MTS Allstream on Tuesday said it would lay off hundreds of employees and refine its product portfolio around IP in the second phase of its effort to increase its enterprise business.
The company cited declining revenue and increased competition from cable providers as the impetus for the plan, which executives said would see its product and service portfolio more tailored to large and upper mid-market segments. Approximately 800 people will lose their jobs, most of them in the first half of next year. MTS Allstream said it expects to save $50 million to $60 million as a result.
Manitoba Telecom Services (MTS) bought Allstream, formerly AT&T Canada, in a $1.7-billion deal last year in order to compete more effectively with Bell Canada and Telus. Like all telco service providers, the combined entity has experienced increased revenue and margin pressure as customers move from legacy to IP networks, said president Bill Fraser. The pain has been particularly acute in business legacy data and voice services, he said.
Fraser insisted, however, that the first phase of the MTS-Allstream integration was successful, and that the team exceeded its target of $40 million in expense savings.
Key to the phase two plan is tighter integration of MTS Allstream’s divisions, Fraser said, which will be organized around customer segments. The company has about 100,000 customers at its national division, Fraser said, but it will also be seeing to make its base of small and medium business users more profitable.
“Our revenue base is evolving from legacy to growth services, as we always expected it would,” added Wayne Demkey, MTS Allstream’s CFO. “Improvements to the cost structure are offsetting the impact of the accelerated decline in legacy revenue.”
SeaBoard Group analyst Iain Grant said MTS had entered the Allstream transaction with rose-coloured glasses which obscured the extent of the margin erosion the combined organization now faces. He noted that prior to the acquisition, Allstream was often the No. 2 provider in whatever region it served, but both Bell and Telus have been expanding their operations to the west and central Canada, respectively.
“Those things were well known. That’s why Allstream was for sale,” he said. “They thought they would be able to turn this around in a year and made some big noises to Bay Street . . . you’re looking at a couple of years here.”
In its AT&T days, Allstream had provided legacy data services jointly for cross-border customers with Rogers Communications, and Demkey said the companies have been trying to organize an orderly transition. In the States, however, AT&T has been contracting services to those customers that may not use MTS Allstream’s facilities, or would only do so on a wholesale basis. Roger’s purchase of Call-Net earlier this year makes the partnership more shaky, Demkey admitted.
“It is probable that portions of that business will move off of our network in 2006 and 2007,” he said.
MTS Allstream is not the only one restructuring. Last week, Telus announced its own plan to bring together its wireline and wireless operations, a move that Grant said only made sense considering the market’s changing dynamics.
“There is no real reason to have separate wireless division. Customers don’t have a separate wireless pocket,” he said.
Demkey said MTS Allstream has set a target of generating 33 per cent of its revenues from growth versus 67 per cent from legacy. Today, about a quarter comes from growth markets, he said.