter of 2015, click here.
