Webcast Transcript

Transcription

Webcast Transcript

FINAL TRANSCRIPT
MTS Allstream, Inc.
Third Quarter 2015 Results Conference Call
Event Date/Time: November 4, 2015 - 5:00 p.m. E.T.
Length: 41 minutes
FINAL TRANSCRIPT
November 4, 2015 – 5:00 p.m. E.T.
MTS Allstream, Inc. Third Quarter 2015 Results Conference Call
CORPORATE PARTICIPANTS
Brenda McInnes
MTS Allstream – Vice President, Treasurer
Jay Forbes
MTS Allstream –Chief Executive Officer
Heather Tulk
MTS Allstream –Chief Customer Officer
Paul Cadieux
MTS Allstream –Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
Phillip Huang
Barclays Investment Bank– Analyst
Greg MacDonald
Macquarie Capital Markets – Analyst
Jeff Fan
Scotia Capital – Analyst
Sanford Lee
Canaccord Genuity – Analyst
Maher Yaghi
Desjardins Securities – Analyst
Vince Valentini
TD Securities, Inc. – Analyst
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FINAL TRANSCRIPT
November 4, 2015 – 5:00 p.m. E.T.
PRESENTATION
Operator
Good afternoon, my name is Tracy and I will be your conference Operator today. At this time, I
would like to welcome everyone to the MTS Allstream Third Quarter 2015 Results Conference Call. All
lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will
be a question and answer session. If you would like to ask a question during this time, simply press star,
then the number one on your telephone keypad. If you would like to withdraw your question, press the
pound key.
Thank you, Ms. Brenda McInnes, Vice President and Treasurer, you may begin your conference.
Brenda McInnes – Vice President and Treasurer, MTS Allstream, Inc.
Thank you, Tracy. Hello, everyone, and thank you for joining us today for a discussion on our
progress on our strategic initiatives and our Q3 2015 results. The news release, MD&A, financial
statements and supplemental information package can be found on our website at mtsallstream.com.
Today, our Board of Director approved the 2015 fourth quarter dividend, which has been set at
$0.325 per share.
Today’s call will consist of comments by Jay Forbes, our President and CEO, followed by a
question and answer period with our Executive Team.
Before we start, I’d like to remind all listeners that today’s presentations and remarks may
contain forward-looking statements. A number of assumptions were made by us in preparing these
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forward- looking statements, which represent our expectations as of today. As such, they are subject to
the risk that actual results may differ materially from a conclusion, forecast or projection in such
forward-looking information. Therefore, forward-looking statements should be considered carefully and
undue reliance should not be placed on them. 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. For additional information about such material factors and
assumptions, please refer to our third quarter 2015 MD&A released this afternoon, which is available on
our website.
I will now turn the call over to Jay.
Jay Forbes – Chief Executive Officer, MTS Allstream, Inc.
Thanks, Brenda, and good afternoon to everyone joining us on the call. I’d like to take a few
moments at the beginning of the call to introduce our Executive Team leaders, some of whom you may
not be familiar with.
Joining me on the Executive Team is Paul Cadieux, our Chief Financial Officer; Mike Strople, the
President of Allstream; Paul Beauregard, our Chief Corporate and Strategy Officer, and Corporate
Secretary; Heather Tulk, our newly minted Chief Customer Officer, who is now leading our sales,
marketing, and our customer service activities; Marvin Boakye, our Chief Human Resource Officer; and
our two new promotions to our Executive Team, Kevin Jessiman, our Senior Vice President of
Information Services, and Pat Solman, our Senior Vice President Network and Field Services.
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I’m excited about the depth of knowledge and experience these individuals bring to the
Executive Team and believe we have the right team in place to deliver on our strategic plans and allow
us to realize our full potential.
You've had an opportunity to review our quarterly results, so I’ll only comment briefly on them,
but let me begin by providing an update on the strategic initiatives that we have been working on.
During the quarter, we realized what our Company can do when we’re focused on executing on
our strategic initiatives. Work done on improving Allstream’s bottom line is paying off, as we’re making
noticeable progress delivering converged IT solutions to our targeted customers in our five key markets.
The turnaround of Allstream continues with its realignment of its cost structure and capital investment
discipline, with significant improvements in free cash flow being the prime result. Allstream is now a
leaner business, on solid footing, serving the right customers, and finally producing the expected results.
I know all of you are looking for an update on our exit process for Allstream. I can tell you that
the process is well underway and we’ve had several meetings with prospective buyers. Things are
progressing as planned, and as you can appreciate, I’m not able to comment much more than that at
this time.
Looking at MTS, we've had a busy quarter with the completion of full diagnostic of our
operations, where we identified a number of opportunities to move our Company forward as a
customer-first organization. We’ve developed a three-year transformation plan, led by our newly
established transformation management office, which will unlock approximately $100 million in free
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cash flow improvements, the vast majority by the end of 2017. The unlocked free cash flow will allow us
to strategically invest in the processes, systems and tools necessary to transform our operations,
simplify products and processes, and to improve our customer experience. This will translate into an
improved growth profile for our Organization, as well.
There’s a lot of work already underway by our transformation management office. We’re
already rebuilding the process for how we manage capital investments at MTS, with the expectation of
lowering MTS’s capital intensity, improving the returns on capital investments and better aligning our
capital program with our strategic priorities. This new process will be fully operational for 2016.
You will also see MTS on a heightened brand journey, as we work towards rolling out our new
rejuvenated brands. We recently unveiled what we want our customers to think and feel about MTS to
our employees, creating lots of excitement here at MTS. We look forward to sharing our brand new
strategy with you in early 2016.
Part of the changes to improve MTS's cost structure include streamlining the back office support
functions and management function. In May, I spoke of the efficiency opportunity that exists within the
demographics of our workforce. Approximately 15 percent of our workforce is expected to retire in the
next five years, with another 20 percent eligible to retire thereafter. If we replace these employees with
new employees, at the very least we would realize significant salary and benefit savings, with the
pension cost savings alone being significant. By investing capital in systems and processes to fulfill part
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of their functionality, the productivity gains could be tremendous. By starting this transformation now,
we expect to speed up this process and the realization of the savings.
In order to achieve this, we recently initiated a voluntary workforce reduction program. The
number of reductions will be determined by employee interest, as well as organizational needs. We
expect the reductions of 200 to 250 employees to be completed by the end of Q1 2016, and expect
these in turn will generate annualized cost savings or $20 million to $25 million, with a one-time cost of
approximately $10 million to $15 million.
We look forward to providing you with additional updates on our transformation program
throughout 2016.
I’d also like to take a few minutes before we open the call to questions to provide some brief
thoughts on our quarterly numbers.
In Q3 2015, we made some notable progress and faced some continuing challenges. Our
significant shift in strategic focus and vigilance in lowering our capital investments directly factored into
our consolidated free cash flow increase of $14.7 million, when compared to the same period last year,
a 48 percent increase.
At Allstream, we continue to be very pleased with the momentum we’re seeing in this business.
While total revenues were down in this quarter due to declines in the legacy revenues, efforts by our
Sales Team continue to drive strong growth in converged IT revenues, which were up $5.9 million over
Q3 2014.
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Allstream is also ahead of its workforce reduction targets and in reducing its operating cost
structure. At the end of Q3, 340 employees have exited the business, and Allstream remains on track to
have approximately 75 percent of these targeted employees leave by the end of 2015, with the
remaining exiting in 2016.
Allstream’s operations expense in Q3 was down mainly due to savings from its headcount
reductions, and with a run rate of $37.9 million from these reductions, Allstream will realize even
further benefits in 2016. These restructuring activities continue to have a positive impact on EBITDA
before restructuring costs, as EBITDA increased by 4.9 percent in Q3 2015.
Allstream’s rigorous capital investment discipline has also harvested significant free cash flow
savings, with a reduction in their capital investments of $12 million. This brings their capital intensity
ratio down by 7.2 percentage points to 10.1 percent in the third quarter; all of this, without impacting IT
revenue growth, which was up 8.29 percent.
You may be wondering how we achieved this, so let me give you an example of the types of
initiatives that Mike and the Allstream Team have taken to reduce capital spending.
By refreshing an out-of-date service availability matrix, which details which routers are to be
used for each type of service, Allstream has been able to first redeploy equipment that is no longer
required in the field, as opposed to deploying new equipment. This has resulted in redeployment of over
1,500 pieces of equipment or 25 percent of the base this year.
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The combination of the cost structure realignment and capital investment discipline has resulted
in a significant $14 million improvement in free cash flow this quarter, and, more importantly, Allstream
is firmly in the positive free cash flow territory for 2015.
Our Q3 results at MTS are a reflection of a company in transformation. We know that MTS is a
great asset, and while there are a value opportunities to be had, until now, we have not taken the
necessary steps, had the right focus or dedicated the required resources to move the business forward
towards its full potential. Our 3 percent quarter-over-quarter decrease in EBITDA before restructuring
reflects the challenges we face at MTS and why we are working on improving the overall performance of
this Company. While it is early in the transformation process, we have seen some early promising results
in our capital investment process, with a 20 percent decrease in our capital spend over Q3 2014, and we
expect our efforts will deliver results in revenue and EBITDA as the transformation process continues
over the next year and the following two years.
With that, I’ll turn the call over the Operator for any questions you might have.
Q&A
Operator
At this time I would like to remind everyone, in order to ask a question, press star, then the
number one on your telephone keypad.
Your first question comes from the line of Phillip Huang from Barclays. Your line is now open.
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Phillip Huang – Analyst, Barclays Investment Bank
Hi, thanks. Good afternoon. There’s quite a few numbers in the press release. I just want to first
clarify, so that I’m not double counting them. So, you mentioned on Page 1 of the release that for MTS
you’ve identified $100 million in free cash flow improvement and will action $30 million to $40 million of
that in Q4, with the cost roughly being $100 million, as well, but then on Page 3 you mention that the
three phases of your three-year transformation program will deliver free cash improvement of $60
million to $70 million. Is the $60 million to $70 million included in the $100 million that was mentioned
on Page 1, or is that additional to that 100?
It is part of the $100 million. So, the $60 million to $70 million of programs that we’d initiate in
2016, and beyond, and have already actioned to programs in Q4 of 2015.
Okay. Then what’s driving—so, the remaining $30 million is outside of the three phases. That’s
coming from another bucket I guess.
So, just for clarification, as part of our first phase of the MTS transformation, we plan on
reducing our capital investments by the $20 million to $25 million, and we expect to see an additional
$20 million to $25 million of cost savings from our workforce restructuring. The reason why you couldn’t
add those two numbers together, along with the $60 million to $70 million of additional initiatives that
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we have identified and plan to watch in 2016 and beyond, is the same issue that we ran into with
Allstream. Given the capital-intensive nature of the business, some of the streamlining that is being
done is capital relief and will go towards helping us reduce our capital spend by $20 million to $25
million.
Got you, okay, that’s helpful. My second question is - so as part of your initiative to drive
improvements in the free cash flow, you plan to rationalize some pricing promotions and discounts. I
was wondering if you could give us an update on your competitive environment, and also how you got
comfortable with this strategy, given your competition could turn more aggressive than they currently
are.
Yes. So, before I turn it over to Heather for a few comments on that particular initiative, let me
just offer an overarching view of the marketplace. Competition has remained relatively consistent with
what we’ve been seeing over the last eight to 12 quarters, if you will. Obviously, we have the big three in
competition with us in the wireless market, and for all intents and purposes, in the wireline market, we
are facing Shaw as the continued competitor there. While there are to and fros in terms of market
campaigns that enter the market from time to time, there hasn’t been a significant change in the
competitive posture or strength of any one of those four competitors in the marketplace over the
continuum time that I speak of.
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Heather Tulk – Chief Customer Officer, MTS Allstream, Inc.
Yes, thanks, Jay. So, following on to that, with respect to the specific question, we’re just kicking
of the piece of our transformation program around pricing, promotions and discounts, and really, over a
number of years, the embedded pricing and promotion and structures of all of our products has gotten
fairly complex, and so really what we’re looking at here is to actually go in and to refine that, to look at
where we can unlock some opportunities, from an immediate benefits perspective. But, also, actually,
we believe that in doing this it will strengthen our competitive position over time through simplification
and making it easier for our sales channels to perform more effectively with our customers. So we
actually see that this is an interesting, very complementary place where we can improve our financial
performance in the short term and actually also at the same time improve our ability to sell in the longer
term.
Got it, that’s very helpful. Then, finally, to the extent that you can comment regarding the
Allstream process, I know that this is clearly - a sale is clearly your preferred course of action due to the
lack of strategic fit. What do you think are the biggest hurdles right now from completing this, and if, for
whatever reason, you need to consider a Plan B, what would that Plan B be? Thanks.
Yes, and so perhaps just on this one, Phillip, I probably shouldn’t offer very much more in
comments than what we have already done. We’ve shared with you in the past that we do believe the
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situation is materially different from that which was the case before, and, as a consequence, we think
we have a business that is financially much stronger, and, as a consequence, are quite confident that the
process that we’ve designed will deliver an exit option for us, as in keeping with the expectations of the
marketplace.
Thanks very much.
Operator
Your next question comes from the line of Greg MacDonald from Macquarie. Your line is now
open.
Greg MacDonald – Analyst, Macquarie Capital Markets.
Thanks. Good evening, guys. Jay, when you were talking about the $137 million and change in
EBITDA number, you sounded like you’re a bit disappointed and referenced an expectation that the Firm
can do better on revenue and therefore EBITDA. That sounds to me like you thought you could have
done better on revenue and see the flow-through on that. The consensus number alternatively suggests
that the revenue number was somewhat in line and that expenses were a little bit higher. I wonder,
which of the two do you align yourself with? If the OPEX numbers were a little higher relative to
consensus, is that a function of actually OPEX coming in higher? Do we on the street not really
understand the expectations on timing of the cost synergy hits? So, where are we coming out on that,
i.e., EBITDA miss, you know, where did the street get it wrong?
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So, Greg, I won’t be able to comment on inferences. So I’ll leave that for you to interpret, but for
clarification, yes, we see an opportunity for EBITDA improvement in this business. As we have signaled
in the past, we see the early opportunities for EBITDA improvement coming from operating margin
expansion through operating cost reduction.
As we’ve also communicated, for us, as we go through this journey, free cash flow and free cash
flow productivity is going to be our prime measure of success, with a view that being able to bring forth
a level of free cash that allows us to maintain and indeed entertain the prospects of a growing dividend
in time would be of interest to us.
As we look at the initiatives that we have tackled to this point in time, you can see that they are
very much about funding the transformation agenda that we have in place and have been directed at
the streamlining of operations and the reduction of capital, with a view that as we improve the
customer experience through the re-engineering of this underlying systems and processes that touch on
and impact that customer experience, to Heather’s earlier point, that is going to deepen the retention
that we enjoy with our customers and give us a growth profile that we believe will be better than the
one that we currently have for the organization.
So, we will lead with cost reductions. It started with capital cost reductions. It will continue with
operating cost reductions as we streamline some of the functions, efficiencies gained through the
introduction of new processes and systems, and as we, again, create that unique customer experience
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that we have targeted, from there we would see the incremental benefit of additional revenue through
both reduction of churn and the maximization of penetration and share in the marketplace.
Okay, all that makes sense. Can you then just help us out on the timing of the $50 million in
annualized cost savings? Are we like halfway through that, three-quarters of the way through that?
So we have - as you can see through the capital investment reductions, they are starting to take
root and we’ll have full visibility in 2016. In terms of the streamlining of the back office functions, we will
begin to accept those voluntary retirements in this quarter, later this month, in fact, with a view to
completing that by the end of Q1 2016. So, you will begin to see it impact in Q1 and will have full run
rate impact of those operational cost savings in Q2 and beyond.
Great, okay, thanks. It sounds like a bit of timing. One just quick sort of factual one. Are you
prepared to tell us how much revenue and EBITDA impact the TTC acquisition was?
We haven’t disclosed that, I don’t believe, to this point, so let us take that away as something
that may be additive to future supplementals.
Okay. Thanks, guys.
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Operator
Your next question comes from the line of Jeff Fan from Scotiabank. Your line is now open.
Jeff Fan – Analyst, Scotia Capital
Thanks. Good afternoon, everyone. I just want to go back to the wireless question. I understand
you guys are putting together some plans to try to improve the results, but the magnitude of the decline
in EBITDA and margins seems to be much more than we’ve seen before, so I’m wondering if you can just
dissect for us a little bit what’s going on in the ARPU, and also why did the costs go up in the quarter as
much as it did?
Then also, below the EBITDA line, I guess on the deferred wireless cost, I totally understand that
part of the increase was due to the double cohort, and I think you’ve quantified that, but even after
excluding that impact, we saw a pretty big increase in the spending related to subsidies, so I’m just
wondering if you can just explain whether that’s purely volume-driven or is there something going on
with respect to higher subsidy per handsets that’s causing that number to go up.
So, a variety of questions, Jeff, and good afternoon to you. I’ll turn it over to Heather here
momentarily to kind of give you some deeper insights. But, it’s interesting, we’re seeing a variety of
things converge kind of all at once here in our marketplace. We have a small, but notable, explosion in
M2M devices, which is showing some positive growth in terms of units, but a degradation in terms of
ARPU, as we look to machine-to-machine type of connectivity growing in this marketplace. We also have
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the cessation of an agreement with OnStar that is working against us in terms of units, and at the same
time, as we look at the double cohort, it has had a pronounced impact on our particular situation.
So, perhaps I’ll ask Heather to kind of weave a number of those together for you to kind of give
you a few additional insights.
Thanks, Jay. Yes, so, definitely in the quarter, on wireless, most of the story, as you mentioned,
was related really to pushing through the double cohort and are working our way through that. So,
definitely, as you saw in our disclosures, our churn was up and that was the main driver of what you see
in our results. Really, it was related virtually and entirely to the double cohort.
Interestingly, prior to June 3, we had about 20 percent of our postpaid customers who were offcontract, and with the ruling that came through on the 3rd of June, this rose to over 40 percent, so quite
a material increase in the number of customers off-contract. As I’m sure most of you know, churn is
traditionally quite a bit higher for off-contract customers versus on-contract, and so this mix shift
created a weighted average, in effect, which drives overall churn up, as the off-contract churn
percentage of the base is so much higher.
Interestingly enough, what you don’t see in our disclosures is that we obviously took action
against this and put a number of programs in place, including incentives for people to extend their
existing contract for a year with BYOD offers, as well as our numerous offers designed to get our
customers back on-contract. We’re moving through that quite well. What’s interesting is that in our
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consumer post-paid business, as an example, which is the majority of our subscribers, we actually saw
significant year-on-year improvement in churn in both on-contract and off-contract churn rates. So, the
churn is improving, but obviously the mix of the customers on- and off-contract is working against us.
I would say that coming out of the quarter, we definitely saw market improvement month-onmonth. June, obviously, was the first big hit that we saw here, and you saw a little bit of it in Q2. Early in
the quarter, we saw materially - we actually exited the quarter in fairly good shape in terms of where
we’re seeing our year-on-year performance, so we feel we’re working through this well, but no doubt,
as we continue to get the rest of that off-contract base back into contracts, this will be a story going
forward as we work our way through this.
Just a clarification - on the percentage of post-paid that are off-contract, you said before June 30
it was 20 percent and after June 30 it rose to - did you say 30 percent?
No, just over 40 percent.
Forty? Okay. Where are you now at the end of the third quarter on that number?
The end of the third quarter, we’re just above 30.
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Okay, and just one quick question on guidance. Your guidance for MTS talks about higher
EBITDA in '15 versus '14. I’m wondering if there’s any update there with the results year-to-date.
Paul Cadieux – Chief Financial Officer, MTS Allstream, Inc.
Hi, Jeff, it’s Paul Cadieux here. I just want to advise you, though, that we no longer provide
updates to our guidance in-year. We share our results and allow you effectively to draw your own
conclusions. What we have been doing, though, what we believe we’ve been doing much better is
providing more and more disclosure, such that you’re better equipped to make those conclusions
yourself.
Great. Thank you.
Operator
Your next question comes from the line of Sanford Lee from Canaccord Genuity. Your line is now
open.
Sanford Lee – Analyst, Canaccord Genuity
Hi. If you can do one quick clarification - you mentioned I guess in the MD&A somewhere about
an SR&ED credit. Did that hit the - benefit to CAPEX for the MTS division in the quarter? So, we should
add that back as far as we’d consider maybe recurring free cash flow from the MTS division?
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Yes, the way we treat the SR&ED credit, it does come out of the capital expenditure line, but it
does come in back through other investing activities.
Okay, so that's - the other thing is - I’m trying to get my head around the 18 percent CAPEX-tosales target. So, this something like you’re sounding like you’re implementing right away for 2016. You
mentioned redeployment of equipment, so getting some CAPEX savings from that, but I just find it a
little hard to understand where you’re getting all the savings from when your peers like Bell and TELUS
are talking about increased spending because of FTTH. You know, Bell has acquired lines of about 23
percent CAPEX-to-sales, TELUS at 28 percent, 29 percent. Can you maybe give us a few other areas
where you’re going to drive some of these savings on the CAPEX?
You know, perhaps I’ll jump in here. In advance of Paul assuming the role of CFO, we did a deep
dive in terms of our capital investment program at MTS and found that the economic evaluation and
strategic fit wasn’t as rigorous as we would ideally like it to be, and as we started to scrutinize the
investment spend saw ample opportunities to both reduce the intensity and come back to your 18
percent as a target. It not only reduced the capital intensity, but actually improved the return on the
capital that we’re investing as well, and, again, bringing a more robust discipline to the evaluation, the
management and the post-implementation of the capital that we’re deploying in the organization. So
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we see ample opportunity for the organization to meet the growing expectations of our marketplace
within that envelope spend that we have highlighted.
Specifically, as it would relate to fibre-to-the-home, again, for us, when we look at our
technology roadmap for the organization, our goal is to make sure that Manitobans enjoy a customer
experience second to none, and as it relates to the technology that underpins that experience, we’re
currently passing about 70 percent of homes in Manitoba with our fibre-to-the-home or fibre-to-thenode VDSL2 networks. When we look at the networks and their capabilities and the needs of the
marketplace, there’s a good marriage of both capability and innate needs for the near-term to midterm, and thus factors into our belief that we can manage the business well within that envelope of 18
percent.
Okay, great, and one last question then. You mentioned the ARPUs getting a little bit worse this
quarter. Can you say if any of that is related to the new bundled Total Internet plans, which, when you
look at it on the surface at least, it looks like a bit of a re-price on the wireless data side?
Quite the opposite, we have been very, very pleased with what we’ve been seeing in terms of
the dynamics of the Total Internet. We’re seeing a goodly amount of customers that are coming into the
Total Internet plan actually being new users of one of the two services and very often opting for
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upgrades in the quality of service that they are selecting as part of that package. So, that is absolutely
not kind of a root cause of any of the ARPU degradation that we’ve been seeing.
Great. Okay, I’ll jump back in the line.
Operator
As a reminder, in order to ask a question, please press star, one on your telephone keypad. Your
next question comes from the line of Maher Yaghi from Desjardins Capital. Your line is now open.
Maher Yaghi – Analyst, Desjardins Securities
Yes, thank you for taking my question. I want to go back to the wireless side of things and I
wanted to just get a clarification. You mentioned that you re-contracted approximately 10 percent of
your base. I mean, is it fair to assume that we’re going through a transitional period, and as your base
that is off-contract gets back into its more normalized level, which is, like you said, before the double
cohort was approximately 20 percent, that that operating cost is going to improve, i.e. will go back to
similar levels in terms of margins than last year?
The second question I have, in terms of the revenue run rates going forward, as you plan this
transformation for MTS, are you forecasting revenue growth to come with that transformation, and if
so, when do you expect that revenue growth to start to occur? Thank you.
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Maher, good afternoon. Let me start with the second question first, if you don’t mind. In terms
of the transformation program, we’re envisioning three phases. The first is about funding the journey;
the second is about the transformation of underlying systems and processes that underpin our customer
experience; and the third is about a different revenue growth Product profile, one that focuses on
increased retention, a return on, and a higher rate of organic growth. Those phases, while there’s a
degree of overlap, they’re largely sequential in nature.
You will have seen to this point the capital investment overhaul, you will have seen the back
office streamlining, you will have seen the reinvigoration of the brand, and we’ve highlighted a number
of the initiatives that will then be born as Phase 2, and the overhaul of the underlying processes and
systems. So, we wouldn’t see material changes in our revenue growth profile until we entered Phase 3
of this transformation journey.
Heather, maybe you want to speak to the wireless?
Yes, yes. So, with respect to the wireless question, I’m reflecting on how to answer it succinctly,
because it’s a fairly complex story. So, I guess the thing to keep in mind about the double cohort is, I
guess, to answer direct your question, is a little bit of both. There’s a one-time impact of the double
cohort which relates to the cancellation of a large number of contracts on the same day, which drives up
your cost, to an answer your direct question, in the immediate term, and we’re definitely seeing that as
we get those customers back on-contract.
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November 4, 2015 – 5:00 p.m. E.T.
The industry as a whole is also facing a second impact, which is the shortening of the entire
contracted base from a three-year cycle to a two-year cycle. So as we work through that going forward,
we will have customers coming up for re-contracting more frequently than they have in the past. So
when you take that apart, you could say the portion that’s related to the one-time hit of all the contracts
of one time, that will go away as we work through and get them back on-contracts, but there is certainly
a permanent defect in the business created by the shortening contract cycle across the industry.
Maher Yaghi – Analyst, Desjardins Securities
Thank you.
Operator
Your next question comes from the line of Vince Valentini from TD Securities. Your line is now
open.
Vince Valentini – Analyst, TD Securities, Inc.
Yes, thanks very much. I just wanted to clarify a couple of things, one on the free cash flow. So,
I’m not clear on the SR&ED credits. The $45 million in free cash flow you reported, would that have been
$13 million lower if the SR&ED credits didn’t hit this quarter, or are you saying it was not an impact?
It would have impacted the free cash flow, so we did not have—sorry, would not have.
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November 4, 2015 – 5:00 p.m. E.T.
Vince, most of the SR&ED is actually deferred tax losses for us. We get very little of the SR&ED in
terms of actual cash. It builds up our tax loss carry-forward.
Okay. No, that’s great. As you may know, last year, Jay, there was a SR&ED item that did impact
free cash flow, so I think it was a bit confusing to people, so thank you for being clear on that.
The second thing is, is on the wireless, I’m not sure I understood the reference to machine-tomachine. So you’re saying you have more machine-to-machine subscribers that count in your subscriber
numbers now and that obviously would lower ARPU because those are extremely low ARPU customers.
Is that what you’re implying, because it didn’t really seem to show up in the subscriber numbers that
there was no increase, you know, any - there was no bulge in subscriber numbers to offset the decline in
ARPU, so I just wanted to make sure I clarify what you were saying there?
Yes. So, yes, the machine-to-machine in terms of the ARPU is quite a bit lower than what we’d
expect in a traditional P2P type of customer relationship, and, again, this is a dynamic that we’re starting
to see in the marketplace. It’s arguable that it’s not overly material at this point in time, but it is a
dynamic that we’re going to start to see and one that should be on people’s radar screen as we start to
think about ARPU as a number.
Would M2M be included in pre-paid or post-paid, the way that you count them?
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November 4, 2015 – 5:00 p.m. E.T.
Post-paid, yes, yes.
They are post-paid? Okay. The last clarification before I have one other question is, the OnStar,
can you just remind us when that lapsed and when it will stop being a year-over-year impact from not
having that contract anymore?
We’re just trying to recall it offhand. We can get back to you on that. It’s still going to go through
for a couple of quarters, but it’s of a declining impact.
Okay, and the last one. Jay, it sounds like you won’t answer this, but I’ll just ask anyway. The
free cash flow continues to be better at Allstream, you continue to say the processes is going well and
you’re confident there’ll be a result in line with street expectations, which it seems to imply that you’re
pretty deep into the process, but can you give us any further comment on the timeline, or do you hope
to have something to say before the end of the year or before the end of the first quarter next year? Is
there any guidance on timeline you can give us?
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November 4, 2015 – 5:00 p.m. E.T.
Yes, Vince, one of the things that we said from the outset is that we did not want to provide any
expectations around timing, in that we did not want to paint ourselves into a corner from a negotiation
point of view, and suffice it to say that remains our ongoing position.
Okay, fair enough. Thank you.
Thank you.
Operator
There are no further questions at this time. Ms. McInnes, I turn the call over to you.
Brenda McInnes – Vice President and Treasurer, MTS Allstream, Inc.
Ladies and gentlemen, we have reached the end of our Q3 2015 Results Conference Call. Once
again, thank you for joining us today.
Operator
This concludes today’s conference call. You may now disconnect
27

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