BCE Inc (BCE) 2007 Q2 法說會逐字稿

Welcome to MTS 2007 second quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for your to queue up for questions. (OPERATOR INSTRUCTIONS) . I would like to remind everyone that this conference call is being recorded August 2, 2007, at 4:30 p.m. Eastern time. I will now turn the conference over to Ian Chadsey. VP of Investor Relations. Please go ahead.

Thank you, John. Good afternoon, everyone, and welcome to the call. Earlier today we issued our second quarter news release MBA in our supplemental package which are available on our website at MTS Allstream.com. That said, today's comments may contain forward-looking information related to finances and operations of the Company, including comments on revenue, EBITDA, earnings, cash flow and CapEx. These statements are based on assumptions made by the Company and run the risk that our actual results may differ from those anticipated. Statements made today reflect the assumptions of MTS as of August 2, 2007 and accordingly are subject to change after that date. MTS disclaims any intention or obligation to update or revise the statements, whether as a result of changing circumstances, future events or otherwise. These cautionary statements are made on behalf of each speaker whose remarks contain forward-looking information.

Board of directors today approved the third quarter dividend which has been set at $0.65 per share. On today's call we have Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; John MacDonald, President of the Enterprise Solutions Division; Kevin Shepherd, President of the Consumer Markets Division; Chris Peirce, Chief Regulatory Officer, and with that I'll turn the call over to Pierre.

Thank you, Ian. Good afternoon, thank you for joining our second quarter conference call. Earlier today we released our financial results for the second quarter of '07. These results mark our sixth consecutive quarter of solid performance for our company. They also demonstrate that over the past 18 months we've repositioned MTS Allstream to better succeed in our markets and deliver strong value to our shareholders. Our results continue to support our confidence that we have built solid momentum in this competitive and changing industry. Through the first six months of the year we're on track not only to meet our guidance for '07, but to exceed it for EPS. We also expect to achieve the high end of the guidance range for EBITDA and free cash flow, mostly as a result of strong performance from our operations. We're increasing the EPS guidance range to $2.55 to $2.75, up from the previous range of $2.30 to $2.50 per share. This improvement supported by growth services revenues which continue to show excellent results growing at double-digit rates and combined with success of our cost reduction programs are improving our margin performance. Other factors contributing to a higher guidance EPS range include expected lower amortization and lower debt charges.

As for our market environment, the announced privatization of our largest competitor, will have a substantial effect on the Canadian telecom marketplace. We see this important market change as positive for our company, both operationally and particularly in the enterprise market, and on the regulatory front. In this environment, we're focusing our attention on customers' needs and in driving more growth and operating improvements to deliver our announced business plan and strategy. As well, we're continuing our analysis of the potential national wireless initiative, and related spectrum option and I think you've all heard our position in the industry Canada consultation on this matter. Our ongoing operations continue to make progress through the second quarter and for the first six months of '07. Earnings per share from continuing operations grew by 16%, compared to the second quarter of '06 and grew by over 17% for the first six months of the year.

Our growth services, which include wireless high-speed internet, digital television, converge IP services and unified communications, continue to add customers and revenues at double-digit rates. Revenue from our growth services were up by 12% to 186 million for the second quarter of '07. Year-to-date, they represented 38% of total revenue compared with 34% during the same period last year. And we remain on track to achieve the 40% level for 2007. Revenue from legacy services which include local, long-distance and data, were 288 million for the second quarter, and as expected down 8% from the second quarter of '06. Our total revenue performance continues to be masked by the reductions in the Rogers and AT&T relationship. As announced, both customers are continuing to migrate portions of their business from our enterprise solutions division to their own network. Those reductions which began in 2005, should end in 2008. If we exclude their related impact, our total revenue would have grown by 1.7% from Q2, 2006. This is a significant milestone as it highlights the success of our business strategy to shift our dependency from legacy to growth services and reflect a better performing national enterprise division operating mostly under the Allstream brand.

Other highlights from the second quarter included free cash flow from continuing operations, steady at the end of the second quarter at 177 million. The consumer markets division, residential access lines continue to reflect stabilization and the trend of significantly fewer line losses for the last three quarters. This performance results from our unique four-product bundle and discipline pricing strategy combined with innovative converging features between our various product lines. Our mid-market business initiative continues to demonstrate solid growing results. With 226 new contracts won year-to-date. Our small business initiative was successfully launched in our test market in Vancouver in the second quarter and provides small business customers with a flexible communications service package with easy elec-a-cart selection of features. We continue to perform strongly in achieving our announced cost reduction plan and remain on track to deliver on our cost-saving target of between 40 and 50 million for 2007. And at the end of June '07, we achieved 50 million of in-year savings and 26 million of annualized cost savings in this program. Wayne will provide more detail and the financial highlights in just a few minutes.

I'd like to turn now to some of the key highlights from our operations. Beginning with the enterprise solutions division. In the second quarter of '07, this division once again achieved an improved presence in the marketplace contributing 67 million of EBITDA for the quarter. Revenue from our enterprise growth services combining converge IP and unified communications increased by over 17% compared to the second quarter of '06. And we continue to see solid demand for our advance IP-based products and this is well supported by our Allstream brand awareness campaign, targeted at business customers across the country and I hope that you had an opportunity to notice it yourself on billboards or in airports or in the press. We signed 94 million of new enterprise contract in the second quarter reflecting increased traction in the national marketplace.

Now, let me take a few minutes to talk about some of the significant new contracts signed. We secured the three-year contract with the Canadian payments association to design, build, deploy and manage an MPLS network. This project will span a network of centers in 15 cities across the country and in the process modernize the clearance process for Canadian checks. We secured three-year contract with Brink's Canada to implement and manage a 23-site North American MPLS network. We were selected as a telecommunications vendor for Ontario's 14 Community Care Access Centers, MTS Allstream will provide IP phone equipment and services to enhance the ability of the centers to provide quality care to the province growing population. We were awarded by the city of Winnipeg to launch Wi-Fi hot spots at civic facilities around the city of Winnipeg. And recently, we were awarded by the Quebec provincial government a 17 million contract for the provision of primary rate interface access services. This compliments the contracts that we have with the government and gives us an opportunity to demonstrate our capabilities and delivery strengths over our competitors.

Let's now turn to our consumer market division, which also demonstrated solid results. Wireless customers increased by 11% while revenues increased by over 17% in the second quarter. Our wireless ARPU has increased by 4.3% or $2.40 year-to-date. And during this period we also expanded our EVDOI speed wireless network rolled out across Manitoba converting 17 sites in the second quarter. We continue to see improvements in the competitive residential telecom marketplace in Winnipeg. Our win-backs in the quarter have more than tripled compared to the second quarter of '06. And I want to highlight that our recent successes have been achieved in no small measure thanks to our discipline bundling strategy. Almost 80% of win-back customers bring at least two additional growth products with them when they return to our local phone service. We now have over 65,000 customers in Manitoba participating in one of our bundle offers, an increase of 39% over the same period last year. Our bundling strategy has allowed us to stabilize our local competition losses, sustain growth in our consumer products and compete in the marketplace more on a value basis.

For example, ARPU for bundle customers has grown 1.5% year-to-date and our churn rate is down by 60% compared to non-bundled customers. We believe that these results demonstrating a significant slow down in local line losses have placed MTS Allstream ahead of the curve in the telecom consumer space and within our peers. We have indeed reduced by half our quarterly rate of losses to 4.5% for Q2, 2007, from 8.1% in Q2, 2006. High-speed internet also had an excellent second quarter. Customers increased by 17% while revenues increased by 11% as compared to last year. Our digital television business recently passed a major milestone, ending the second quarter with 71,000 customers with revenue growing by 32% and ARPU increasing by 2.5% or a $1.16 for the year. We continued to announce innovative features that combine our television service with other consumer products, including a listing of video-on-demand shows available on cell phones. The ability to change customer programming online, and the ability to bookmark video-on-demand products over the internet. Our self-serve capability are improving fast. Let me give you an example that I think you can all relate to. If you change your MTSTV programming on your website, it is changed in just a few minutes on your TV set. This demonstrates, I think, well, our strategy of putting the customer in control with easy to use and efficient tools.

Turning now to the regulatory front. The second quarter was a very active time for our company and for the entire industry. First on July 25, the CRTC had the first decision approving retail deregulation for local phone markets in Fort McMurray and Halifax and some other Atlantic communities. As you know, we've applied for local forbearance in the Winnipeg market and we believe our application will be granted shortly as we've met all the quality of service requirements from the CRTC. We also filed our second round of comments in the CRTC essential facilities proceeding, and as we pointed out to the regulator, the new forbearance framework for the business market is premise upon the presence of competitors like MTS Allstream who provide services by using a combination of its own facilities together with those leased from other service providers. We're confident that this proceeding will result in a robust next-generation essential facilities framework.

Moving now to the national wireless spectrum opportunity. You're aware of various participants have submitted filings with the Federal government outlining views on how the wireless spectrum option rules should be established. In our filings within Canada we believe we presented a compelling case to the Federal government that there is a need for more competition in the wireless market, giving the current pricing, margin levels and penetration rates in Canada. And we believe that the recent events in the Canadian telecom have supported our position in Ottawa, not only on wireless but on multiple fronts including industry policies, wholesale access and essential facilities framework which bring me to recent developments in the industry. As I'm sure you can appreciate, we're not going to speak directly on the business developments of our competitors; however, I can comment from an overall perspective on our privatization from the largest player in the industry might impact the industry in our company.

First, when looking at the Canadian wireless market, the announcement made by our peers over the last few months provide more evidence that more competition is needed as the industry stream is changing at the rapid rate and potential large consolidations could be on the horizon. We also believe that the privatization of this size and complexity involving a major competitor done in challenging debt markets will create interesting opportunities in the telecom market in Canada, which we can exploit and benefit from, particularly in the national marketplace. If and when the privatization transaction takes place, we believe it will also underline the crucial role MTS Allstream plays in the Canadian marketplace as the main competitor in the enterprise market in the east and in the west. In summary, MTS Allstream continues to achieve solid financial and operating performance and delivering on its announced guidance, business plan and focus strategy.

We're pleased by the results and are confident that we are well-positioned to continue to compete and see the opportunities in Canada's rapidly changing telecom industry. Now I'll turn the call to Wayne. Wayne?

Thank you, Pierre, and good afternoon, everyone. We are pleased to report the sixth consecutive quarter of solid financial results for MTS Allstream. Our results for the second quarter and for the first six months of this year underline the progress we have made to improve the fundamentals of our business. Let's turn to the highlights, from continuing operations in the second quarter, earnings per share were $0.79 up 16.2% from a year ago while EBITDA was 170.5 million up 2% and free cash flow was 85.6 million. Revenues of 474.1 million were down 1% from a year ago. For the first six months earnings per share were $1.54 up 17.6% from the same period last year. EBITDA was 335.5 million up 1.6% and free cash flow was 177.2 million. Revenues of 941.5 million were down 1.9% from the first half of 2006. Our reported results, which include items that are not from continuing operations, were as follows. For the second quarter earnings per share was $0.88 compared to a loss of $0.02 per share a year ago. EBITDA was 172.2 million, down 2.5% while free cash flow was 86.9 million up 10.6%. Revenues of 474.1 million were down 3% from the same period of 2006. For the first six months of 2007, earnings per share were 1.68 up 166% while EBITDA was 342.4 million up 1.7% and free cash flow was 187.4 million up 31.5%. Revenues of 940.7 million were down 3% from the first half of 2006.

Our reported results in 2007 reflect certain non-reoccurring items including non-cash tax asset valuation allowance adjustment, future tax rate adjustment, restructuring costs and a positive regulatory decision that determined we had been billed twice over the past several years for the basic service extension feature charges. For 2006 reported results include discontinued operations, integration costs, a future tax rate adjustment and two positive retroactive regulatory decisions. More details on these non-recurring items can be found in our second quarter MD&A.

Now, let's turn to our results from continuing operations. The strong performance in our growth services was a major contributor to our second quarter and year-to-date results. Electively our growth service revenues increased by 12.3% to 186.2 million in the second quarter of 2007, and by 11% to 360.1 million year-to-date. Rope services represented 38% of our total revenues in the first six months, up from 34% last year. Among growth services wireless revenues grew 15.8% on the strength of 11.1% increase in cellular customers and 4.3% increase in average per unit for the six months ended in 2007. High-speed internet revenues also showed significant growth up 11.8% year-to-date on the strength of customer growth which was 17.4% in the second quarter.

Digital television continued to show strong growth with revenue up 31.6% in the second quarter and 36.2% in the first six months of this year, driven by a 25.5% increase in our customer base and a 2.5% increase in average revenue per unit. The popularity of our TV product is clearly demonstrated by our increasing market share which has now reached approximately 30% in Winnipeg. Our next-generation data revenues, which comprise of converged IP and unified communications, achieved double-digits results of 17.3% in the quarter and 14.2% for the first six months. Our converged IP operations were up 11.9% in the first six months of 2007. Our IP VPN customer accounts increased to 212, reflecting the attractiveness and growing demand for our innovative products and services available to business customers. Our unified communications operations showed excellent results increasing by 43.4% this quarter and 20.1% year-to-date as we continue to gain momentum and achieve higher sales volumes. As expected, our legacy revenues declined in the second quarter by 8.1% to 287.9 million compared to the second quarter of 2006 and by 8.5% to 581.4 million year-to-date when compared to the same period last year. Included in these declines are reduced legacy revenues associated with AT&T and Rogers, customer migrations to newer IP based growth services and reprice, all of which continue to impact our legacy service revenues for this quarter. Importantly, we've made significant progress in reducing these trends.

Our residential line losses have stabilized and the trend was continued over the last three quarters, during which we have reduced the rate of line losses by more than half. This improvement reflects the continued success of our win-back and retention programs and the strength of our customer value proposition through our bundled strategies. When you look at total customer connections, which include network access service, high-speed internet, wireless and digital TV, it increased almost 3% or 55,000 at the end of the second quarter compared to the same period in 2006. Total revenues from continuing operations were down 1% this quarter compared to last year, but this is skewed by the decline in certain revenues associated with AT&T and Rogers as they migrate more of their telecom activities to their own networks. Excluding this migration, total consolidated revenues were actually up 1.7% for the second quarter of 2007. Importantly, revenues from our enterprise services division have increased 1.2% in the second quarter, when you exclude these wholesale customers. For the year, we expect both consolidated and enterprise solutions division revenues to show positive growth if you exclude AT&T and Rogers. On the cost side operations expense was 299.2 million in the second quarter, a 2% reduction from the second quarter last year and 591.7 million year-to-date of 4.9% reduction from a year ago. Demonstrating the continuing success we're having with our cost reduction initiatives.

In 2007, we expect to achieve annualized cost savings of 40 million to 50 million through additional cost reduction opportunities identified under our efficiency program. As of June 30, 2007, we have achieved end year savings of 15 million representing annualized cost savings of approximately 26 million, expected costs associated with this program are 30 to 40 million, and year-to-date our costs are 15 million. EBITDA from continuing operations of 170.5 million in the second quarter, was 2% higher than the second quarter of 2006. And year-to-date EBITDA from continuing operations was 335.5 million which is 1.6% higher than the same period last year. We not only increased EBITDA, we also increased our consolidated EBITDA margin to 36% in the second quarter, and 35.6% in the first half from 34.9% and 34.4% respectively a year ago. This improvement reflects the strong performance of our growth services along with the success of our cost reduction program. Second quarter earnings per share from continuing operations were up 16.2%, $0.79 when compared to the same year earlier. Year-to-date, earnings per share from continuing operations were up 17.6% to $1.54 when compared to the same period in 2006. This increase in earnings per share in the second quarter and year-to-date is due to higher EBITDA along with lower debt costs, higher other income and fewer shares outstanding.

Cash flow was strong again this quarter and for the six months ended June 30, we had 177.2 million of free cash flow from operations. These strong results leave us well positioned to reach the high end of our guidance range for 2007 and fully support our dividend. The board of directors has declared a third quarter cash dividend of $0.65 which is payable on October 15, 2007, to shareholders of record on September 28, 2007. On an annualized basis, our dividend rank's us as one of the highest yielding stocks on the Toronto Stock Exchange. Capital expenditures from continuing operations during the second quarter were 58.9 million and during the first six months of the year were 107.3 million. These amounts are slightly lower than last year due to timing differences on various capital projects. Our capital expenditure requirements for 2007 are similar to 2006 in the range of 14 to 15% of revenue.

At this level, our capital expenditures are slightly below what you're seeing in other telecom's as we benefiting from the significant investment in state-of-the-art networks that were completed over the past number of years in each of our divisions. We also continue to benefit from our substantial tax assets. As many of you know the Company expects to make no payment of cash taxes before 2014. As we've stated previously, there are two items that impact our cash flow rules that are not from continuing operations. The first is restructuring costs associated with our cost reduction program. As I said earlier, we are on track with the 30 to 40 million restructuring costs expected for 2007. The second is pension solvency and we're currently estimating that our pension solvency funding should be approximately 4 million in 2007 compared to earlier estimates of 15 to 20 million at the end of last year. This issue continues to develop in a positive way with our estimated funding in 2008 and beyond continuing to decline as a result of increasing interest rates. In fact, if interest rates remain at current levels, funding for 2008 and beyond could be as low as 10 million per year. Regarding our share buy-back program that we launched last year, as of the end of June 30, 2007, we had repurchased 3.7 million shares of MTS Allstream at an average cost of $46.09 and a total cost of $172.4 million. This leaves us well on our way to completing 320 million share buy-back program as we have repurchased for cancellation more than half of the shares required in the program. The early success that we've had on this program has left us with the ability to be opportunistic in our purchases going forward.

We are pleased to report strong growth in earnings per share and as a result we are increasing our guidance for earnings per share at this time from our previous guidance of $2.30 to $2.50 to a revised guidance of $2.55 to $2.75. In addition, we expect to be at the high end of our EBITDA and free cash flow guidance ranges. This more favorable outlook is being driven by strong performance by all of our growth services and the continuing success of our cost reduction initiatives, along with favorable results in amortization expense and debt charges.

In summary, we had another solid quarter. We're on track to achieve our 2007 efficiency program. Generated double-digit growth in all of our growth services. Our growth services represent an increasing proportion of total revenue and we continue to generate solid free cash flow from our operations. Thank you and we'll be pleased to answer any questions you may have.

Thank you. Ladies and gentlemen we'll now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) . One moment for your first question. Your first question comes from Jonathan Allen from RBC Capital Markets.

Thank you very much. First, good numbers for the quarter. The first question, Wayne, looking at--you mentioned in the MD&A you had an actuarial evaluation done in the quarter in that because of that you're expecting higher earnings going forward and I think that led to the reduction in the tax valuation allowance that you had. I'm just curious, first of all, if you can give us a sense of what the solvency deficit might be on the pension plan and would this--with the valuation done, will this actually impact your earnings or EBITDA in the next year?

Okay. Thanks, Jonathan. In terms of the valuation on our pension plans, that is done as of January 1, 2007. And so we would have got the results--in the second quarter. That showed a solvency deficit of in aggregate from all of our pension plans 155 million. That is down considerably from that previous year. Importantly, we also have a going concern surplus overall between our plans of just under 100 million. The impact on our income tax valuation is that payments to your pension plan are deductible for tax, so to the extent that we have less payments to our pension plan, we would be able to use up more losses quicker and thereby increasing the value of our tax assets. And the--it doesn't, though, have a significant impact on our earnings going forward.

Okay. That would make sense. Next question for you, looking at the enterprise division this quarter, it looks like the year-over-year revenue trend continue to improve. I think it was only down, what, 3.5% year-over-year this quarter, and yet the EBITDA decline in margins continue to slip a little bit more than we've seen in the last few quarters. I think the EBITDA there was down 7 or 8%. I'm just curious, is this a continuation of the mix issue moving more toward growth services or have you seen up front costs in association with the new contracts that you have been signing up?

I think I can even be more specific than that. The impact on the revenues I think that we've talked about are the biggest negative impact is that the Rogers and AT&T, the loss of certain parts of the wholesale business that we had with them, and in aggregate that is also relatively good margin business, so it has an impact on our EBITDA, as well, and if you reduce that, we would see in the second quarter growth in our revenues from our enterprise division and also growth in our EBITDA.

Okay. Has there been any change in the rate at which those revenues from Rogers and AT&T have been coming off or has it been pretty consistent?

Pretty consistent, I would say, and fairly significant this year. It was a little bit less than what we had expected but still a significant decline is expected this year.

Okay. Thanks very much, Wayne.

Your next question comes from Greg McDonald from National Bank.

I have two quick questions. One, I was interested to see if you or maybe no shares were purchased in the quarter. I wonder what is the reasoning for that? Is that an issue vis-a-vis evaluation from the board's perspective or was there another reason for that. I note that you did say your plan is to complete the buy-back but I was wondering if there was anything special on the 2Q.

Nothing special in the second quarter. We're six months into the year and we've completed more than half of the program. So we're happy with where we're at right now and we have the, I guess, ability to be opportunistic in terms of that program, and that is what we intend to do for the balance of the year.

Okay. Makes sense. And the second one is on the consumer lines, as you pointed out, pure excellent results there. I just want to make sure I understand the seasonality issue. Looks to me you added 4700 subscribers. Your seasonality explanation is that you lost about 3,000, so that suggests to me that normally you would get sort of this cottage impact of plus 8 to 10,000. Am I understanding that correctly?

Right.

Notwithstanding that you are still seeing a massive decline in your year-over-year erosions, 4.5%. Can we expect that that 3,000 is relatively stable going forward and has it been versus the past, or is that 3,000 year-over-year decline actually declining itself pretty dramatically?

It's been stable at about that level for the last couple of quarters Greg, so I think that our expectation going forward is that losses will be around that same level.

I would say Greg, also when we're foreborn and what that would do to the numbers and how aggressive from quarter-to-quarter we're going to--our competitors are going to be. So it may vary a bit but we're still, as you're seeing, you notice that we're still happy about those numbers and our performance for a few quarters.

Right, they were pretty good. You sort of indicated in my last question there, Pierre, as for forbearance, most urban major markets I think most are expecting foreborn in the fourth quarter, is that your expectation for Winnipeg.

It is hard for us to say. But for us, since we met all the requirements put forward by the commission and we believe that we should be foreborn shortly. I think there is more question depending upon the market, and if the quality of service requirements are met or not, but, no, we hope, in fact, that for us it is in the third quarter.

Okay. Great. And, again, good progress. Thanks, guys.

Thank you.

Your next question comes from Vince Valentini from T.D. Newcrest.

Thanks. On the buy-back, are you then planning to get more active now that your quiet period would be over for this quarter and given the share price has pulled back a bit should we expect to see you in the market as early as next week?

Well, Vince, without being specific, we're going to continue to execute on our plan and we will remain opportunistic in particular considering the current Canadian telecom market turmoil and to continue to create and deliver more value for our shareholders.

Okay. And the second one is probably for John on the enterprise side. If we do strip away the Rogers and the AT&T and look at the underlying revenues that are now growing, can you break that down a bit for us into the buckets of sort of data, long-distance, local, where you're seeing the best traction and what your outlook would be? And this question I guess I would put in context, the CRTC data last week that was surprisingly strong in my mind on the enterprise data front showing 10.5% growth and revenues in that sector in 2006 showing that the legacy revenues dropped significantly as a percentage of total, only 38% for the whole industry. That is a positive inflection point that should help a company like yours going forward. If you would comment on where the revenue drivers are, that would be helpful.

If you look at our performance year-to-date. Wayne, correct me if I wrong. I think our mix as of first six months is about 35% of our revenue is coming now from growth services. And so we actually are quite encouraged with what we see going on in the enterprise space. And on a number of different fronts. For example, relative to unified communications we see more and more of a willingness of enterprise to actually purchase more IP-PBX services not just in the normal case of running out of capacity for an existing box or moving or establishing a new location but more and more customers are actually seeing the value in terms of how they can transfer from their operations by moving into a unified communications sphere. So we're seeing quite an uptick in just the premise based as well as the advanced connectivity like IP trunking that would connect those devices together.

On the converged IP services themselves, I'm talking all dimensions from the core network services, MPLS, [laratree services] gigabit ethernet services we see strong growth occurring in those areas, as well. And we as of the end of the second quarter, I believe, we're up to 211 MPLS customers which is comparable to what our competition has in the business, and we see strong growth and a lot of deal flow that is occurring in that area. I'm quite bullish in terms of what I see relative to the growth sectors of our business. And the supplementary growth areas in terms of the professional services and security elements that go along with an advanced IP fabric are also showing some positive traction. And in spite of all of that, from a growth perspective we see in the legacy arena, volumes continue to be up there. Obviously contracts when they come up for renewal it has an impact on the ARPM but we still see some that is hanging in there and not eroding quite as quickly as we had expected and ergo, we see the strength in our legacy services, as well.

Okay. Thanks.

Your next question comes from Dvai Ghose from Genuity Capital Markets.

Thanks very much. A couple more questions on the margin side. If I look at in Manitoba margins they were up a heavity 265 beeps year-over-year, up to 55.6%.

Is that sustainable? Well, I mean, we are--as you're aware looking at competition, and on the-- so that would serve to drive down margins, but on the other side we're looking at cost reductions and in addition I think what you've seen also that even in the face of that competition, we have managed to have selectively, anyway, have some price increases in some of our products. So I think that if you kind of put all of that together, that in general that's our expectation that we would stay in that range, anyway.

We're supporting that also that with the improvement guidance in EPS, but also basically saying on the EBITDA side we think we're going to hit the high end of the range and assuming the competitive environment stays about the same our reaction should be the same as well. And our progress and costs seems to be continuing fairly well. We're performing quite well there, which is supporting those margins.

Maybe I can follow up on that, Pierre, because the competitive environment is key. Your not non-compete with bell Canada and Manitoba expires at year end. Should we presume that bell Canada will be in your markets next year on a wireless basis, as least? I mean, they can resell Tellus, for example, and do you expect them, for example, to offer voice and perhaps DSL services in Manitoba?

Well, I, you know, what bell plans at the end of the day, but I would have to assume that Manitoba market is not their number one priority and in particular a privatize bell, I would say. It is a smaller market. It is already pretty competitive, and their brand here is not very well known. So it is still possible, I would say, but on our side, we're probably not that concerned about that. We have quite a bit of competition here and quite aggressive competition, as you know. I don't know, Calvin, if you want to add anything.

I think, Pierre summed it up very well. In terms of, -- they are in the local market today with some local voice and data offerings, but it is really through the form of group telecom operations and I would say the impact has been very minimal, so far.

Two quick follow ups. On the retention fund and access line, residential side very good performance. To what extent was it driven by the $40 home phone package which was the most aggressive, (Inaudible) phone package in Canada today and is there a risk of reprice.

I think some of that improvement is certainly due to marketing efforts only part of which are the total phone package. I think you have to look at the total picture, including our range of services we have in the bundle. In terms of reprice we clearly there is some in particular LD reprice as a result of offering the plan but you have to look at the fact that it is really available to our best customers that take broadband services. And what we've actually found is the LD price is in the range of what we had planned. But we're actually seeing a significant uptick on feature revenue that we get from the plan. So overall, I would say we're quite pleased with what it's done. It is not the only thing that's contributing to our success but it is certainly a part of it.

That sounds great. My very last one. I apologize. The upside surprise in the income in margins were somewhat upset by the 173 basis points decline at Allstream. I think your down to 18.2% margin in the quarter, 13% decline in the EBITDA. You mentioned that you're losing relatively high margin wholesale revenue. I guess my question is, if you exclude wholesale revenue component that you're losing you're revenue's are up a modest 1/.2%, but wouldn't your EBITDA be more-- down even greater, ie... is the rest of your margin much lower than the wholesale margin so are your margins probably going to continue to decline as you lose that wholesale revenue?

No, what we expect to see, we lost some fairly high margin revenue there, and at the end of this year a lot of that's gone. So it is not as big of a threat in fact going forward. So when we look at our other revenues, and the mix of margins, we see very strong margins in our both our converged IP and unified communications, which are primary growth engines in our enterprise division, and that rival of the margins that we're seeing on our legacy services. So I think that that shows an improved outlook going forward.

And divide the overseeing in margin performances is what we anticipated in the budget. In the mid-market expansion where we hired a bunch of people to look at the growing businesses in that area, they're actually comped on gross margin and we were pleasantly surprised at what has turned out to--the results is turning out as a result of that. It is actually very strong margin performance in terms of new customer acquisition as well.

That's great to hear. Thank you.

Your next question comes from Glen Campbell from Merrill Lynch. Please go ahead.

Yes, thanks very much. My first question is on your possible expansion wireless outside Manitoba. You talked about that for a while now. You said you would be quite I guess controlled and would manage risk on that. And you've got a fair bit if free cash flow head room now relative to our dividend. Would it be fair to say, then, anything you would undertake there would be done with the existing dividend as a constraint, or is the dividend on the table in the sort of likely scenario as you're considering for expansion?

I think it is hard to talk about wireless until we really know what the framework around the option and if indeed there is even an opportunity for us to consider going into that business. So I would tell you that we're continuing to work at it. We're continuing to talk to third-party about testing interest to come to Canada, potentially with us. And we'll continue to do that until we hear more or we hear from the government about what will be the rule of the game, and then we'll have an opportunity at that time to evaluate our option, considering the markets, the type of market that we're going to see there at that time, and if there is a debt market and in terms of opportunities with partners at that time. So it is a bit hard to say right now, but let's just say that it could take all different type of setup or all number of scenarios and once we get there, we will--we'll make the decision and analyzing the type of framework the government is going to put on the table. But right now there is no definite plan. But as some noted, we understand the profile of our company, and we understand also the importance of the dividend to this Company.

So not to put words in your mouth too directly but it sounds like in sort of the most likely case, in the conservative scenarios you looking at you would work around the dividend you have but you don't want to be definitive about that. Is that fair?

I haven't said that. We'll see when we get there.

Okay. Thanks, and a follow-up, if I might. On capital expenditure can you give us a sense this year how much money you're spending on further upgrades to your wireline access network? I'm trying to see where capital intensity might get to once you are completely done. Thanks.

You talking about Manitoba?

Yes.

Glenn, we don't tend to give that detail in our--in terms of our capital expenditures. What I can tell you though is that definitely the majority of our capital expenditures are on our growth areas.

But you're also quite close to the end of the line in terms of shortening local loops. I'm wondering if there is an opportunity lying ahead for expansion of free cash flow or reduction of wireline CapEx once that is done.

In general, I would project our CapEx at similar levels to what we're seeing. There are some things that will reduce our spending on, but we also believe that we're going to find some opportunities to continue to invest in various areas that will generate growth revenues and further EBITDA going forward.

Okay. Thanks very much.

Your next next comes from Peter Rhamey, from BMO Capital Markets. Please go ahead.

Pretty general question when it calls to guidance. When you look at year-to-date performance, you're tracking EBITDA and earnings well ahead of even the upper end of the revised range. Is there something specific you see in Q3 or Q4 that wouldn't be seasonal factors alone. How that would impact your growth initiative into the VanCouver market in the small/medium size enterprise segment. Do you see something happening, Pierre, you did mention your confident on 54 to 55% margin. I'm trying to understand why you haven't been more bullish on your guidance.

I think it's more a fact that we're being prudent and really trying to analyze the situation and the future in particular in a time where there is so much turmoil and change in the telecom industry and in the debt market, but I think it is prudent for us to state it the way we state it and we'll see in the next quarter.

Very good. One for John, the enterprise market you bid and won a contract for what I would call legacy business PRIs. And you indicated in your commentary, Pierre, that was perhaps, if I understood it right, a lost leader. Is there a specific business contract coming up out of the Quebec government that you're targeting that is more value added than PRI?

No, we should see that as just a stand alone PRI contract. It is one of the situations where we looked at the opportunity and what we saw the market price in Quebec based on some recent deals. We had the capacity of the network. We saw the opportunity as well to provide this connectivity with the service of the Quebec government as an opportunity to evolve the connectivity over time to match our unified communications portfolio. So it made a lot of sense. It is profitable. It is an aggressive price point but that just seems to be the nature of the market at this point.

And last question, Pierre, you did mention in response to I think Glenn's question, that you've talked to a number of parties from outside Canada with regards to the wireless opportunity. How would you gauge that interest? Is there a high level interest? Are people interested in looking at the market opportunity here? Or would you say it is more of a modest net?

I think you know, and I knew that before even before talking to them, I've been involved in wireless a long time, but the interest in Canada, I think, is there because of the high level of margin. It is often different from many countries, and the lack of a large number of competitors in some of the large markets that we have. So I think you can say that there is quite a bit of interest and but everybody is at the same place as we are. Which is we'll see when the industry in Canada announce the framework around the auction.

And what is your view with regards to some of the activity in the U.S. with Google advocating a wholesale network mandated condition put on spectrum auction? Do you see that as something you would be interested if it was applied--we don't have 700 megahertz auction,, but is that something that you would consider or is that something you are not interested in?

Can you just--

I'm sorry.

I missed your question in terms of what would we consider?

Sorry. 700 megahertz auction, the FCC ruled to impose some conditions on the new auction which would be basically require the winner of the spectrum to provide a wholesale type model to any and all players out in the market. Generalizing.

I missed a few words in your question. But, no, absolutely that is something that if we were in that business we would indeed consider we're being the national competitor to the incumbent, we have to be supportive of wholesale market and for us, let us remember that anything we do nationally is kind of a green field. So it is always brings positive results for our business and we are receptive to it.

In other words, you don't have reprice risk.

Correct. We can introduce innovative products and sometimes disruptive products, that for us are a gain and for others would be difficult to introduce because of the reprice.

Very good, thank you.

Last question comes from John Henderson from Scotia Capital please go ahead.

Thank you. I just wanted to ask, getting back to sort of use of proceeds I guess from directories and buy-back, is the decision--I mean, you mentioned the word opportunistic and that all makes sense, but I wonder is it opportunistic in the sense of using those proceeds for possibly wireless build out or acquisitions if they come up from a different telecom environment that we're facing with the privatization or what have you of BCE?

I wouldn't read too much into this in terms of us having made a decision to retain, proceed to do an acquisition. I think as Wayne said, we're opportunistically executing on our plan and in terms of acquisition, it is probably way too early to call on any of that. I don't think BCE is going to close before the first quarter next year, or something like that. By the time they get to shedding some asset that is going to be later than that, if there are other acquisition, as we said, a few months ago we're always looking and interested, but I don't think right now there is a plan in the Company to use the proceed to do acquisition or even the wireless initiative that's still just a potential anyhow.

Okay. Thanks. I have a follow-up. For John, I guess. Tellus seems winning a fair amount of federal business. The D&D contract being the latest. I wonder if you could give a little bit of your interpretation on that, and participation--what is the degree of participation in the business? Would you have been bidding on that? Would you say you lost to Tellus or is Tellus buying market share here. Or what would your interpretations be?

I don't want to comment on their approach to the market. We take a look at each one of those bids very carefully. We did win a significant piece of business, but CNS won through public works, Bell won the second sister contract to CNS2 and we're actively implementing that, it covers multiple government departments and we still continue to have a strong book of business on existing, I'll call it on more legacy oriented contracts with the government, in addition. We're looking as well at the new contracts that are coming up and will hit the street, fairly significant ones as well. But in all of these we look at them on a case-by-case basis. We look at the D&D one, in particular, in terms of the degree of on-net and off-net and what we think would be an acceptable risk for us to take and we do this case by case. We're happy with the degree of involvement we have with the Federal government. We would like to have more, obviously but want to make sure when we get more we can do it on a profitable basis.

Great. Thanks very much.

I will turn the call back over to Ian Chadsey.

Thanks, John. Today's call will be archived on the investor section of the MTS website and that concludes our call for today. Thank you very much for joining us.

Ladies and gentlemen, that concludes the conference call for today. Thank you for participating. Please disconnect your lines.