Quebecor Inc.'s push into the wireless arena, a move that had analysts salivating and competitors delaying moves in the lucrative Quebec market, is turning out to be a mixed blessing.
Pierre Karl Péladeau, Quebecor's president and chief executive officer, told shareholders at the company's annual meeting Thursday that the cost of building a new wireless network and pulling in customers will drag down the company's financial results in the short term.
Quebecor Inc.'s telecom unit, Vidéotron Ltée, started offering high-end smart phones last fall that can play the Montreal-based media conglomerate's portfolio of popular French language content.
But at the same time, Vidéotron's main rival in Quebec, BCE Inc., has been launching a new, high-quality TV service over its broadband Internet network. And the cable company, used to hunting the telco's customers in home phone and Internet service, is now having its own TV customers poached by Bell.
And so even as Vidéotron picks up new wireless customers, Quebecor is facing pressure in core businesses - and that is beginning to affect the company's profits, free cash flow and earnings before interest, taxes, depreciation and amortization. It has spent more than $1-billion on wireless network infrastructure and licences.
"The sustained nature of our expansion leaves us no choice but to go through a period in which there is a relative diminution in profits, to enable us to lay even more solid foundations for the future," Mr. Péladeau said.
His remarks came the day Quebecor reported that profit fell in the first quarter by about 2 per cent, slipping from $34.9-million, or 54 cents per share, last year, to $34.3-million, or 53 cents a share. Revenue growth was strong, moving up 4.5 per cent in the quarter to more than $990-million, but analysts had predicted stronger subscriber growth at Vidéotron, which lost 3,000 basic cable TV subscribers in the quarter and added around 29,000 wireless subscribers.
As usual, Vidéotron's revenue growth - at 9 per cent - compensated for sagging growth at Quebecor's media division, where revenues again declined.
"While some margin compression was expected... due to wireless start-up costs, the shortfall this quarter was a little more than we anticipated," wrote Drew McReynolds, an analyst with RBC Capital Markets, in a research note to clients. "Meanwhile, subscriber results were weak across Internet, Phone and TV."
On a conference call with analysts after markets closed, Mr. Péladeau was unequivocal about the investments the company has made, even as the company navigated the launch of the right-wing Sun News TV network and pursued an NHL franchise and arena in Quebec City.
"Investing in new products and services don't scare us, and we're not afraid to go through short-term pain for long-term gain," Mr. Péladeau said, adding that the company has "adopted a disciplined approach that allows us to reach our objectives without affecting our financial profile."
But with Bell investing heavily in its new TV network in Montreal - as well as in Toronto - Vidéotron is facing tougher competition in television. Vidéotron CEO Robert Dépatie said the company's bundling strategy - where it discounts one service if it's purchased as part of a package - and its access to Quebecor's news media and entertainment content is helping it compete.
The company also offered some details about a rollout of more advanced, digital cable technology in the second half of the year, an upgrade its cable peer Shaw Communications Inc. is implementing in Western Canada, where it is also facing a TV threat from Telus Corp., a phone company.