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Vidéotron, TVA units bode well for Quebecor results

Quebecor Inc. president and CEO Pierre Karl Peladeau in Montreal, Dec. 6, 2011. An early peek at results from some of the conglomerate’s key units bodes well for the full quarterly results expected on Thursday.

Graham Hughes for The Globe and Mail/graham hughes The Globe and Mail

In recent quarters, Quebecor Inc. has felt the sting of weak advertising revenue and the bite of costs associated with building an expensive wireless network.

But an early peek at results from some of the conglomerate's key units bodes well for the full quarterly results expected on Thursday.

Vidéotron Ltée, the telecom subsidiary, released results early in advance of a cash tender offer it was making for outstanding debt. It posted strong numbers for its television, Internet and home phone services, with combined revenue growth exceeding 5 per cent.

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Vidéotron's growth tops the performance of some other cable operators, including Rogers Communications Inc. and Shaw Communications Inc. It appears to be capitalizing on rival Bell Canada's slowness in getting its Internet-protocol TV, called Fibe TV, rolled out to the Quebec market.

But in wireless, where Vidéotron is a relative newcomer, the numbers were disappointing in terms of new subscribers and the average amount spent by each mobile customer. Analysts say the company is feeling the effects of tough competition and the absence in its product lineup of Apple Inc.'s iPhone.

In response, Phillip Huang, of UBS Securities Canada Inc., lowered his expectations for Vidéotron's wireless growth for this year. He now expects the unit will generate revenue of $180-million, down from his previous estimate of $200-million.

The good news from wireless, however, is that losses from the new wireless network, which launched in September, 2010, have likely peaked, according to Dvai Ghose, of Canaccord Genuity Corp.

Two and a half years ago, Quebecor tagged the cost of constructing its wireless network at up to $1-billion. The Montreal-based company viewed the investment as essential for competing against Bell Canada, which is expanding its television presence in Eastern Canada with Fibe TV. Those costs – combined with expensive subsidies Vidéotron must incur on handsets to attract customers – have eaten into profits and investor confidence.

Quebecor shares have returned only 4.5 per cent over the last year, compared with about 25 per cent for BCE and Telus and 16 per cent for Rogers Communications.

Vidéotron generates the largest share of Quebecor's revenue. For the three months ended Dec. 31, revenue rose 7 per cent from a year earlier to $634.8-million. Profit climbed 69 per cent, to $161.9-million.

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TVA Group Inc., Quebecor's news media and broadcasting division, also posted results on Feb. 29. The subsidiary has been a drag on broader operations but the latest figures were not as bad as expected. Revenue declined 1 per cent to $131.6-million and profit fell by half to $9.2-million.

Both Vidéotron and TVA will receive lots of attention on Thursday, when Quebecor reports results. It is expected to report a 4-per-cent increase in revenue from a year earlier, to $1.1-billion, and a 43-per-cent gain in profit, to $62.3-million. Profit a year earlier was crimped by the cost of building the wireless network.

Investors will be particularly interested in hearing management's forecast for advertising spending at the company's media assets, which include magazines, television and the Sun newspaper chain. Ad spending has been weak since the 2008 financial crisis.

When it comes to Vidéotron, investors will want explanations for why the average revenue per wireless customer declined so rapidly from a year earlier. The important metric fell by 14 per cent last quarter, which compares with gains of 4 per cent for BCE Inc. 's Bell Canada and 1 per for Telus during the same period.

Vidéotron spent $217-million on capital expenditures in last quarter, up 1.4 per cent from the year-earlier period, and analysts will be asking for updates on spending plans for this year. There will also be keen interest about when Quebecor sees its venture into wireless turning cash-flow positive, notes Drew McReynolds, of RBC Dominion Securities Inc.

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