Quebecor Inc (TSX:QBRa). (QBR.B) discussed its third quarter 2024 financial results, emphasizing significant growth in its wireless segment and strategic investments in network expansion.
Despite a competitive market and a slight decline in overall revenues, the company showcased strong wireless performance and a disciplined approach to capital expenditures.
Key Takeaways
- Quebecor achieved a record 132 net wireless additions, with 352,000 new lines year-over-year.
- Wireless EBITDA increased by 17% to $271 million, with margin improvement from 40.5% to 45%.
- Consolidated revenues decreased by 1.8% to $1.4 billion, with adjusted cash flow from operations down $47 million.
- Net income attributable to shareholders was $189 million, a decrease from the previous year.
- The company plans to maintain a disciplined approach to network investments and capital expenditures.
Company Outlook
- Quebecor is focused on enhancing customer experience and maintaining competitive pricing.
- The company plans to continue investing in network expansion and optimizing service offerings.
- Management is committed to improving network quality and customer experience post-Freedom acquisition.
Bearish Highlights
- Quebecor reported a decrease in consolidated revenues and adjusted cash flow from operations.
- The Media segment faced declining advertising revenues and a decrease in cable segment EBITDA by 12% year-over-year.
- Revenue decline in Internet services is attributed to a change in revenue recognition from upfront sales to rentals.
Bullish Highlights
- Wireless segment saw significant growth, with a record number of new lines added.
- The company's market share in Quebec remained strong, and wireless revenues grew by 5% to $600 million.
- Free cash flow increased by 10.1% to $546 million, indicating a strong financial position.
Misses
- Consolidated revenues and EBITDA both saw a decline compared to the previous year.
- The Media segment's EBITDA was negatively impacted by declining advertising revenues.
Q&A Highlights
- Executives discussed subscriber growth and ARPU strategies amidst ongoing competition.
- Management addressed concerns about competition in the value segment and reiterated their commitment to prudent capital expenditure.
- Churn rates were reported to be under 1% for Videotron and around 1.5% for Freedom and Fizz.
- CapEx for 2024 is projected at around $600 million, with expectations for stability.
Quebecor Inc. showcased resilience in a challenging market, with a strong performance in the wireless sector and a strategic focus on network quality and customer experience. The company's disciplined approach to capital expenditures and commitment to debt reduction were also emphasized, positioning it favorably for future growth and stability.
Full transcript - None (QBCRF) Q3 2024:
Operator: Good day, everyone. Thank you for standing by. Welcome to Quebecor Inc.’s Financial Results for the Third Quarter Conference Call. I would like to introduce Hugues Simard, Chief Financial Officer of Quebecor Inc. Please go ahead.
Hugues Simard: Ladies and gentlemen, welcome to this Quebecor conference call. My name is Hugues Simard. I’m the CFO. And joining me to discuss our financial and operating results for the third quarter of 2024 is Pierre Karl Péladeau, our President and CEO. Anyone unable to attend the conference call will be able to listen to a recording by telephone or webcast. Access details are available on our website, and the recording will be available until February 5, 2025. As usual, I want to inform you that certain statements made on the call today may be considered forward-looking, and we would refer you to the risk factors outlined in today’s press release and reports filed by the corporation with the regulatory authorities. Let me now turn the floor to Pierre Karl.
Pierre Karl Péladeau: Thank you, Hugues, and good morning, everyone. So more than 15 years ago, recognizing a huge opportunity in Quebec and across Canada, Quebecor set up on a growth strategy based on wireless. First, launching as an MVNO, then building our own network and further acquiring Freedom Mobile, we have never waven our resolve or direction. We invested wisely, stayed the course and establish ourselves not only as a solid lasting fourth quarter in the Canadian telecom industry, but most importantly, as a lower price, better and faster alternative to the Big Three. As proof that our strategy is paying off, we continue to outperform our competitors, and I’m proud to report our best ever quarterly wireless loading performance of 132 net additions and a remarkable year-over-year performance of 352,000 new lines. Collectively, Videotron, Freedom and Fizz now have 4,050,700 total mobile active lines, a significant milestone achieved in quite a short time. Each of our three brands continue to improve its performance quarter-after-quarter, resonating more and more with Canadians across the country with innovative and affordable products and services. We have created a healthy competitive environment, giving Canadians more choice, lower prices and better experience. We will spare no efforts as we press on with our strategy of sustainable, profitable wireless market sales share growth. Before turning to our operational results, I would like to comment on a few regulatory issues. First, we are happy with the CRTC decision on wholesale roaming rates and rate-setting approach, which will support our continued expansion through better rates that finally reflects current market dynamics after years of being geared towards the sole benefit of the Big Three at the expense of the Canadian consumers. Given that the MVNO rates are already updated and much higher than current market rates, it is crucial not only to obtain fair rates for [indiscernible] roaming access, but also to ensure they decrease year-over-year following market trends. However, we were very disappointed with the CRTC October decision on access to fiber Internet network. Quite honestly. We don’t understand how Bell was able to convince the CRTC and how the CRTC listened and rule that these rates reflect their actual cost while there are multiple brands offer the service directly to customers at a cost of about 50% of the FTTP access rates. I repeat, the various brands retail price is about 50% of what we would need to pay to offer FTTP services. Never was there a TPIA rate ruling that made so little economic sense. We have offered decisions that reflects market realities and would have allowed us to offer much lower Freedom Internet prices as we have been doing with wireless services for more than 18 months. Unfortunately, the CRTC’s decision will prevent us from launching our services on these networks, denying Canadians better service and lower prices, and we urge the CRTC to review and adjust the rates in their permanent decision. I will now review our operational results, starting with the Telecom (BCBA:TECO2m) segment. As we navigate our busiest season of the year, we remain focused on the value of our brands deliver to consumers and committed to always providing the best possible experience. I would like to take this opportunity to thank all of our employees who are actively contributing to our growth and our success as well as our ever more satisfied and loyal customers who recognize the true value of our product and services and appreciate our second to none customer experience. Speaking of customer experience. And I’m proud to report that according to a survey conducted by Léger between August 5 and August 15, Quebecor is again rated Videotron as a telecommunication company with the best customer service. Videotron was chosen by almost twice as many respondents as its nearest rival, confirming its status as the undisputed leader in customer service. Our long-standing focus on customer experience throughout the company and all our brands explains in big part our, once again, stellar churn reduction this quarter for each of Videotron, Freedom and Fizz, clearly concstrating with our competitors’ performance. Pursuing our expansion plan, we made two further announcements this quarter. First, Fizz widened its footprint with the addition of new service areas in British Columbia, Alberta, Manitoba, Ontario, and Quebec, bringing Fizz 100% digital universe to an additional 2.2 million Canadians. Secondly, Videotron extended its wireless service area to the Gaspésie and Côte-Nord regions and enlarged its service area in the Bas-Saint-Laurent region. Residents of these regions can now subscribe to Videotron wireless service. Always the innovative player , Videotron, who were first to offer international roaming plans in Quebec, has also added 45 new destinations to its Canada International plan this quarter, bringing that total to 66 destinations where customers will enjoy the same worry-free service when they travel. On the Freedom Mobile side, customers who choose a plan, including Roam Beyond, starting at $45 per month can get access to 92 destinations at no extra cost. In terms of market trends this quarter, we noticed that the incumbents are now offering everyday low prices via their fighter brands, but we came out on the winning end of that bottle, our performance proving that we are increasingly relying less on pricing alone and more on great customer service and improved network and quite frankly, a way more enjoyable experience overall. Despite the fighters aggression, we did notice a decrease in promotional intensity in Q3 and at the beginning of Q4, which seems to point to more disciplined market conditions in the next quarters. With the growing success of Freedom and Fizz, consolidated wireless ARPU decreased as expected by $2.29 at $35.31, largely attributable to the dilutive impact of Freedom’s prepaid services and Fizz, including introductory prices, but also due to higher promotional discounts and lower overage revenues as our plan are getting richer to the benefit of our customers. Realistically, we do not expect ARPU growth until we reach a better balance between our brands, but we anticipate that customers’ growth would largely offset the pressure on ARPU. In addition, we are amongst providers with the highest proportion of BYOD activations, which also add pressure on ARPU, but helps lower our overall costs and improve cash flows. As proof of our rigorous execution, wireless EBITDA increased by 17% this quarter, reaching $271 million, and our wireless EBITDA margin improved from 40.5% to 45% as compared to Q3 last year despite higher branding and advertising spending to fuel the expansion of our brand sales as well as increases in the domestic and international roaming fees attributable to our strategy of offering customers expanded roaming plans at affordable prices. We are, of course, continuing to be very tight on operating expenses, generating significant reduction from our ongoing cost reduction initiatives. In addition, we are strategically using our low-cost brand Fizz, to fight Bell’s price war, which they are spreading across their multiple brands, selling below their own declare cost. Fizz lower cost structure help us to fight on price and its unique 100% digital experience is increasingly resonating with Canadian consumers, boosting our performance in younger and urban target markets. Our wireless marketing strategies are geared towards making Freedom credible, Videotron unmatched and Fizz successful. Our mobile growth speak for itself, and we are extremely proud of the positive impact we are having on Canadian consumers by promoting healthy competition and lowering wireless prices without compromising our customer experience. These long-term strategies come with shortened sacrifices as we build the foundation of our continued success, of course, but we are confident that our business model of putting the customer first will always prevail as proven by our momentum that keeps improving. Moving now to the Wireline segment. We continue to see aggressive, well, I would say, even extreme aggressiveness from Bell in Quebec, who is basically offering free TV in order to get Internet net adds. We are successful in holding our ground as shown by our low and stable churn rates. But ultimately, these shortsight tactics result in a significant deterioration of revenues for all industry players. And unfortunately, it looks like Bell is now expanding these unhealthy behaviors to the Ontario market with our Primus brand. As we responded to Bell aggression more actively this quarter, we managed to grow our Internet adds by 12,000, an improvement on the increase of 5,000 a year ago and without a significant impact yet from Freedom on Internet, which are only using as bundling strategy for our wireless customers at this time. We also launched Fizz TV in the quarter in dev-op mode and for now excluded from our TV customers’ numbers, but from which we expect a significant impact in 2025. Nonetheless, our TV customer variance improved versus last year performance as is the case for wireline telephony. With a resilient mindset and in line with our commitment to deliver the best possible customer experience, Videotron launched illico+. It’s a brand-new unified video streaming service for French speakers across the country created by the merger of Club illico and Vrai. Building on the success of Club illico over the past 10 years, Videotron is strengthening its leadership in French language entertainment. This new rebranded platform is offering an extensive catalog of more than 8,500 titles with over 1,800 additions coming in 2025. The platform will combine scripted content as well as the specialized unscripted content that make Quebecor and their reputation for years. Quebec orders [ph] remains committed to investing in original Quebec production, enhancing their discoverability and offering the best international content in French. illico+ will now be the go-to-platform for showcasing Quebec talent, both on screen and behind the camera. Turning to our Media segment. Media posted an EBITDA of $12 million in the third quarter, a $4 million unfavorable change due in good part to the broadcasting activities, which continue to suffer the repercussions of the decline in advertising revenues and to be confronted with the same major challenges that persist with the media industry. MELS Studios posted an EBITDA improvement of $3 million in a busy quarter with local and international production. Despite this challenging situation, savings from our reorganization initiatives announced last year are materializing. Unfortunately, these savings in the last quarter were largely offset by the cost of applying the new federal digital service tax. While this 3% tax was originally intended to target large foreign digital companies to ensure that they contribute to our Canadian system, it is unacceptable and above all, unfair that Canadian businesses have to bear the significant impact of this measure, which constitute a double tax on domestic business. Faced with this situation, which runs counter to its objectives, the government must review the application of the digital services tax to exclude Canadian businesses who already paid their taxes in Canada and made a significant contribution to the broadcasting system. Furthermore, in the third quarter, CVR [ph]continued to hold the highest market share in Quebec at 39%, a testament to the loyalty of our audiences and the quality of our content. The new then Public Affairs channels LCN recorded a significant 0.8% growth for the period due in part of its exceptional coverage of the U.S. election campaign. It does maintain its position as Quebec most watched specialty channels ahead even of the over-the-air channel Novo from Bell Media. Since the start of fall programming, CVR has reached 5.4 million Quebecers every week or 71% of the population. CVR carried 15 of the top 30 shows in Quebec in the third quarter of 2024, including Chanteurs Masqués, which is the Quebec version of Mask Singer, which stopped the list with an average audience of nearly 1.6 million viewers. Finally, our Sports and Entertainment division put on major shows in the quarter, including Billy Idol and a popular singer, Billie Eilish, who launched a world tour at the Centre Videotron Quebec City on September 28. With a total attendance of 19,000, this show was our most successful and profitable to date. I will now let Hugues to review our detailed financial results.
Hugues Simard: On a consolidated basis in the third quarter of 2024, Quebecor reported revenues of $1.4 billion, down 1.8% and EBITDA of $594 million, down $30 million, almost entirely attributable to a $26 million negative stock-based compensation variance. Adjusted cash flow from operations decreased $47 million to $435 million due to higher CapEx investments in our networks and our expansion. But free cash flow provided by operating activities increased $50 million or 10.1% to $546 million due to lower interest costs and a continued disciplined cash management. In our Telecom segment, total revenues decreased by $26.9 million or 2.2%, mainly due to the lower wireline services and equipment revenues as we made two significant decisions of: first, switching our Helix boxes from a purchase to a rental model in the second quarter; and secondly, deciding to forgo most of our annual price increases at the beginning of the year, knowing well that we would continue to face an undisciplined competitor in Quebec. Cost control and synergies from the integration of Freedom Mobile helped minimize the impact on our adjusted EBITDA, which decreased only slightly by $3.6 million or 0.6%. Wireless revenues increased by 5% to $600 million in the quarter, and wireless EBITDA reached $271 million, a 17% increase. Wireless EBITDA margin improved from 40% to 45% compared to Q3 last year. Telecom CapEx, excluding the acquisition of spectrum licenses are up $13 million in the quarter, reflecting our increased investments in our networks. We now invest more in 5G network expansions, new revenue growth opportunities as well as in the rental of wireline devices, as I mentioned earlier, with significant synergies between the companies, such as in Ottawa, for example, where we’ve dismantled one network and generated significant ongoing CapEx savings. Telecom adjusted cash flows from operations, thus decreased due to the CapEx increase, decreased by $16.7 million. Our Media segment reported revenues of $155 million, a 7% decrease and an EBITDA of $15 million, a $6 million decrease compared to the same quarter last year. Sports and Entertainment segment revenues increased by 7% to $64 million, and EBITDA was slightly down to $12 million in the quarter. Quebecor reported a net income attributable to shareholders of $189 million in the quarter or $0.81 per share compared to a net income of $209 million or $0.91 per share reported last year. Adjusted income from operating activities, excluding, as usual, unusual items and losses on valuation of financial instruments came in at $192 million or $0.82 per share compared to $202 million or $0.88 per share in the same quarter last year. For the first nine months of the year, Quebecor’s revenues were up 5% to $4.1 billion, and EBITDA is up 6% to $1.8 billion. EBITDA from our Telecom segment grew 6% to $1.8 billion for the same period, an improvement of $98 million over last year. As of the end of the quarter, Quebecor’s net debt-to-EBITDA ratio stood at 3.36 times, still the lowest of all telecom competitors with wireline and wireless services. I would also point out that we are the only telecom company in Canada to continue to regularly reduce our debt and strengthen our balance sheet, thanks to our steady and disciplined cash flow generation capabilities. Quarter-after-quarter, even after purchasing and canceling this quarter, 1,260,000 Class B shares for an investment of $40 million. We intend to continue to delever over the next quarters and operate in the low 3s as we have stated before. I would also like to highlight the success of our recent refinancing where Videotron issued US$700 million of senior notes in the U.S. investment-grade market, yielding 5.1% on a fully hedged basis. The proceeds will be used to repay existing Videotron indebtedness, including the first tranche of the term loan drawings under Videotron’s credit agreement maturing on October 3 of next year and the redemption of Videotron’s 5.75% senior notes that were maturing on January 15, 2026. Available liquidity of more than $2.3 billion at the end of the third quarter and our growing free cash flows will allow us to continue to improve our very strong balance sheet. So far this year, so during the first nine months of the year, we purchased and canceled 2.2 million Class B shares for a total investment of $69 million. We thank you for your attention, and we’ll now open the lines for your questions.
Operator: [Operator Instructions] The first question is from Jerome Dubreuil from Desjardins. Please go ahead Jerome.
Jerome Dubreuil: Thanks for taking my questions. Looking for your thoughts on the industry in general. It looks like some peers are maybe feeling the need to do something here in terms of change of strategy. Do you also feel that need to do something? Or maybe this something is already done with the Freedom acquisition from last year?
Pierre Karl Péladeau: Thank you, Jerome. No, we do not intend to change the course, as I said in my speech. We are still in the same direction, making sure that the acquisition we made with Freedom and our enlarged footprint will continue. We look forward to try to assemble as efficiently as possible bundling we’ve been stuck and I refer to the CRTC’s decision on FTTP access. We will continue to work hard to try to convince the CRTC that this decision doesn’t make sense. When we are able to see, and it’s quite obvious that prices offered by Bell in the marketplace when they’re offering. What’s the price for 1 gig in Ontario right now?
Hugues Simard: $69.
Pierre Karl Péladeau: $69 at the retail price and the cost rule by the CRTC, it’s $69 without the CBB. I guess that you know this seems to be so obvious that we look forward to be able to work for our bundle and then therefore, increasing our capacity to get more revenues out of our customers because they would have experienced the quality of our network and the quality of our customer experience.
Jerome Dubreuil: Thank you. Second question for me is you spoke about potential stabilization of wireless ARPU in the future once you get where you want to be in terms of share of your total wireless subscriber base across the different brands. Would you mind sharing what is the ARPU direction for the different brands that you have right now?
Pierre Karl Péladeau: Well, we would again, repeat that Videotron has been always a premium brand. And certainly, we’ve been able to get our market share with that time frame that we’ve been able to establish it. It didn’t came in six months. It came on a 10-year basis. And this is why since the market create new brands at the beginning, it was flanker brands, and now they are fighter brands. And therefore, I guess that we didn’t have any other choices to follow this trend other than being better in this trend by offering 100% digital universe, which fit very well in a certain segment of the population on top of which the prices are quite competitive with what we’re seeing in the marketplace, first with flankers and today is fighters.
Operator: Thank you. The next question is from Maher Yaghi from Scotiabank (TSX:BNS). Please go ahead.
Maher Yaghi: So the first one I have is related to your prepared remarks, Pierre Karl, and just your answer here to Jerome’s question. You’re arguing that wireless roaming rates and also broadband rates should decline and be linked to the declining market prices in the market. But the CRTC has, for a long time, linked tariffs and rates to the cost to serve and not necessarily to market prices, which in wireless are being driven down by yourself through Freedom. So are you arguing that the CRTC should move away from its cost-plus methodology and move to a retail minus approach? Because that would be a big change that you’re proposing. And second one I have is related to wireless. You had a great performance in terms of loading definitely in the quarter, great success and you’re taking a lot of market share from incumbents, especially it looks like from BCE (NYSE:BCE). You indicated that you will stand pat on your pricing strategy. The question I have is, how should we think about revenue growth in wireless in the coming quarters as you keep that pricing strategy in place? Because obviously, we might see a peak in terms of subscriber growth. So I’m trying to figure out how we should think about ARPU growth in the coming quarters as you keep that pricing strategy? Thank you.
Pierre Karl Péladeau: Thank you, Maher. Well, first of all, obviously, we’re not the ones that will make rules at the CRTC, but something we know is certainly it depends the assumption that you’re using when you refer to cost. I’m not an accountant, I’m not a financial expert, but I’ve been listening to our colleagues and looking at the way that sometimes our competitors describe their cost. What do you include in your cost? This is the real question. And I guess that somewhere we should and probably as of today, we’re not good enough to convince the CRTC and their accounting perspective that those costs are not the one that reflects the reality. And the reality is that they’re selling 1 gig at $49 or at $59 since they are asking us to pay $69. Again, you’ve been following the industry for many years. We’ve been looking also at what took place with the TPIA prices or regulated prices by the CRTC. It went from north to south and then established in the middle of the road, which is the rates that are actually the one applicable. The funny thing is that those TPIAs were bought by our competitors. They bought all of them. And you know what, they’re doing and using it now to sell 1 gig at a price of $59, which is quite surprising. So what was the logic behind all this? Will they be forced again to make a write-off in the near future because we don’t see the value of buying a company when you don’t have the value of it anymore. So we’re applying right now TPIA prices when we are offering bundles. And this is why, again, I referred to my prepared remarks, that is something that we’re using to get some wireless customers. We would like to add additional services like TV. We see TV as also a growth segment. And therefore, while we are getting wireless customers, we have the capacity down the road to improve our revenue development and our margin. So I guess that I’m answering a little bit both of your question and maybe Hugues will have maybe one or two things to add.
Hugues Simard: Yes. Just on your loading versus ARPU second question, Maher, I think one thing we’re starting to present here, to be quite honest, obviously, we’ve been transparent with this. And since the acquisition of Freedom, we always said that there was an opportunity for us to disrupt the market that was inefficient and that was offering prices that were higher than the U.S. and higher than the industrialized world for telecom services. Now that being said, I would point you and your colleagues as well to what the incumbents are doing. And they’re not doing it through their main brands, as you know, but they’re doing it through their fighter brands. So it’s a little bit annoying to be called the aggressor in English Canada, and I really urge you, Maher, to go on their various websites. And I’m going to throw a few numbers at you. If you go to Chatter, you’ll see that Chatter has 50 gigs for $34.
Maher Yaghi: This morning?
Hugues Simard: Yes, yes. Right now. For $34 with a month free. We’re at $35 for 50 gig at Freedom. Lucky. Let’s look at Lucky. Lucky, you get 15 gigs for $29 a month. Well, we have 10 gigs for $29 a month at Freedom. Let’s go see Public. What’s Public doing? 20 gigs for $30. Same argument. And this is for wireless. For wireline, okay, so let’s even look at what Bell is doing. If you look at Distributel or Primus, you’ll see that 500 megabits for $44.95 a month in Ontario. So this is what we were saying in our prepared remarks that this war, this aggression in Quebec, which, by the way, if I may be so bold, is that we did not launch the price war in Quebec. We never, and you will remember, Maher, that for a few quarters, we didn’t even respond and we lost market share and we lost net ads. We were negative net ads in Internet for a few quarters. And yes, this quarter, we responded more in kind. But we never launched this war. And we still believe that this is at the level of maturity of the market in Quebec. It is not right, and it is not business. It’s very tricky from a business standpoint to do what Bell is doing, because I think it’s hurting the entire business in Quebec. And now that we see that they’re going to Ontario, I think I feel a little bit worried about the wireline business in Ontario and in the rest of Canada. As I said, if Primus is offering 500 megabits for $44 and distributor is offering gig for $69.
Maher Yaghi: I think we can all agree that the industry would benefit from improved pricing. That’s for sure. I’m trying to understand how your ARPU is might look like in the coming quarters. If you can just help us understand where are you in that cycle on wireless ARPU.
Hugues Simard: Well, Maher, it all depends. I can’t answer that. It depends how if this price war continues or not or if people become a little bit more reasonable. We said in our remarks, you will remember that we were very, very disciplined, and I’m sure you will agree with that with our back-to-school offers. And we have been so far, everything we’ve launched for or that we’ve put out for Black Friday is also, I’m sure you will agree, quite disciplined. Now we can’t speak for our competitors. I mean if they go crazy again or if they continue to go crazy in Quebec, then I’m not sure where RFQ is going to end up. But I think we’re doing our share. And now I think the ball is in the incumbent sport.
Pierre Karl Péladeau: And back to Jerome question and what you referred also, Maher, I guess that we should repeat that we’re staying the course. We said at the beginning when Freedom acquisition took place that we intend to gain market share. And it’s true that since the assets that we acquired, especially the network was not at the level that we would compare this network with Videotron because in Videotron, we’ve been investing for the last 10 years. In fact, we’re doing what is necessary. And we’re seeing as of today that our network is improving. Our customer experience is improving. But without having a competitive environment, we don’t think that we’ll be able to get our market share growing, so we intend to stay there. And we’re not changing our direction. We’re not going to buy any telecom company in the U.S. We will continue to grow where we’ve been able to grow and successfully for the last few years.
Maher Yaghi: Thank you. Thank you for your answers.
Operator: All right. Thank you.
Hugues Simard: Operator?
Operator: Yes. The next question is from Aravinda Galappatthige from Canaccord Genuity (TSX:CF). Please go ahead.
Aravinda Galappatthige: Good morning. Thanks for taking my questions. Two main questions from me. First of all, maybe Hugues, just on the swing due to the stock-based comp. I know that kind of created some variance to expectations. And I know in the past, you’ve had meaningful variations because of stock-based comp. Was there anything unusual about this one? Any set of changes in valuation and so forth? Just wanted to get some clarity on that. And secondly, I guess, the more important question on wireless loading. I just wanted to get some comments around the quality of loading here. I know we’ve seen with some of the incumbents that have reported a bigger swing towards prepaid. And also related to that, whether maybe you could comment on any changes to cost of acquisition on the wireless side that showed up in Q3. Thank you.
Hugues Simard: Thanks, Aravinda. On your first question, yes, the stock-based compensation, the swing is due to very simple, well I mean two things, mostly to our stock price variation, which as you compare as we compare ourselves to last quarter to the third quarter of last year, our stock in the quarter had dropped by $3.5. And this quarter, it actually increased by $6.5. So there’s a $10 swing quarter-to-quarter. And that’s the biggest swing that we’ve seen for, well, ever, I think, but at least for many years. And we also I have to point out, of course, we also had issued more option-based compensation. So the two make up the difference. As to the wireless loading and the quality of the loading, we’re also seeing some prepaid, of course, in the case of Fizz is continuing to perform very well. So that – I suppose it could be considered prepaid. But in our mind, whether it’s postpaid or prepaid, that is a prepaid that is what you call that an authorized payment, for example autopaid. So if you have AutoPay on your prepaid, how different is it from a postpaid bring your own device, for example. And so I think I would point you more towards our churn that’s coming down in all of our brands, which I think as to the quality, I think it does point to the quality of our loading as we are keeping these customers much longer. And we’re improving every single brand on that front.
Aravinda Galappatthige: Thank you. And just one small clarification on a previous comment. I think you’ve mentioned a $3.6 million decline in EBITDA or 0.6%. Were you referring to the, was that the, I’m not sure if I heard you correctly, was that the cable component that you were giving a disclosure on?
Hugues Simard: No, that was the telecom segment. Well, it’s not Quebecor consolidated, but it’s the telecom segment. So it’s Videotron, Freedom and Fizz basically.
Aravinda Galappatthige: Okay. All right. Thank you. I’ll pass the line.
Hugues Simard: But where we’re pointing out, it’s an important point because we’re pointing out to revenue declines in the wireline, but we were able to lower operating costs significantly and more synergies from Freedom are continuing to come in, which basically allowed us to have a flat EBITDA, I mean $3.6 million or almost flat EBITDA for the quarter in the telecom side.
Operator: All right the next question is from Matthew Griffiths from Bank of America (NYSE:BAC). Please go ahead, Matthew.
Matthew Griffiths: Okay, thanks for taking the question. So I was obviously, after the Freedom acquisition, the market that Freedom kind of goes after is more of the value segment of the market. And since competition has obviously really escalated in that segment, perhaps one could argue like the opportunity is going to be spread across more players. And so I wanted to get your thoughts on the need for you guys perhaps to look at a premium offering, perhaps investing more in the network to kind of hit more in different segments to generate greater long-term growth and greater profitability and perhaps give customers somewhere to migrate to. Obviously, the incumbents have the ability to load on a prepaid and then migrate them up when appropriate to a premium brand, and that’s maybe not available. So just your thoughts on that and the CapEx implications.
Pierre Karl Péladeau: Thank you, Matthew. I guess that this is a very interesting question. And as you can imagine, certainly, a marketing perspective, and I’m not sure it’s going to be a good idea. We share this with the public and with our competitors. Again, I would say that we’re coming from where we were and Freedom was different than the premium brands. Freedom have not been there for 30 years like Rogers (NYSE:ROG), Bell and Telus (NYSE:TU). Freedom was there for 10 years or a little bit more. It went through a different life cycle, I would say, stick for a while, back healthy and now certainly on solid ground to grow. But it’s not only Freedom. It’s the network we acquired and the network we intend to continue to invest. And then therefore, what we would be able to do with the network is certainly something that will open up opportunities in the future. I would say it’s certainly, again, not a good idea that we share this with the public, but we can easily say that the assets that we’re building on would certainly give us a springboard to the future.
Matthew Griffiths: So can I just follow up on that? It sounds like you kind of recognize the need to invest more in the network. And there was a small increase year-over-year in CapEx, perhaps explained by kind of the Eastern Quebec kind of rural network expansion that was talked about and perhaps expanding Fizz’s reach to new areas out West. But to what extent do you think it’s sustainable to run at the very low capital intensity levels that you’re currently at? I mean, is there a fear that you end up in a situation where the network quality gap just widens and then the need to go and rely on lower and lower ARPU increases?
Pierre Karl Péladeau: Well, Matthew, I would tell you, I don’t think that we should conclude an equation between the efficiency of the network and the amount of capital expenditure that you’re doing. You have the right and we consider that we have the obligation to spend wisely, to spend at the right place with the right technology, make sure that there is no overlaps, that we’re making the best out of our procurement department. We’re running our operations tightly. And this is what we’ve been able to achieve forever. I would say, never say never, but for the last 20 years when we started operating Videotron, we did something very well in this position. And for us, there’s no reason why we should change and start spoiling money. So we have the capacity of improving our network at a decent and reasonable cost. I don’t think that we need to spend more money inefficiently, and we will stay the course. We know that nothing is going to take place in a quarter. But since we acquired the asset and the company, we have been improving it. And we know that because we have the capacity to supervise our network. We know what are the problems. We know what should be fixed. And there’s opportunity in the future to reduce the cost of operating the business because when you’re expanding your network, then you have the capacity, well, not the possibility. You run the capacity to reduce your operating expenses. So this is what we did. And it’s not something original. We did it in Quebec with Videotron because, obviously, as you can imagine, the network that we are now running on was not built in a weekend, in a month or in a year. It was built in 10 to 15 years, and it still continues to be built with the new technologies that we’re implementing, LTE Advanced, our 5G, 5G plus and all that stuff. And we were able to reach this level without spoiling our money. And our capital expenditure were reasonable. And if we have a better ratio than the incumbent, well, what, we’re proud of it.
Matthew Griffiths: All right. Thank you for your answer.
Operator: Right. Thank you. The next question is from Drew McReynolds from RBC (TSX:RY). Please go ahead, Drew.
Drew McReynolds: Yes. Thanks. Thanks very much. Good morning. Three for me. Hugues, just starting off, are you able to just give us what postpaid and prepaid churn was in Q3? Obviously, you continue to say it’s down. Are you able to get that? Second, just in terms of Internet ARPU, clearly shifting a little balance on the growth and profitability front. Is Q3 more indicative of what you want to achieve going forward? And then lastly, obviously, very good wireless loading, 350,000 on a trailing 12-month basis. Is that actually are you gaining market share when you look at the overall market? And I guess the real apples-to-apples would be within your footprint, which presumably is not as big as each of the national operators. Thank you.
Hugues Simard: On your first question on churn, we haven’t given out the churn, but we did say that it was lowered in all of our brands. And I can directionally tell you that we’re in on Videotron, we are just about on a monthly basis, we’re just about slightly higher than the 1% mark. And with Freedom being Freedom and Fizz being slightly higher, but certainly in the 1.5% range. And that’s also, when I’m looking at that’s going from very much higher than that last year when we were talking about Freedom being in the high 2s and even Fizz being in the high 1s or around 2%.
Drew McReynolds: No, thanks for that Hugues and just do you have a couple of questions?
Hugues Simard: And your second question was on Q3, right? Whether Q3 was reflective of how we see things going.
Drew McReynolds: Yes, more on the cable and particularly the Internet side. Obviously, you did much better on kind of loading and there’s probably a seasonal kick back post moving season, but there’s still some ARPU pressure there. Just as you balance growth and profitability on that part of your business, are you pleased with Q3?
Hugues Simard: No, we’re not pleased because, again, as we’ve said very clearly, we think that Bell’s aggression in cable or in wireline in Quebec is unwarranted and is to be honest, blatantly stupid for everyone. But that being said, one thing in terms of revenues going forward, I’ll point you to the fact that, and as we said in our remarks, part of most of the explanation actually for the lower revenues has to do with us not making an annual increase for Internet and cable at the beginning of the year. I’m sure you’re aware that we’ve changed our tune on this. And starting in December, there will be an annual increase being put in. So for 2025, most of that differential should be covered by that or should be made up by that.
Drew McReynolds: Great. And then yes, the last one was just on within kind of your POPs covered given your loading of 350 on wireless over the last 12 months. The data you have, are you gaining share within what we’ve seen with the broader market?
Hugues Simard: As you know, our coverage area tends to be quite urban on the Freedom side. And we are indeed we’re seeing very high. I’m not going to throw numbers at you because they haven’t been vetted. But we’re certainly looking at, we’re probably starting at the 10% kind of position, and we are now more than, if not double that, not very far from that in certain areas like the Greater Toronto area, for example, and the other big cities such as Calgary and Vancouver.
Drew McReynolds: Okay, thank you for that. I appreciate it.
Hugues Simard: Thanks, Drew.
Operator: All right. The next question is from David McFadgen from Cormark Securities. Please go ahead, David.
David McFadgen: All right. Thank you. So a couple of questions. I’ll just go one by one. So when we look at the total telecom EBITDA and then when you factor in the wireless EBITDA growth that you talked about 17%, it obviously implies a low double-digit decline on the wireline EBITDA. So I was just wondering what can be done to improve that decline? And is this purely or mainly a function of the pricing environment out there and the competitiveness in the market?
Pierre Karl Péladeau: Well, David, it’s an interesting question. On one side, obviously, if you were to reduce your prices, you will get more loading. And on the other side, if you want to have less loading, you increase the prices. So again, this is something that we will not share with our competitors through this conference call. But I’m not going to say it’s automatic or it’s mathematical. But there is certainly a big relation between loading and prices that you’re offering. And we said many times, and I guess that maybe the additional information that we can have here is a question of balance. I mean so are we doing what is necessary to keep our absolute number of customers or we would like to protect our margins by not following all those things that are taking place in the marketplace. So again, it’s a matter of balance. And it will depend on a day-to-day basis, what we’re reading from the market. Something we know, and this is something that, obviously, we are emphasizing on through our call centers, through our marketing and advertising strategy is that customer experience is not comparable to our competitors, and we try to enhance and again, to emphasize as much as possible on it. Is this unpenetrable? I would say, not completely, but it’s certainly an asset that we’ve been building throughout all those decades for which we’re very proud and for which we’re doing not too bad. So when we compare with the numbers that we saw in the U.S. Comcast (NASDAQ:CMCSA) last week, we compare highly favorably. And again, it’s a matter of making sure that we have a balance of loading and margin, and we will continue to be driven by those pieces of the equation.
David McFadgen: Okay. So just on the wireless business, the incumbents are basically discontinuing the prepaid on their primary brands. They’re just going to run it on the flankers. So just wondering what are your plans, if you can share them for your prepaid business?
Pierre Karl Péladeau: Yes, I guess that answer to that, maybe we should consider that and you’ve been educated that way that there’s a big difference between prepaid and postpaid from our competitors’ perspective. But we’re not seeing this the same way because, again, our digital 100% brand, which is the one that we’ve been driving with this, and it’s prepaid in all of the means you have the money in your bank account. And if you want to desubscribe, you need to go on the website and do it yourself since our prices are competitive. But I mean, you can easily understand that if we were to lower price, our fifth customer will know right away and then they’ll come on the website because “they’re probably more educated customers than others”. And then they will reprice their service. And obviously, as you can imagine, this is why we need to be prudent. Again, this is why we have a perspective of balance between loading and pricing.
David McFadgen: Okay. And then just the last question is, can you give us an update on CapEx for this year and an outlook for next year?
Hugues Simard: Yes, we’re still on track, David, for the guidance was we had given you guidance for 2024, about $600 million, maybe a little bit higher than that. I think we’re on track with that. For next year, we haven’t given any guidance yet, but we did point out to the fact that in our view, CapEx should be fairly stable other than we’ve mentioned wireline equipment. We’ve switched now from a selling the boxes to renting the boxes. So as you know, that creates extra CapEx. So there’ll be the impact of that. But other than that, we’re looking at stability for going in the next few quarters.
David McFadgen: Okay. All right, thank you. Thank you.
Operator: Thank you. The next question is from Stephanie Price from CIBC (TSX:CM). Please go ahead, Stephanie.
Stephanie Price: Hi, thank you for fitting me in. I wanted to just touch on capital allocation. So leverage is now close to your target range and you were active in the share buyback this quarter and your payout ratio is also near the bottom of your targeted range. Just curious in terms of outside of investments in the business, how should we think about capital allocation here? Would you prioritize an increased return of capital to shareholders? Or would the focus be on M&A?
Pierre Karl Péladeau: Well, I guess that we need to figuring out what’s going to take place. I mean, if we consider that there is an opportunity for us that we’ll build in the future, we’re considering it. That doesn’t mean we’re going to jump on it. And if we were considering it, certainly not at an inflated price. We will be guided by the accretion aspect, accretion on EBITDA, but accretion also on money invested on the cash that will be required. I’d like to highlight something that maybe we were not emphasizing on sufficiently. Our definition of free cash flow, it’s quite simple, but it’s probably worth to mention it again. So it’s EBITDA minus interest on debt, minus interest on leases, minus taxes, minus share repurchase and minus dividend. So we’ve been showing that this number is positive, and this number brings cash in the bank, which is used to reduce our debt and improve our ratio. Compared to our competitors, our debt is not growing. We’ve been seeing our debt competitors growing every quarter for which purpose, this you know. So it’s worth to mention this. Back to the reallocation. As you know, I guess that you’ve been seeing that our payout ratio in terms of dividend is one of the lowest of the industry. Certainly, at the low side of the bracket we mentioned publicly a few quarters ago, so I think it’s worth also to mention this since, again, the free cash flow that we’re generating is always positive. I don’t know if answer completely your question. If not, maybe you, may have other answers. I don’t know, I think that’s exactly what I would have said.
Stephanie Price: That’s great. Thank you very much.
Operator: Thank you. The final question for today is from Vince Valentini from TD (TSX:TD) Securities. Please go ahead, Vince.
Vince Valentini: Hey, thanks very much. Can I try to clarify a couple of accounting things and a couple of things you’ve said so far? First of all, on Drew’s question on market share, when you say it used to be 10% and now more like 20% in some cities, I assume you’re saying market share of gross ads for Freedom as opposed to total share of all subs in the market?
Pierre Karl Péladeau: Well, yes. I’m referring to gross ads, yes I was referring to gross ads. Yes. Absolutely.
Vince Valentini: No. no problem. Just want to make sure you the…
Pierre Karl Péladeau: No, no, actually, I was not referring to gross ads. Sorry. When I said 10%, we start, when we bought Freedom, we bought we were probably at a 10% market share nationally. And in some big cities, most notably the GTA, we’ve almost doubled that. So that’s just a market share of the current market share, I’m not sure how to say it differently.
Vince Valentini: Okay. You think you’re at a 20% share of the GTA market. And obviously, you have to be much lower than that in Vancouver and Calgary and other big cities or subs would be demonstrably higher.
Pierre Karl Péladeau: No, first of all, I didn’t say double that. I said if it’s lower than 20%, but its way higher than 10%.
Vince Valentini: Okay. Second, Dave was asking about the you came up and answered his question about the capital treatment for Helix boxes now that you’re renting. Can you help me with the revenue impact? Is that in some way impacting the Internet revenue decline this quarter of how you’re treating the rental fees versus what used to be selling boxes?
Pierre Karl Péladeau: Well, yes, because we used to take it upfront. And now the revenue comes over the next periods, right so it will get better. Obviously, the revenue will keep coming in over the next quarters. So yes, basically, we used to recognize the revenue upfront, which we don’t net of discounts if there were discounts. And now we’re recognizing it over time and CapEx in the box, of course.
Vince Valentini: Would that change in the quarter have had a big impact on Internet revenue being down 4.8% like would it have been minus 3%, if not for that or something?
Pierre Karl Péladeau: No, no. It’s very recent that we started that anyway. So no, I think it’s immaterial, honestly, in the quarter. But it will be more material forward.
Vince Valentini: Okay. Fair enough on that one. Another one to clarify is your leases, it’s not huge dollars, but I mean it’s up 10% year-over-year, $33 million versus $30 million last year. Is that just simply like sites for cell sites and other things we think of as leases? Or is there any way that some of the wholesale fees are somehow being captured as a lease like when your MVNO expands or as you pay domestic roaming fees to Rogers or others?
Pierre Karl Péladeau: No, to your second point, no. It’s more sites and higher rents or these sites cost more. The leases are just more expensive basically.
Vince Valentini: Okay. Getting to the end here. Working capital, pretty big inflow. I know you’re proud of the free cash flow and debt reduction, and you should be. But I mean, it seems to be getting a bit of a tailwind from working capital that can be lumpy. It was up $111 million in the third quarter and $72 million year-to-date. Is there anything sustainable in that? Or is this just timing issues that could reverse?
Pierre Karl Péladeau: No. On cash flow, no, no. Well, working capital, as you know, is hard to predict, but we’re certainly managing it, and you will have seen the trend over the last quarters that it keeps improving. So I wouldn’t expect a big change of direction over in Q4. No.
Hugues Simard: There’s no spectrum auction taking place.
Vince Valentini: Thank you. And last detailed one, and I may have one big picture after it is simply on the growth in wireless EBITDA of 17%, if I remember the number correctly. Does that include any drag from higher stock-based comp? or you do you give us that number on a gross basis and then the stock-based comp adjustment is more just at the telecom level in aggregate? Or would 17% have been achieved despite absorbing higher stock-based comp?
Pierre Karl Péladeau: No, the stock-based comp is spread. A good chunk of it is in the head office variance that you saw, but the rest is spread. And it’s spread also between wireline and wireless, of course So wireless will take its share of the stock comp increase, yes.
Vince Valentini: Okay. If that’s the case, then the math should be pretty straightforward. If your wireless EBITDA is up 17%, your cable segment EBITDA is down 12% year-over-year. That is unusually bad for any cable company, especially for one that’s managing its costs as aggressively as you guys. Can you talk through that at all? Is that something you find acceptable? I know you’ve talked a lot about the price war in Quebec. Is that just the reality of what it translates to in terms of EBITDA growth? Or is there something temporary in there that you can make look better in the next few quarters?
Pierre Karl Péladeau: Well, it’s either on the revenue side, Vince, as you know, or the cost side. Right And the cost side in wireline, as you know, these are long term, there is efficiencies and then we continue always to work on efficiencies, and we will continue to do so, especially since we’re facing more pressure on the top line in wireline. But it’s mostly repeating what we’ve said before. It’s mostly a revenue issue, most of which is due to the fact that we did not bring wireline prices up at the beginning of the year and that we will do now to help matters for 2025.
Vince Valentini: Thank you. Sorry for the laundry list. Just need to clarify those things. Thanks.
Pierre Karl Péladeau: Okay, thank you very much, Vince. And thank you to all of you. I would only like to add something because it was something that surprised me. But yes, for sure, again, we will say that it’s a competitive environment and certainly have some effects. But when we’re calculating our ARPU, we don’t exclude any customers, which we’ve been seeing our competitors doing. And funny is that they’re excluding the one with the lowest ARPU, which mathematically increase their average ARPU. So we recognize the competitive aspect of the market and – but we will always be transparent about it. And we will continue to focus on our capacity to generate money to generate cash to improve our balance sheet and to reduce our debt, which will give us even more leeway in the future. So on this, I’d like to thank you all and wish you early a little bit on the process, but a Merry Christmas, and we will talk to you at the next quarter.
Operator: Ladies and gentlemen, this concludes Quebecor Inc.’s financial results for the third quarter conference call. Thank you for your participation, and have a nice day.
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