CALGARY, ALBERTA — (Marketwired) — 07/15/16 — Shaw Communications Inc. (TSX: SJR.B)(NYSE: SJR) announces consolidated financial and operating results for the quarter ended May 31, 2016. Revenue from continuing operations for the quarter and year-to-date of $1.28 billion and $3.58 billion increased 13.0% and 6.7% over the comparable periods, respectively. Operating income before restructuring costs and amortization(1) for the quarter and year-to-date of $555 million and $1.56 billion improved 5.3% and 3.5% over the comparable periods, respectively. Excluding the results of wireless and the former media division, revenue and operating income before restructuring costs and amortization for the quarter from the combined Consumer, Business Network Services and Business Infrastructure Services divisions were up 1.2% and down 0.2% in the quarter over the comparable period, respectively.
Chief Executive Officer, Brad Shaw said, “We continue to make significant progress in our journey to becoming an enhanced connectivity provider. Our third quarter financial and operating results include a full quarter contribution from WIND Mobile (“WIND”), our new wireless division, and we are pleased to confirm that during the quarter we surpassed over 1 million wireless subscribers. We also completed the first critical step in our wireless network upgrade. All 3G equipment in western Canada has now been replaced with Nokia equipment which enables us to increase speeds and throughput as well as put to use an additional 10MHz of AWS-1 spectrum to significantly enhance performance. Our path towards an LTE network is currently underway and we expect to have this completed by the end of fiscal 2017.”
“In addition to enhancing our wireless network, the continuous investments we have made to our wireline infrastructure have positioned us to go-to-market with a premium Internet product that is immediately available throughout our entire footprint. Today we launched WideOpen Internet 150, an affordable and unrivalled product that showcases the strength and reach of our hybrid fibre coax network. The new product is available to all customers that are connected to our fibre coax cable system. We are making great strides towards delivering a seamless customer network experience and believe that more and more customers will choose Shaw to connect to the world,” said Mr. Shaw.
Selected Financial Highlights
Shaw continues to focus on identifying and driving efficiencies throughout the business. As part of our strategic direction and transformation to an enhanced connectivity company, the Company initiated an efficiency program that will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate of approximately $75 million. The actions that took place during the current quarter resulted in a non-recurring restructuring charge of $24 million.
Net income for the quarter was $704 million or $1.44 per share relative to $209 million or $0.42 per share for the comparable period. Net income for the nine month period was $1.09 billion or $2.21 per share compared to $604 million or $1.23 per share for the comparable period. The increase to net income in the period reflects higher operating income before restructuring costs and amortization with the addition of our Wireless results, our gain on the sale of the Media division which were offset in part by an equity loss from our investment in Corus Entertainment Inc. and the following non-recurring items: i) transaction costs associated with the WIND acquisition; ii) restructuring costs related to the aforementioned efficiency program, iii) impairment losses related to investments; and v) an impairment to goodwill associated with our Tracking business.
Consolidated free cash flow(1) for the three and nine month periods of $182 million and $473 million, respectively, compares to $256 million and $618 million for the comparable periods. The reduction for the quarter and year-to-date was largely due to lower free cash flow from Media as a discontinued operation for only one month prior to its disposition and higher planned capital expenditures from continuing operations, all of which were partially offset by higher operating income before restructuring costs and amortization and lower cash taxes.
Revenue generating units (“RGU”s) continue to be affected by a number of external factors including the economy, competition, seasonality and the wildfires that significantly affected the Fort McMurray area. The fires in the Fort McMurray area caused a 5,400 RGU reduction in the quarter; however, many of those customers have reconnected following the lift of the mandatory evacuation order. Shaw–s network did not incur any significant damage or service interruptions due to these fires.
“The generosity and true spirit of the residents in Alberta was evident following the fires in Fort McMurray. Many of our friends, families, customers and our own employees lost their homes in this tragic event. I am so proud to be part of a community that pulls together to support their own and want to thank everyone for their continued dedication and support,” said Mr. Shaw.
“We have an exceptional management team in place and as we look ahead over the next 18 months, we are confident in the execution of our strategic plan. This is a period of investment for our future and we continue to implement the building blocks required to complete a number of these strategic initiatives by the end of fiscal 2017.”
Shaw is expecting that its fiscal 2016 operating income before restructuring and amortization for its consolidated results (including Wireless) and for Consumer, Business Network Services and Business Infrastructure Services on a combined basis to range between flat to low single digit growth as compared to fiscal 2015.
In regards to consolidated capital, investment in fiscal 2016 is expected to be $1.2 billion, including WIND. In addition, Shaw is introducing preliminary fiscal 2017 consolidated capital to be approximately $1.3 billion and will provide additional details regarding fiscal 2017 guidance in conjunction with the release of its fourth quarter results.
Brad Shaw concluded, “By the end of fiscal 2017 we will have the X1 set-top box available to all customers, completion of the wireless LTE upgrade in our existing markets and DOCSIS 3.1 implemented throughout the wireline network, enabling Internet speeds of 1GB and more. As we enter the next fiscal year, our entire employee base is behind this strategy and has never been more motivated to execute on our future with operational efficiency top of mind.”
Shaw is an enhanced connectivity provider. Shaw serves consumers with broadband Internet, WiFi, video, digital phone and, through WIND Mobile, wireless services. Shaw Business Network Services provides business customers with Internet, data, WiFi, telephony, video and fleet tracking services. Shaw Business Infrastructure Services provides enterprises colocation, cloud and managed services through ViaWest. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (TSX: SJR.B)(NYSE: SJR). For more information, please visit
The accompanying Management–s Discussion and Analysis (“MD&A”) forms part of this news release and the “Caution concerning forward-looking statements” applies to all forward-looking statements made in this news release.
MANAGEMENT–S DISCUSSION AND ANALYSIS
For the three and nine months ended May 31, 2016
July 15, 2016
Contents
Advisories
The following Management–s Discussion and Analysis (“MD&A”), dated July 15, 2016, should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto for the quarter ended May 31, 2016 and the 2015 Annual Consolidated Financial Statements, the Notes thereto and related MD&A included in the Company–s 2015 Annual Report. The financial information presented herein has been prepared on the basis of International Financial Reporting Standards (“IFRS”) for interim financial statements and is expressed in Canadian dollars unless otherwise indicated. References to “Shaw”, the “Company”, “we”, “us” or “our” mean Shaw Communications Inc. and its subsidiaries and consolidated entities, unless the context otherwise requires.
Caution concerning forward-looking statements
Statements included in this MD&A that are not historic constitute “forward-looking statements” within the meaning of applicable securities laws. Such statements include, but are not limited to, statements about future capital expenditures, asset acquisitions and dispositions, cost efficiencies, financial guidance for future performance, business strategies and measures to implement strategies, competitive strengths, expansion and growth of Shaw–s business and operations, and other goals and plans. They can generally be identified by words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “target”, “goal” and similar expressions (although not all forward-looking statements contain such words). All of the forward-looking statements made in this report are qualified by these cautionary statements.
Forward-looking statements are based on assumptions and analyses made by Shaw in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances as of the current date. These assumptions include, but are not limited to, general economic conditions, interest, income tax and exchange rates, technology deployment, content and equipment costs, industry structure, conditions and stability, government regulation and the integration of acquisitions. Many of these assumptions are confidential.
You should not place undue reliance on any forward-looking statements. Many factors, including those not within Shaw–s control, may cause Shaw–s actual results to be materially different from the views expressed or implied by such forward-looking statements, including, but not limited to, general economic, market and business conditions; changes in the competitive environment in the markets in which Shaw currently operates and will operate and from the development of new markets for emerging technologies; industry trends and other changing conditions in the entertainment, information and communications industries; Shaw–s ability to execute its strategic plans and achieve cost efficiencies; opportunities that may be presented to and pursued by Shaw; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it now operates and will operate; Shaw–s status as a holding company with separate operating subsidiaries; and other factors referenced in this report under the heading “Risks and uncertainties”. The foregoing is not an exhaustive list of all possible factors. Should one or more of these risks materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein.
The Company provides certain financial guidance for future performance as the Company believes that certain investors, analysts and others utilize this and other forward-looking information in order to assess the Company–s expected operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The Company–s financial guidance may not be appropriate for this or other purposes.
Any forward-looking statement speaks only as of the date on which it was originally made and, except as required by law, Shaw expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect any change in related assumptions, events, conditions or circumstances
Non-IFRS and additional GAAP measures
Certain measures in this MD&A do not have standard meanings prescribed by IFRS and are therefore considered non-IFRS measures. These measures are provided to enhance the reader–s overall understanding of our financial performance or current financial condition. They are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between periods. These measures are not in accordance with, or an alternative to, IFRS and do not have standardized meanings. Therefore, they are unlikely to be comparable to similar measures presented by other entities.
Please refer to “Non-IFRS and additional GAAP measures” in this MD&A for a discussion and reconciliation of non-IFRS measures, including operating income before restructuring costs and amortization, free cash flow and accelerated capital fund.
Introduction
The Company–s third quarter financial and operating results include contribution for the full period from our new Wireless division following the closing of the acquisition of WIND Mobile (“WIND”). We surpassed one million wireless subscribers in the quarter and continue to grow the subscriber base. We completed the first critical step in the wireless network upgrade with all 3G equipment in western Canada now replaced with Nokia equipment which enables us to increase speeds and throughput and put to use an additional 10MHz of AWS-1 spectrum to significantly enhance performance.
In addition, the continuous investments we have made to our wireline infrastructure positions us to go-to-market with a premium Internet product that is immediately available throughout our entire footprint. WideOpen Internet 150 is an affordable and unrivalled product that officially launched today and will showcase the strength and reach of our hybrid fibre coax network. The new product is immediately available to all customers that are connected to our fibre coax cable system. We are making great strides towards delivering a seamless customer network experience and believe that more and more customers will choose Shaw to connect to the world. As we continue to expand our product and service offering through next generation video and network connectivity deployment of DOCSIS 3.1, we will continue to offer our customers a leading experience.
By the end of fiscal 2017 we will have the X1 set-top box available to all customers, completion of the wireless LTE upgrade in our existing markets and DOCSIS 3.1 implemented throughout the network, enabling Internet speeds of 1GB and more.
Shaw continues to be focused on identifying and driving efficiencies throughout the business. During the quarter the Company initiated a program to improve its overall efficiency as the Company set out to create the optimal structure to lead the organization through its strategic asset realignment and manage costs effectively in the challenging economic and competitive environment. Disciplined cost management and operational efficiency remain key focuses for the Company. The program initiatives that began in the quarter and that will continue into the next year will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate, of approximately $75 million. The initiatives that occurred in the third quarter resulted in a non-recurring restructuring charge of $24 million.
Selected financial and operational highlights
Basis of presentation
On April 1, 2016, Shaw sold 100% of its wholly owned subsidiary Shaw Media Inc. (“Shaw Media”) to Corus Entertainment Inc. (“Corus”), a related party subject to common voting control for $2.65 billion, comprised of $1.85 billion in cash and 71,364,853 Corus Class B non-voting participating shares.
Accordingly, the operating results and operating cash flows for the previously reported Media division are presented as discontinued operations separate from the Company–s continuing operations. Prior period financial information has been reclassified to present the Media division as a discontinued operation, and has therefore been excluded from both continuing operations and segmented results for all periods presented in this MD&A and the accompanying interim financial statements. This MD&A reflects the results of continuing operations, unless otherwise noted.
Financial Highlights
Subscriber highlights
Shaw–s current method of counting Business Network Services subscriber measures is at the individual unit level. These measures are suited for traditional offerings such as analog video, and phone, including SmartVoice and non-cloud based traditional internet products, because larger installations result in subscriber additions that correlated relatively with the increase in business.
With the introduction of SmartVoice, SmartWiFi and SmartSecurity cloud based solutions, subscriber additions are generally recorded at the customer level so that one customer is recorded when an installation may involve several units. The result is that when new customers subscribe for our market leading services, the subscriber impact is minimal. The effects are greater when existing customers upgrade from traditional business internet with additional subscriptions to our cloud based solutions because the customer that was formerly counted for each unit is now counted as a single subscriber. This means that, as the Company succeeds by attracting new and existing customers to its new offerings, the number of Business Network Services subscribers for internet fall even as revenue increases.
Overview
Our fiscal 2016 third quarter financial results, including a full period of operations from the new Wireless division, represent improvements in operating income before restructuring costs and amortization over the third quarter of fiscal 2015. Highlights of the quarter are as follows:
Revenue increased 13.0% and 6.7% for the three and nine month periods, respectively, primarily with the contribution of $132 million of revenue from the Wireless division formed by the March 1, 2016 acquisition of WIND. Business Network Services and Business Infrastructure Services divisions also contributed to revenue increases, the result of customer growth and the mid-December 2015 acquisition of INetU by the Business Infrastructure Services division.
Operating income before restructuring costs and amortization of $555 million and $1.56 billion for the three and nine month periods improved 5.3% and 3.4% compared to $527 million and $1.51 billion for the comparable periods. The improvement in the quarter reflects the addition of the Wireless division and growth in the Business Infrastructure Services and Business Network Services divisions reflecting higher revenues, the acquisition of INetU and the effect of favorable year-over-year foreign exchange. This improvement was partially offset by lower operating income before restructuring costs and amortization in the Consumer division related to lower revenues and higher costs associated with the deployment of FreeRange TV and programming.
Revenue and operating income before restructuring costs and amortization increased $133 million and $53 million, respectively, over the second quarter 2016. The increase in revenue was primarily due to $132 million of revenue for Wireless. The increase in operating income before restructuring costs and amortization was primarily due to the addition of $29 million for Wireless and lower promotional and employee related costs in the Consumer division.
Consumer and Business Network Services, excluding named and wholesale customers, had a combined 5.8 million RGUs as at May 31, 2016. During the quarter, Consumer RGUs declined by 47,256 compared to declines of 41,922 RGUs in the second quarter of 2016 and 46,023 RGUs in the third quarter of 2015. RGU decline in the current quarter is comprised of 14,861 phone, 8,760 Internet and 27,482 cable video, partially offset by satellite video gains of 3,847. WIND acquired its one millionth RGU in May 2016, finishing the quarter with 1,003,469 RGUs, a significant milestone in the execution of the Company–s wireless strategy.
Net income was $704 million and $1,086 million for the three and nine months ended May 31, 2016, respectively, compared to $209 million and $604 million for the same periods last year. The changes in net income are outlined in the following table.
Net income third quarter increased $540 million compared to the second quarter of fiscal 2016 mainly due to higher income from discontinued operations million relating primarily to the gain on the divestiture of Shaw Media as a discontinued operation, increased operating income before restructuring costs and amortization and lower income taxes. Partly offsetting the net income improvement in the quarter were increases in other costs net of revenues, restructuring charges and amortization. Net other costs increased primarily due to a $17 million impairment of goodwill relating to the Tracking business, a $51 million impairment of the Company–s joint venture in shomi, a $20 million write-down of a private portfolio investment, $12 million acquisition related costs and a $10 loss from an equity accounted associate. See “Other income and Expense” for further detail on non-operating items.
Shaw continues to focus on identifying and driving efficiencies throughout the business. During the quarter the Company initiated an efficiency program that will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate, of approximately $75 million. The program actions that took place in the third quarter resulted in a non-recurring restructuring charge of $24 million.
Net income for the current quarter and the nine months ended increased $495 million and $482 million, respectively, relative to the comparable period mainly due to higher income from discontinued operations relating primarily to the gain on the divestiture of Shaw Media as a discontinued operation and higher operating income before restructuring costs and amortization. Partly offsetting the improvement in the quarter were increases in other costs net of revenues, the aforementioned restructuring charges and amortization. Net other costs increased primarily due to costs recorded in the quarter related to the acquisition of WIND and INetU, the impairment of goodwill relating to the Tracking business, the impairment of the Company–s joint venture in shomi, the write-down of private portfolio investment and a $10 loss from an equity accounted associate.
Free cash flow of $182 million and $473 million for the three and nine months ended May 31, 2016, respectively, compared to $256 million and $618 million for the comparable periods. The decreases are primarily the result of receiving one month of free cash flow from discontinued operations prior to the divestiture and higher planned capital expenditures, including the incremental Wireless division spend. The decrease was offset partially by an increase in operating income before restructuring costs and amortization, including an incremental $29 million from the Wireless segment, and the added dividend from investments in associates.
Outlook
Shaw is expecting that its fiscal 2016 operating income before restructuring and amortization for its consolidated results (including Wireless) and for Consumer, Business Network Services and Business Infrastructure Services on a combined basis to range between flat to low single digit growth as compared to fiscal 2015.
In regards to consolidated capital, investment in fiscal 2016 is expected to be $1.2 billion, including WIND. In addition, Shaw is introducing preliminary fiscal 2017 consolidated capital to be approximately $1.3 billion and will provide additional details regarding fiscal 2017 guidance in conjunction with the release of its fourth quarter results.
See “Caution concerning forward-looking statements”.
Non-IFRS and additional GAAP measures
The Company–s continuous disclosure documents may provide discussion and analysis of non-IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore may not be comparable to similar measures disclosed by other companies. The Company–s continuous disclosure documents may also provide discussion and analysis of additional GAAP measures. Additional GAAP measures include line items, headings, and sub-totals included in the financial statements.
The Company utilizes these measures in making operating decisions and assessing its performance. Certain investors, analysts and others utilize these measures in assessing the Company–s operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The non-IFRS financial measures and additional GAAP measures have not been presented as an alternative to net income or any other measure of performance required by IFRS.
Below is a discussion of the non-IFRS financial measures and additional GAAP measures used by the Company and provides a reconciliation to the nearest IFRS measure or provides a reference to such reconciliation.
Operating income before restructuring costs and amortization
Operating income before restructuring costs and amortization is calculated as revenue less operating, general and administrative expenses. It is intended to indicate the Company–s ongoing ability to service and/or incur debt, and is therefore calculated before one-time items such as restructuring costs, amortization (a non-cash expense) and interest. Operating income before restructuring costs and amortization is also one of the measures used by the investing community to value the business.
Operating margin
Operating margin is calculated by dividing operating income before restructuring costs and amortization by revenue.
Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items
Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items is calculated as revenue less operating, general and administrative expenses from discontinued operations. This measure is used in the determination of free cash flow.
Free cash flow
The Company utilizes this measure to assess the Company–s ability to repay debt and return cash to shareholders.
Free cash flow is calculated as free cash flow from continuing operations and free cash flow from discontinued operations.
Free cash flow from continuing operations is comprised of operating income before restructuring costs and amortization and includes changes in receivable related balances with respect to customer equipment financing transactions as a cash item and dividends paid on the Company–s Cumulative Redeemable Rate Reset Preferred Shares.
Free cash flow from discontinued operations is comprised of income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items after deducting program rights amortization on assets held for sale, cash amounts associated with funding CRTC benefit obligations related to media acquisitions and excludes non-controlling interest amounts that are included in the income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items.
Free cash flow from continuing operations and free cash flow from discontinued operations are each calculated by adding dividends from equity accounted associates and deducting interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions and adjusted to exclude amounts funded through the accelerated capital fund) and equipment costs (net) and adjusted to exclude share-based compensation expense and recurring cash funding of pension amounts net of pension expense.
Free cash flow from continuing operations has not been reported on a segmented basis. Certain components of free cash flow from continuing operations, including operating income before restructuring costs and amortization continue to be reported on a segmented basis. Capital expenditures and equipment costs (net) are reported on a combined basis for Consumer and Business Network Services due to the common infrastructure and for Business Infrastructure Services is separately reported. Other items, including interest and cash taxes, are not generally directly attributable to a segment, and are reported on a consolidated basis.
Free cash flow is calculated as follows:
Accelerated capital fund
In fiscal 2013, the Company established a notional fund, the accelerated capital fund, of $500 million with proceeds received, from several strategic transactions. The accelerated capital initiatives were funded through this fund and not cash generated from operations. Key investments included the Calgary data centres, further digitization of the network and additional bandwidth upgrades, expansion of Shaw Go WiFi, and additional innovative product offerings related to Shaw Go WiFi and other applications to provide an enhanced customer experience. Approximately $110 million was invested in fiscal 2013, $240 million in fiscal 2014 and $150 million in fiscal 2015. The accelerated capital fund closed in fiscal 2015.
Statistical and financial measures
The following measures are industry metrics that are useful in assessing the operating performance of a wireless entity, but do not have a standardized meaning under IFRS.
Wireless ARPU – Average revenue per subscriber unit per month (ARPU) is calculated as service revenue divided by the average number of subscribers on the network during the period and is expressed as a rate per month.
Wireless subscribers (or Revenue Generating Units (“RGUs”) – Recurring revenue-generating units (e.g. cellular phone, smartphone, tablet or mobile Internet device) that has access to the wireless network for voice and/or data communications, whether Prepaid or Postpaid. Prepaid subscribers include revenue-generating unit where the account is within 90 days of the prepaid credits expiring.
Discussion of operations
Consumer revenue for the current quarter of $935 million was down 1.5% relative to the comparable period. This decrease in revenue was driven by: i) lower video, phone and internet RGUs; ii) fewer On Demand buys as a result of the very successful boxing event in the prior year; and iii) a one month credit given to all of our customers in Fort McMurray and surrounding areas. Partly offsetting the decrease was the impact of rate increases in the fourth quarter of 2015. For the nine month period, revenue of $2.81 billion was in line with the comparable period. Revenue improvements driven by the combined offset of the January 2015 and August 2015 rate adjustments and year-to-date internet RGU gains were fully offset by lower video and phone RGU–s.
During the quarter, Consumer RGUs declined by 47,256 with cable video, phone lines and internet decreased 27,482, 14,861, and 8,760 respectively. The cable, internet and phone RGU declines included the loss of an estimated 5,400 RGU–s as a result of the Fort McMurray evacuation. The Company expects to recover many of these RGU–s in the fourth quarter. The economic slowdown in parts of western Canada and competitive pressures continue to weigh on Consumer RGUs; however, for the first time since February 2013 Satellite video RGUs increased with a 3,847 RGU gain as compared losses in the prior year of 1,111.
Operating income before restructuring costs and amortization for the quarter of $427 million was lower by 2.7% relative to the comparable quarter. The quarter results reflect a decrease in revenue and higher expenses, including implementation and recurring costs attributable to the launch of FreeRange TV and higher programming costs. Operating income before restructuring costs and amortization for the nine-month period was lower by 0.2% than in the comparable period. The aforementioned rate increases and lower employee related costs were fully offset by RGU losses, fewer On Demand buys, and higher costs related to the launch of FreeRange TV and programming.
Current quarter revenue was in line with that of the second quarter of fiscal 2016 and operating income before restructuring costs and amortization increased 6.0% or $24 million reflecting lower promotional costs, lower employee related costs in part due to the corporate restructuring in the quarter and delayed timing of marketing spend.
During the current quarter the residents of Fort McMurray and surrounding areas in northern Alberta were affected by the devastating wildfires. Shaw and its employees are dedicated to help support those affected as they begin to rebuild their communities. Our customers were offered a one-month credit for all of their services. The application of this credit, retroactive to May 3, 2016, ensured that all affected customers continued to have access to Shaw Go WiFi, FreeRange TV and their @shaw.ca email account while they are out of their homes. The revenue effect associated with the service credit in the period is approximately $2 million.
In addition, all residents and visitors whether Shaw customers or not, in Northern Alberta and Edmonton were provided open access to the Shaw Go WiFi network where available. This connection allowed residents to have access to timely news and information, and help them stay in touch with friends and loved ones. The company also announced the launch of a new Shaw TV channel to help Fort McMurray residents stay connected to the latest community news and developments as they returned home.
Business Network Services
Revenue of $136 million and $409 million for the quarter and year-to-date were up 3.8% and 5.7%, respectively, over the comparable periods primarily due to customer growth in both the small to medium business and large enterprise markets. The core business, excluding satellite services, increased 5.1% in the current quarter and 7.1% on a year-to-date basis, reflecting customers converting to or adding Shaw–s services. The Company also provided a one-month credit to its business customers impacted by the Fort McMurray fires and also provided free access in work camp facilities to Shaw services for use by evacuees to stay connected. The revenue effect associated with the service credit in the period is approximately $1 million.
Operating income before restructuring costs and amortization of $66 million and $196 million for the quarter and year-to-date improved 4.8% and 3.7%, respectively, over the comparable periods. Consistent with the growth trend throughout the fiscal year, improvements were due mainly to higher revenue from customer growth which was partially offset by annual salary rate increases and the incremental costs associated with pursuing new customer opportunities, including additional employees and marketing costs associated with the launch of Smart suite of products.
In the third quarter, revenue declined modestly by $1 million over the second quarter of fiscal 2016, primarily due to service credits provided to business customers affected by the Fort McMurray wildfires. Operating income before restructuring and amortization was comparable to the second quarter results as service credits were offset fully by various cost reductions.
Further complementing its Smart suite of products that includes SmartVoice and SmartWiFi, the Company introduced SmartSecurity in July, building on its portfolio of managed service offerings. This new product is a hassle-free cloud based enterprise-grade network security solution tailored for small businesses. The service provides advanced threat protection with automatic updates, content filtering, traffic shaping and easy site-to-site VPN capabilities.
Business Infrastructure Services
Revenue of $86 million for the three-month period was up 36.5% over the comparable period primarily due to the added revenues from INetU acquired in the second quarter of 2016, customer growth, and favourable foreign exchange. For the nine-month period, revenue of $248 million increased 39.3% over the comparable period. Excluding the effect of foreign exchange, revenue for the U.S. based operations increased by 29.2% to US$66 million for the three-month period and by 23.8% to US$185 million for the nine-month period. Excluding the effect of INetU, revenue for the U.S. based operations increased by 12.1% to US$57 million for the three-month period and by 13.1% to US$169 million for the nine-month period.
Operating income before restructuring costs and amortization improved over the comparable period by 32.0% for the current quarter and by 28.2% for the nine-month period. Improvements were attributable to customer growth, the acquisition of INetU and favourable year-over-year foreign exchange. Partly offsetting the improvements were costs associated with the new data centre operations in Calgary, Alberta and Portland, Oregon and the re-measurements of share appreciation rights.
Compared to the second quarter of 2016, revenue decreased 3.4% primarily the result of fluctuation in foreign exchange in the period. Operating income before restructuring costs and amortization was consistent with the prior quarter. Excluding the impact of foreign exchange, revenue and operating income before restructuring costs and amortization for U.S. based operations increased 3.0% and 6.9% compared to the second quarter of 2016.
The Company–s newest data centre in Plano, Texas is currently under construction and on schedule to open in October 2016. In addition, the recently launched data centre in Calgary has established the Company as a Canadian leader in infrastructure services including private cloud, public cloud, colocation and related data centre services.
Wireless
On March 1, 2016, the Company successfully closed the acquisition of WIND to form its Wireless division. The division is comprised solely of WIND operations. Revenue and operating income before amortization for the current quarter were $132 million and $29 million, respectively. For information purposes, revenue was up 24% relative to the prior year comparable period. The increase was driven primarily by a year-over-year 136,000 increase in subscribers.
As at May 31, 2016, WIND reached a milestone in acquiring its one-millionth combined postpaid and prepaid subscriber. The growth in subscribers has driven both higher handset sales volume and accompanying service revenues. Blended ARPU, inclusive of postpaid and prepaid subscribers, for the quarter ended May 31, 2016 was $36.30.
Capital expenditures and equipment costs
Capital investment was $286 million and $805 million in the current three and nine month periods. Capital investment for the comparable periods was $243 million and $736 million and included $32 million and $91 million, respectively, of investment funded through the accelerated capital fund. The accelerated capital fund initiatives, which were completed in the fourth quarter of 2015, included investment on new internal and external Calgary data centres, increasing network capacity, next generation video delivery systems, back office infrastructure upgrades, and expediting the WiFi infrastructure build.
Consumer and Business Network Services
Success based capital for the three and nine month periods of $60 million and $201 million were in line with the comparable periods last year. The current quarter spend reflected installation activity, and equipment costs that were in line with the prior year quarter across all product lines. On a year-to-date basis lower phone activity along with decreased spend driven by the timing of delivery of advanced Internet WiFi modem purchases, was partially offset by higher Satellite success based spend as a result of improved customer activations and increased equipment discounts, together with lower rental returns, due mainly to the termination of the Satellite rental program. Cable video success base spend was generally in line with last year reflecting higher activations of whole home installations offset by lower cost deployments resulting from the use of refurbished units.
For the three and nine month periods, investment in the combined upgrades and enhancement and replacement categories was $92 million and $307 million, an increase of $8 million and $68 million over the comparable periods. The year-to-date increase was primarily due to: i) investment in the core network including significant bandwidth and upgrade programs; ii) next generation video delivery platforms necessary to support the rollout of Comcast–s X1 and TVE experiences; iii) timing of bulk material and vehicle purchases: iv) investment in Business Network Services managed WiFi and SmartVoice products; and v) mainline Upgrade activities. Partly offset by lower spend on Shaw Go WiFi access points.
Investment in buildings and other of $19 million and $62 million for the three and nine month periods was down $12 million and $71 million, respectively, over the comparable periods. The decrease relates to lower spend on the internal data centre, Shaw Court refurbishment expenditures and lower capitalized interest.
New housing development capital investment for the three and nine month periods was $29 million and $79 million, respectively. The current quarter was up $4 million compared to the same period a year ago due to higher new customer drop activity in both the Consumer and Business Network Services divisions. The year-to-date results were comparable to the prior year period.
Business Infrastructure Services
Capital investment of $35 million and $105 million for the three and nine month periods, respectively, was primarily growth related capital investment in core infrastructure and equipment to expand existing facilities in Denver, Colorado and Portland, Oregon along with development of the newest data center in Plano, Texas. Also included in the nine month period is $9 million related to investment in the Calgary, Alberta facility.
Wireless
Capital investment for the quarter was $51 million reflecting the continued improvement of network infrastructure through capital projects including the continued upgrade of the western Canada network to the latest generation of LTE-ready High Speed Packet Access+ (HSPA+) equipment, a mobile telephony technology that allows for data transmission speeds up to 42 Mbps, and LTE core and radio network rollout readiness across the network.
Discontinued operations – Shaw Media
Revenue and income from discontinued operations net of tax for the quarter was $81 million and $646 million, respectively, compared to $284 million and $73 million in the prior year. The revenue decrease was the result of one month of current quarter results prior to the divestiture of Shaw Media which closed on April 1, 2016 as compared to three months of cumulative results in the prior period. The increase in income from discontinued operations, net of tax, was primarily due to the gain on the divesture of $662 million offset by: i) the impact of lower income from discontinued operations before gain on divestiture, the result of only one month of results in the quarter; and ii) income taxes on the gain.
For the nine month period, revenue of $564 million and income from discontinued operations net of tax of $774 million compared to $790 million and $185 million last year, respectively. The revenue decrease was the result of one month of current quarter results prior to the divestiture of Shaw Media which closed on April 1, 2016. The increase in income from discontinued operations, net of tax, was primarily due to the gain on the divesture of $662 million offset by: i) the impact of lower income from discontinued operations before gain on divestiture, the result of only one month of results in the quarter; and ii) income taxes on the gain.
Capital investment continued on various projects in the quarter and included upgrading production equipment and infrastructure. Capital investment for the quarter was $2 million.
Supplementary quarterly financial information
Net income for the third quarter increased $540 million compared to the second quarter of fiscal 2016 mainly due to higher income from discontinued operations relating primarily to the gain on the divestiture of the discontinued operation, increased operating income before restructuring costs and amortization and lower income taxes. Partly offsetting the net income improvement in the quarter were : i) decreased net other costs and revenue; ii) increased restructuring charges; and iii) increased amortization. Net other costs and revenue decreased primarily due to $17 million impairment of goodwill relating to the Tracking business, a $51 million impairment of the Company–s shomi joint venture, a $20 million write-down of a private portfolio investment and a $10 loss from an equity accounted associate.
In the second quarter of 2016, net income decreased $54 million compared to the first quarter of fiscal 2016 mainly due to decreased income from discontinued operations of $32 million, primarily due to the seasonality of the Media business reflected in income from discontinued operations and net other costs and revenues of $13 million. Net other costs and revenues decreased primarily due to $8 million of costs recorded in the quarter related to the acquisition of WIND and INetU.
In the first quarter of 2016, net income decreased $58 million compared to the fourth quarter of 2015 mainly due to a change in net other costs and revenues of $140 million and decrease in operating income before restructuring costs and amortization of $17 million offset by an increase in income from discontinued operations, net of tax, of $51 million and a decrease in income taxes of $50 million. Net other costs and revenues decreased primarily due to a fourth quarter 2015 gain on the sale of wireless spectrum of $158 million less the impact of a $27 million write-down of a private portfolio investment in the same period offset by an increase in the equity loss of a joint venture of $5 million in the first quarter of 2016.
In the fourth quarter of 2015, net income increased $67 million primarily due to improved net other revenue items of $191 million partially offset by lower income from discontinued operations, net of tax, of $44 million and higher income tax expense of $70 million. The improvement in net other revenue items was due to the combined effects of the aforementioned sale of spectrum licenses and write-down of a private portfolio investment during the fourth quarter and the $59 million net charge arising in the third quarter related to an impairment of goodwill, write-down of IPTV assets and proceeds received on the Shaw Court insurance claim.
In the third quarter of 2015, net income increased $41 million due to higher operating income before restructuring costs and amortization of $29 million, an increase in income from discontinued operations, net of tax, of $40 million, lower restructuring costs of $35 million and $11 million of proceeds related to the Shaw Court insurance claim, partially offset by a charge for impairment of goodwill of $15 million and write-down of IPTV assets of $55 million as well as the distributions received from a venture capital fund in the second quarter. The impairment of goodwill was in respect of the Tracking operations in the Business Network Services division and was a result of the Company–s annual impairment test of goodwill and indefinite-life intangibles in the third quarter. The write-down of IPTV assets was a result of the Company–s decision to work with Comcast to begin technical trials of their cloud-based X1 platform.
In the second quarter of 2015, net income decreased $59 million due to lower income from discontinued operations, net of tax, of $46 million and restructuring expenses of $36 million partially offset by higher operating income before restructuring costs and amortization of $10 million, net other revenue items of $24 million due to the aforementioned venture capital fund distributions.
In the first quarter of 2015, net income increased $35 million due to income from discontinued operations, net of tax, of $56 million and a decrease in income taxes of $26 million, partially offset by increases in amortization of $33 million and net other costs of $17 million. The increase in net other costs was primarily due to an equity loss of $13 million in respect of the Company–s 50% interest in shomi, a new subscription video-on-demand service launched in the first quarter.
Other income and expense items
Amortization of property, plant and equipment, intangibles and other increased over the comparable periods due to amortization related to the new Wireless division as well as the effect of higher foreign exchange rates on the translation of ViaWest and the amortization of new expenditures exceeding the amortization of assets that became fully amortized during the periods.
Interest expense for the three and nine month periods ended May 31, 2016 increased over the comparable periods primarily due to increased debt related to the INetU and WIND acquisitions, foreign exchange on U.S. dollar denominated debt and a decrease in capitalized interest.
Business acquisition costs
During the current quarter and year to date, the Company incurred $12 million and $20 million, respectively, of acquisition related costs for professional fees paid to lawyers, consultants, advisors and other related costs in respect of the acquisition of WIND which closed on March 1, 2016. Also included in the previous quarter was $1 million related to the acquisition of INetU. During the first quarter of the prior year, $6 million of costs were incurred in respect of the acquisition of ViaWest.
Equity loss of an associate or joint venture
For the three and nine month periods ended May 31, 2016, the Company recorded equity losses of $15 million and $51 million, respectively, compared to $14 million and $43 million for in the comparable periods related to its interest in shomi, the subscription video-on-demand service launched in early November 2014. For the three and nine month periods ended May 31, 2016, the Company recorded equity losses of $10 million related to its investment in Corus.
Other losses
This category generally includes realized and unrealized foreign exchange gains and losses on U.S. dollar denominated current assets and liabilities, gains and losses on disposal of property, plant and equipment and minor investments, and the Company–s share of the operations of Burrard Landing Lot 2 Holdings Partnership. In the current year to date, the category also includes a write-down of $51 in respect of the Company–s investment in shomi, a write-down of $20 in respect of a private portfolio investment and asset write-downs of $6. In the comparable year, the category included distributions of $27 from a venture capital fund investment, additional proceeds of $11 related to the fiscal 2012 Shaw Court insurance claim and asset write-downs of $55.
Income taxes
Income taxes are lower in the current year mainly due to a reduction in net income offset by an increase in the provincial tax rate and the impact of adjustments in the first quarter of fiscal 2015.
Financial position
Total assets were $15.1 billion at May 31, 2016 compared to $14.6 billion at August 31, 2015. Following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2015.
Current assets decreased $210 million due to decreases in cash of $74 million and accounts receivable of $209 million, partially offset by increases in other current assets of $59 million and inventories of $19 million. Cash decreased as the cash outlay for investing and financing activities exceeded the funds provided by operations. Accounts receivable decreased primarily due to the sale of Shaw Media, partly offset by accounts receivable of WIND acquired during the quarter. Inventories and other current assets increased with the acquisition of WIND.
Investments and other assets increased $763 million primarily due to the Corus Class B shares received as proceeds on the sale of Shaw Media, partially offset by equity losses of associates and joint ventures and write-downs of an investment in shomi and an investment in a privately held entity.
Property, plant and equipment increased $266 million due to the WIND and INetU business acquisitions and capital investment in excess of amortization, partly offset by property, plant and equipment of Shaw Media, which was sold during the quarter. Other long-term assets increased $14 million mainly due to the acquisition of WIND. Intangibles and goodwill decreased $318 million due to goodwill and intangibles related to Shaw Media which was disposed of during the quarter, partly offset by $1.6 billion of intangibles and $254 million goodwill recorded on the acquisitions of INetU and WIND, net software intangible additions and the ongoing effect of foreign exchange arising on translation of ViaWest.
Current liabilities decreased $281 million during the quarter due to decreases in the current portion of long-term debt of $201 million, accounts payable and accruals of $60 million and income taxes payable of $35 million, partially offset by a $16 million increase in unearned revenue. The decrease in current portion of long term debt is due to the repayment of the $300 million variable senior rate notes on February 1, 2016 and the $300 million 6.15% senior notes on May 9, 2016, partly offset by inclusion of the $400 million 5.70% senior notes due March 2, 2017. Income taxes payable decreased as a result of installments made in the period partially offset by the current period provision. Accounts payable and accruals decreased due accounts payable related to Shaw Media which was sold during the quarter and the timing of payment and fluctuations in various payables including capital expenditures and interest, partly offset by accounts payable related to the WIND acquisition.
Long-term debt increased $132 million due to the issuance of $300 million in fixed rate senior notes at a rate of 3.15% due February 19, 2021, the debt incurred related to the acquisition of INetU under ViaWest–s and the Company–s credit facility totaling US $170 million and the effect of foreign exchanges rates on ViaWest–s debt and the Company–s US dollar borrowings under its credit facility, partially offset by the reclassification of the 6.75% senior notes to current liabilities.
Other long-term liabilities decreased $53 million mainly due to amounts related to Shaw Media which was sold and contributions to employee benefit plans partially offset by actuarial losses recorded on those plans in the current quarter. Provisions increased due to the addition of WIND asset retirement obligations.
Deferred credits decreased $19 million due to a decline in deferred equipment revenue.
Deferred income tax liabilities increased $85 million primarily due to the amounts recorded on the acquisition of WIND and INetU, partly offset by amounts related to Shaw Media which was sold during the quarter and current year income tax recovery.
Shareholders– equity increased $605 million primarily due to increases in share capital of $233 million and retained earnings of $624 million and a decrease in accumulated other comprehensive loss of $14 million and equity attributable to non-controlling interests of $236 million. Share capital increased due to the issuance of 6,789,953 Class B non-voting participating shares (“Class B Non-Voting Shares”) under the Company–s option plan and Dividend Reinvestment Plan (“DRIP”) and the issuance of 2,866,384 Class B Non-Voting Shares in connection with the acquisition of WIND. As at June 15, 2016, share capital is as reported at May 31, 2016 with the exception of the issuance of a total of 332,675 Class B Non-Voting Shares upon exercise of options under the Company–s option plan. Retained earnings increased due to current year earnings of $1,066 million, partially offset by dividends of $438 million while equity attributable to non-controlling interests decreased due to their share of current year earnings and derecognition in connection to the sale of Shaw Media. Accumulated other comprehensive loss decreased due to the net effect of exchange differences arising on the translation of ViaWest and U.S. dollar denominated debt designated as a hedge of the Company–s net investment in those foreign operations as well as re-measurements recorded on employee benefit plans.
Liquidity and capital resources
In the current year, the Company generated $473 million of free cash flow, including $132 million of free cash flow from discontinued operations. Shaw used its free cash flow along with cash of $74 million, $1.8 billion net proceeds on the sale of Shaw Media, $300 million proceeds from a 3.15% senior note issuance, borrowings of $1.4 billion under its credit facilities, borrowings of $178 million under ViaWest–s credit facility and proceeds on issuance of Class B Non-Voting Shares of $22 million to repay at maturity $300 million of variable rate senior notes, repay at maturity $300 million 6.75% senior notes, finance the $223 million acquisition of INetU, finance the $1.6 billion acquisition of WIND, pay common share dividends of $286 million, fund the net working capital change of $41 million, make $69 million in financial investments, repay $1.4 billion borrowings under its credit facilities, invest an additional net $74 million in program rights, pay $27 million in restructuring costs and pay $20 million in other net items.
The Company issues Class B Non-Voting Shares from treasury under its DRIP which resulted in cash savings and incremental Class B Non-Voting Shares of $139 million during the nine months ending May 31, 2016.
On December 15, 2015, ViaWest closed the acquisition of 100% of the shares of INetU for approximately US$162 million which was funded through a combination of borrowings under ViaWest–s and the Company–s revolving credit facilities and an incremental term loan proceeds under ViaWest–s credit facility. In addition, ViaWest–s revolving credit facility was increased from US$85 million to US$120 million.
On February 11, 2016 the Company amended the terms of its bank credit facility to increase the maximum borrowings from $1.0 billion to $1.5 billion under the bank credit facility.
The Company entered into an agreement with a syndicate of lenders to provide a $1.0 billion non-revolving term loan facility to partially fund the acquisition of WIND. The Company used the proceeds of the term loan along with cash on hand, $300 million borrowings under its existing bank credit facility and proceeds from the issuance of 2,866,384 Class B Non-Voting Shares to finance the acquisition of WIND on March 1, 2016. The $1.0 billion non-revolving term loan facility and $300 million borrowings under the Company–s bank credit facility were repaid on April 1, 2016 with the proceeds from the sale of Shaw Media to Corus.
Shaw–s and ViaWest–s credit facilities are subject to customary covenants which include maintaining minimum or maximum financial ratios. At May 31, 2016 Shaw is in compliance with these covenants and based on current business plans, the Company is not aware of any condition or event that would give rise to non-compliance with the covenants over the life of the borrowings.
On June 30, 2016, 1,987,607 of the Company–s Cumulative Redeemable Rate Reset Class 2 Preferred Shares, Series A (“Series A Shares”) were converted into an equal number of Cumulative Redeemable Floating Rate Class 2 Preferred Shares, Series B (“Series B Shares”) in accordance with the notice of conversion right issued on May 31, 2016. As a result of the conversion, the Company has 10,012,393 Series A Shares and 1,987,607 Series B Shares issued and outstanding. The Series A Shares will continue to be listed on the TSX under the symbol SJR.PR.A. The Series B Shares began trading on the TSX on June 30, 2016 under the symbol SJR.PR.B. The annual fixed dividend rate for the Series A Shares, payable quarterly, was reset to 2.791% for the five year period from and including June 30, 2016 to but excluding June 30, 2021. The floating quarterly dividend rate for the Series B Shares was set at an annual dividend rate of 2.539% for the period from and including June 30, 2016 to but excluding September 30, 2016. The floating quarterly dividend rate will be reset quarterly.
Based on the aforementioned financing activities, available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations, including maturing debt, during the upcoming fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt.
Cash Flow from Operations
Operating Activities
For the three month period ended May 31, 2016, funds flow from operations decreased over the comparable period primarily due to higher restructuring costs, business acquisition costs and interest expense, partially offset by higher operating income before restructuring costs and amortization and lower income tax expense. On a year to date basis, funds flow from operations increased over the comparable period primarily due to higher operating income before restructuring costs and amortization restructuring costs, lower restructuring costs and lower income tax expense, partially offset by higher business acquisition costs and interest expense. The net change in non-cash working capital balances related to operations fluctuated over the comparative periods due to fluctuations in accounts receivable and the timing of payment of current income taxes payable and accounts payable and accrued liabilities.
Investing Activities
The cash used in investing activities decreased over the comparable quarter due primarily to the proceeds on sale of Shaw Media exceeding the acquisition of WIND in the current quarter and reduced additions to investments and other assets, partly offset by higher cash outlay for capital expenditures in the current quarter. For the nine month period ended May 31, 2016, cash used in investing activities decreased over the comparable period primarily due to proceeds on sale of Shaw Media and lower additions to investments in the current year, partially offset by higher acquisitions and higher cash outlays for capital expenditures and inventory in the current year.
Financing Activities
The changes in financing activities during the comparative periods were as follows:
Accounting standards
The MD&A included in the Company–s August 31, 2015 Annual Report outlined critical accounting policies, including key estimates and assumptions that management has made under these policies, and how they affect the amounts reported in the Consolidated Financial Statements. The MD&A also describes significant accounting policies where alternatives exist. The condensed interim consolidated financial statements follow the same accounting policies and methods of application as the most recent annual consolidated financial statements except as described below.
Accounting policies for WIND Mobile Corp. (“WIND”)
The Company has adopted the following accounting policies in respect of WIND.
Revenue
WIND earns its revenue from providing access to, and usage of, its wireless telecommunications infrastructure. The Company–s principal sources of revenue and the methods of recognition of this revenue are as follows:
The Company offers a dis
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