MTS Allstream Earnings - Doing Things Right, But Not There Yet

MTS Allstream may not be a household name outside of Canada, but up here they are an important player in telecom. The company is really a hybrid, being a regional incumbent telecom but also a national operator serving the business market.

Today was their AGM, during which they presented their Q1 2009 results. Not being a financial analyst, I'll stay away from the operating results, but would like to cite a few data points that support what's on my mind. MTS Allstream has had its share of hits and misses, but has a solid position in its served market, and earns a pretty good return for shareholders. Futhermore, their home base - Manitoba - has not been hit as hard as the rest of Canada in this economic slowdown, so there is some decent organic growth that bodes well for continued success.

So what's on my mind? Well, the Q1 numbers provide nice validation for their IP migration story, which to me is the most important story for any telco to be telling these days. I can't tell you right now just how well they compare to the other major Canadia telcos in this regard, but it's fair to say they're on par or better, especially for digital TV. Just to stretch a bit, I was going to say that their transition to IP holds up well against operators outside of Canada, but I just saw BT's news today about how they're now re-thinking their converged services migration plan. Oooh - that's not good.

Back to Canada. Here are some numbers that tell their story, and to me, it's a pretty good model that other telcos should be striving for as they move away from legacy services to IP-based services.

- Overall, revenue from IP-based services (they call this "growth services")
was 47% of the total in Q1, and that's up from 43% a year ago. It looks to me like IP's share will hit 50% by Q3 at this rate, and that's a great story line. MTS Allstream is going in the right direction, and when combined with their cost-reduction initiatives, are setting themselves up for attractive earnings growth, which will look even better when the economy turns around.

- They have a good mix of consumer and business revenue - roughly 40%/60% - so they're not overly reliant on one sector. In fact, they reported 11% growth in both markets for "growth services", so they're learning how to migrate to IP successfully across the board - not just with one set of customers. This is really important, because in both markets the revenue growth for IP-based services has offset or exceeded the inevitable revenue declines happening with legacy services.

- There are several other encouraging growth metrics to amplify these trends, but you'll have to look for those yourself. What stands out for me is the progress they're making with digital television. It's not exactly IPTV - but it's close enough - and they've been doing this as long as any major carrier in North America. In absolute terms the numbers are small - $13 million in current revenues and about 85,000 subscribers. However, being the local incumbent, they provide service to virtually every household, and in the largest urban center - Winnipeg - 1 in 3 households is using their digital TV service. That's pretty solid market penetration, and with their recent launch adding HD, there's good upside ahead. You know what else is interesting? Their ARPU for digital TV is just under $50, and is not far off the $55.80 ARPU they're getting from wireless. Those are healthy numbers, and both are trending upwards. Add to this the revenues from landline telephony and Internet service (their largest revenue stream actually), and MTS Allstream has a nice growth engine, at least for the consumer market.

- I should also touch on wireless. As mentioned, ARPU is steadily increasing, and churn is not a problem. I don't have comparable data for the rest of Canada, but their churn rate for post-paid is 1.18%, and seems pretty competitive to me. It's also worth noting that wireless penetration is only 61.5% in Manitoba, which is well below the national average, which they estimate to be about 66% - sounds about right. As such, there is a strong growth market for them in wireless, and time will tell how well they attack it once the AWS winners come to market with their new services later this year/early 2010.

Ok, so why aren't we there yet? By all accounts, I'd say MTS Allstream is doing all the right things for moving along the IP migration continuum, and are as far along as any other major operator in Canada. Here's where I change my tune. While it's true that pretty much every line of business is performing well except for traditional long distance, all the metrics and narrative are presented discretely. That's the way it's always been done, I know, whether you're a telco or a cableco. First you talk about landline telephony, then you move on to wireless, then Internet, then TV, then business services, etc. It's a classic silo approach, much like the way their networks have been built, and it's all neat and tidy.

That may be true, be as we all know, that's not where things are going today. It's all about the bundle and converged services. Reading these reports, we might as well be talking about entirely separate companies for each line of business. Telcos are no different than any other business with multiple operations - each one has its P&L and often operate as independent fiefdoms, and can be very competitive with each other. On one level that can work to make everyone more effective, but in telco there's a lot of cannibalization going on, especially where wireless grows at the expense of wireline.

MTS Allstream is a big public company, and I know they have to report things this way, but sooner or later telcos will need to come up with more meaningful metrics about what's really happening in the marketplace. More importantly, of course, the silo approach to running these lines of business makes less and less sense the more converged their networks and service offerings become. This is going to take time, so it's not going to happen any time soon. But if this type of reporting is still the norm a year from now, I'd be getting concerned.

As I started out with this post, MTS Allstream is moving forward into the IP world pretty effectively, and that's the main message I'm trying to convey. They're getting good results, and have built some strong momentum. They also still have some losses to carry forward, so they won't be paying any big tax bills for a while. That said, the sub-story is the latter part of my post, and that's where I raise my questions. No doubt they're on the right path, but they haven't gone far enough yet. Hopefully I'm not alone in this thinking and next time around maybe some of those silos will start disappearing.