BCE Inc (BCE) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the MTS 2007 Third Quarter results conference call. (Operator instructions.) I would like to remind everyone that this conference call is being recorded today, Thursday, November 1, 2007, at 4:00 PM Eastern Time.

And I would now like to turn the conference over to Mr. Ian Chadsey, Vice President, Investor Relations of MTS. Mr. Chadsey, please go ahead.

Thank you, Patrick. Good afternoon everyone and welcome to the call. Early today we issued our third quarter news release, MD&A and our supplemental package, which are available on our website at MTSAllstream.com.

That said, today's comments may contain forward-looking information related to the 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. The statements made today reflect the assumptions of MTS as of November 1, 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.

The Board of Directors today approved the fourth 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; Kelvin Shepherd, President of the Consumers Market Division; and Chris Peirce, Chief Regulatory Officer.

So with that, I'll turn the call over to Pierre.

Thank you, Ian, and good afternoon, everybody, and thank you for joining our third quarter conference call. And earlier today, we released our financial results for the third quarter, and I think that these results demonstrate that MTS continued to build strong and sustainable momentum in the third quarter. In fact, over the past 21 months, I think we've worked hard to reposition MTS to make it a stronger company, and we're well on our way in realizing that goal.

Through the first nine months of the year, we're on track not only to meet our guidance for 2007, but to exceed our targets for EPS that we already raised in the second quarter. We also continue to expect to achieve the high end of the range for EBITDA and free cash flow as a result of the strong performance from our operations.

And we're today increasing our EPS target range to $2.65 to $2.85 up $0.10 per share from our increased projection last quarter, and in total for the year, an increase of $0.35 per share from our initial EPS range projected at the beginning of the year.

Our ongoing operation continued to make significant progress in a number of areas through the third quarter and the first nine months of 2007. Our growth services, which as you know, include wireless high speed internet, digital television, converge IP services and unified communications, continue to add customers and revenues at double-digit rates.

Growth services revenues continued to be the driver of our better performance, growing at double-digit rates and combined with the success of our cost reduction programs, are enabling us to deliver improved results. Revenues from our growth services were up 13% to $194 million for the third quarter and year-to-date, they represent 39% of total revenue, compared with 35% last year. So we're well on our way to achieve the projected 40% level in 2007, confirming our success in rapidly transforming our company.

Total revenues from continuing operation for the third quarter have continued to improve, as they were flat year-over-year, compared to being down 1% in the second quarter of this year. And as we saw in the second quarter, our revenue performance is still masked by the reductions of the Rogers and AT&T contracts, who continue to migrate their business from our Enterprise Solutions Division to their own networks. If we exclude the related impact, our total revenues have increased by about 2% from the third quarter 2006. This is a significant milestone, as it highlights the success of our strategy to shift our dependency on our legacy to our growth services.

Other highlights from the quarter include our consumer residential access lines remaining stable and continuing the trend of significantly pure line losses for the last four quarters, and let me know that these achievements reflect our performance prior to being forborne in Winnipeg, which will add to our flexibility to react to competitive actions and enable us to better meet our customer needs.

Our mid-market national business initiative, which we've launched earlier this year, continues to demonstrate strong results with 369 new contracts, one year to date. Our small business bundle, sold under the Austrian brand, was successfully launched in the Vancouver market. Early responses to our offering in this test market have been positive. We continue to improve our customer service in all our markets in offering a solid and differentiated customer experience. Our customer satisfaction results are confirming it.

And we remain on track to deliver on our annual cost saving target of $40 million to $50 million for 2007. And at the end of September, we had achieved $33 million of annualized cost savings.

Wayne will provide you more detail on the financial highlights for the quarter and year-to-date in just a few minutes.

I'd like to turn now to some of the key highlights from our operations beginning with the Enterprise Division. In the third quarter, the Enterprise Division, which is operating under the Austrian brand, continued to improve its performance. Revenue from growth services increased by over 13% compared to the third quarter of '06. The Division's EBITDA is still being impacted by Rogers and AT&T product migration and if we exclude the related impact, the EBITDA would be stable for the first nine months of 2007.

Our IP and Enterprise customer count grew to 239 in the quarter from 158 a year ago. We signed $49 million of new Enterprise contracts in the quarter and significant new contracts included a $6 million contract with Air Transat, a contract that includes a global managed data network IP service and communications services for Air Transat applications across North America and France; a contract with Western Canada Lottery to provide IP connectivity and network management for a network of gaming terminals in Manitoba, Yukon, Northwestern Territories and Nunavut. This eight-year contract will see MTS Allstream provide MPLS connectivity to nearly 900 retail locations, and will also provide managed wide area network services in all locations; a significant new contract with ADP supplying telecommunications and software development services.

And just last week, we signed a three-year extension with Primus, Canada, worth more than $70 million. The contract includes IP data networking, long distance and local services.

During the quarter, the Enterprise Division also announced the innovative secure connect service, building on our national IP network and establishing a new standard for the delivery of firewall and VPN services to customers.

I'm also pleased to report that MTS Allstream's relationship with Microsoft continues to grow stronger. In mid-October, Microsoft launched its newest unified communications product, Office Communications Server, OCS 2007. And thanks to our close relationship with Microsoft, we were chosen to participate in Microsoft technology adoption program. Through the program, we were able to experience the OCS product 18 months before it hit the market and provide input into its development. MTS Allstream was one of only three Canadian companies asked to participate in that program, and the only integrator present. We're also actively participating in the launch of the Microsoft OCS product across the country.

Now, turning to the Consumer Market Division, we delivered solid wireless results with revenues increasing by close to 16% and customers by 10% in the quarter. For the year, the ARPU increased by 5% or $2.72 supported by a strong increase in wireless data services. High speed internet had an excellent quarter as well. The customer base increased by 15.7%, contributing to a year-over-year revenue increase of close to 15%.

Our digital television business increased its customer base by 25% and the revenues by 30%. And in October, we achieved another significant milestone as we pushed past our 75,000 customers in Winnipeg.

We also continue to see improvements in the competitive residential telephony marketplace in Winnipeg. Our win-backs reached a strong 1900, an increase of 38% from 2006. And almost 80% of win-back customers continue to bring at least two additional growth products with them when they return to our company.

Our bundling strategy continues to be the cornerstone of our success. We now have 67,000 customers in Manitoba participating in our bundled product offers, an increase of 33% over last year. Our bundling strategy has allowed us to sustain growth in our growth products and stabilize our local losses.

Total ARPU for bundled customers is up 2% and our churn rate is down by 68% when compared to non-bundled customers. We believe that these results have placed MTS Allstream ahead of the curve in the consumer space.

Turning to the regulatory front, where the third quarter was a very active time for the entire industry. On August 3rd, the CRTC granted MTS Allstream forbearance in the Winnipeg residential market. Since then on September 27th we applied for residential deregulation in the city of Portage la Prairie. And we're awaiting the CRTC decision. In the CRTC hearing on the central facilities, MTS Allstream made their case that a robust definition of essential facilities is important to ensure continued innovation, competitive pricing, and sustainable competition especially in the business market. We do support the approach that reliable network access for competitors coupled with retail deregulation allows for maximum reliance upon market forces and is the least interventionist regulatory approach. We expect a decision from the commission by mid-2008.

I'd now like to take a minute to expand on a potential national wireless initiative. There's been a whole lot of talk about that. We believed the opportunity for a fourth national wireless player in Canada is significant and has the potential under the right circumstances to create meaningful long-term value for MTS shareholders. But the key words are under the right circumstances. And until we have had time to analyze the spectrum auction rules and evaluate the financial and partnering models that are presenting themselves to us, we cannot fully evaluate the opportunity and we will not make any decisions about whether or how to proceed. What I can say is that together with our board we have put in place business principles that we are following as we review this opportunity. And like everything we've done since the beginning of our business review in early 2006, we will be disciplined and thorough in our analysis of this opportunity. Our goal as always is to create and deliver value to our shareholders. We will only consider a national wireless initiative if the spectrum auction rules meet our requirements.

While we have the capacity to pursue a national wireless strategy on our own, our preference is that we would do so with strategic and/or financial partners. On that front we have been approached by and are in discussions with a variety of potential partners, both strategic and financial, who view our assets and experience as a regional wireless carrier as strategic. These potential partners could contribute significant capital, wireless expertise, international perspective, and overall sponsorship. In addition, we expect the number of interested parties to increase should favorable auction rules be announced.

I want to be clear that management and the board fully recognized the value that MTS dividend as for our shareholders. It is our preference to design plans for our potential wireless participation around the principle of maintaining our current dividend. We are exploring many alternatives that would enable that outcome.

I'm sure you understand dividend payments are a board matter decided each quarter based on many factors. So obviously, publicly held companies cannot make any commitment under any circumstances to the payment of a specific amount of future dividends. But should we decide to proceed, we expect to have the ownership structure and satisfactory financing arranged by the time of the auction. But no decisions on the potential national wireless initiative will be made until several months following publication of the auction rules.

The bottom line for now is that we're doing our homework. We continue to be focused on creating long-term shareholder value. And we will only proceed with national wireless if the circumstances are right.

So in summary, MTS Allstream continues to achieve solid and improving financial and operating performance and we are confident that we are well positioned to continue to be successful in Canada's rapidly changing telecom industry.

Now I'd like to turn the call to Wayne.

Thank you Pierre and good afternoon everyone. We are pleased to report the 7th consecutive quarter of solid financial results for MTS Allstream. Our results for the third quarter and the first nine months of this year continue to underline the progress we've made to improve the fundamentals of our business.

Our financial highlights for the third quarter include double-digit increases in all growth services for both our Enterprise Solutions and Consumer Markets divisions. This continuing strong performance drove consolidated revenue growth of almost 2% and Enterprise Solution division revenue growth of 0.5% this quarter when you exclude the impact of Rogers and AT&T. This marks the second quarter in a row that our Enterprise Solutions division achieved positive growth in revenues when you exclude these two exiting customers.

I'll review first our consolidated results from continuing operations and then look more closely at our growth services and legacy businesses for our Enterprise Solutions and Consumer Markets divisions.

We discussed results from continuing operations because we believe they assist investors in understanding the performance of our company. Reported results include a number of items such as the cost of restructuring that we've undertaken over the last 20 months, which are not from continuing operations. These items are outlined in our third quarter news release and MDA.

Earnings per share from continuing operations were strong in the third quarter, increasing 18% to $0.73 compared with the third quarter last year. This increase resulted from increased EBITDA, lower amortization, lower debt charges and fewer shares outstanding. The increases in EBITDA both in the third quarter and year to date reflect the higher percentage of revenue coming from growth services and the continued success of our cost reduction initiatives.

Revenue in the third quarter was flat compared to last year and down 1.4% as expected for the year to date. More importantly, we have realized positive revenue growth of about 2% for the quarter and 1% year to date when we exclude the migration of Rogers and AT&T to their own network, which began about two years ago.

The strong performance in our growth services which increased by 13.2% for the third quarter and 11.8% year to date was a major contributor to our results. Growth Services which include wireless, converged IP, unified communications, digital television services and high-speed internet services represent a growing proportion of our business at 39% of total revenues in the first nine months of 2007, up from 35% last year. Free cash flow for the first nine months of 2007 remains strong at $241 million, which more than covers all cash requirements including non-reoccurring items like restructuring expenses and all pension costs.

Turning to the cost side, operations expense was 3% lower than a year ago at $917.1 million, demonstrating our strong performance in realigning our cost structure. In 2007, we expect to achieve annualized cost savings of $40 to $50 million through additional cost reduction opportunities identified under our efficiency program. During the nine months to September 30th, 2007, we realized in year savings of $28 million, representing annualized cost savings of approximately $33 million from operational efficiencies and our decrease in usage of competitor networks.

Now let's look more closely at our growth in legacy services businesses. Wireless revenues year to date grew 15.8% on the strength of a 10% increase in cellular customers and a 4.8% or $2.72 increase in average revenue per unit. We could also confirm that we are not seeing any meaningful impact from wireless number portability. High-speed internet revenues also showed significant growth, up 12.7% year to date on the strength of customer growth which was 15.7% at the end of the third quarter. Digital television continued to show strong growth with revenue up 30.5% in the third quarter and 34.2% in the first nine months of this year driven by a 25.3% increase in our customer base and a $1.00 increase in ARPU. The popularity of our TV product is clearly demonstrated by our increasing market share which has reached 30% in Winnipeg, achieving another significant milestone by signing up our 75,000th customer in October.

Our next-generation data services which comprise converged IP and unified communications achieved double digit growth of 13.1% in the quarter. Our converged IP revenues were up 11.3% in the first nine months of 2007. And our unified communications revenues increased by 19.4% this quarter as we continue to gain momentum and achieve higher sales volumes.

As for our legacy services, they declined as expected. Included in these declines are reduced revenues associated with AT&T and Rogers along with customer migration to newer IP-based growth services and the impact of competition and re-price primarily in our long distance line of business. Although the decrease in our long distance line of business may look higher compared to other teleco's, if you exclude the impact of Rogers and AT&T, this decrease is in line with what we've seen at other teleco's. Importantly, we've made significant progress in stabilizing our legacy business in our consumer division and cross-selling growth services to legacy customers in our enterprise division.

Stabilization of our residential line losses in Manitoba has continued over the last four quarters, reflected in a significantly reduced rate of line losses. This improvement demonstrates the continued success of our win-back and retention programs and the strength of our customer value proposition through our bundled strategies. Overall when you look at total customer connections which include network access service, high-speed internet, wireless and digital TV, they've increased almost 3% at the end of the third quarter compared to the same period in 2006.

All in all we're pleased with our performance, notably our growth services, the impressive performance of our enterprise division and the increasing stability we are achieving with legacy services. For the year as a whole as Pierre has outlined, we've increased our earnings per share guidance to $2.65 to $2.85 per share and expect to achieve the high-end of our guidance range for EBITDA and free cash flow.

During the third quarter of 2007, capital expenditures were $20 million higher compared to the same quarter last year as a result of timing differences between this year and last year. As a reminder, 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 below what you're seeing in other teleco's as we are benefiting from the significant investments in state-of-the-art networks that were completed over the past number of years in each of our divisions.

With respect to the share buyback program, as we indicated in the press release, we've refrained from making additional purchases under the program over the past few months. We've done so in order to preserve our ability to take advantage of various possible emerging opportunities to create value for MTS shareholders. Obviously this includes a potential national wireless initiative but this should not be construed in any way to mean that we have made any decisions in that regard. Should an opportunity acceptable to the company not materialize, we plan to complete the $320 million share buyback program.

I can tell you that the board and management are unanimous in their view that refraining from making purchases under the share buyback program for the time being is in the best interest of MTS shareholders.

With our continuing strong results and positive outlook, the board of directors has declared a fourth quarter cash dividend of $0.65 which is payable on January 15th, 2008, to shareholders of record on December 31st, 2007. On an annualized basis, our dividend ranks us as one of the highest yielding stocks on the TSX.

Thank you and we'll be pleased to answer questions you may have.

(Operator instructions). Your first question comes from Greg MacDonald of National Bank Financial. Please go ahead.

Thanks. Good afternoon guys. My question is on the national division. And I wonder first off if you might help me get a better understanding of what the business looks like without the Rogers and AT&T revenue streams. Are you prepared to actually share what the most recent quarter revenue impact was? And then secondly, I wonder if you might give us a profile as to new business contracts. I know IP businesses actually have lower margins but higher free cash. So I'm trying to get a sense of what forward-looking margins are in the national division, sort of down in the 16.5% or so range where they are right now. Is that a future margin expectation that we should be looking to model or is that going to continue to trend down in the future years? Thanks.

Well maybe Greg if I could jump in there and talk about the national division. I think that Wayne indicated that when you exclude the impact of the Rogers and the AT&T, I'll call it exit, that we actually are seeing growth in the national division. And I believe as well if you wanted to characterize just to take a little bit of exception with how you characterized some of the future growth opportunities is it. I think that we are seeing some very strong margin performance in the-- certainly in the converged IP arena. And if-- speaking specifically to gross margin, we see strong gross margin performance there. Less strength when you look at converged or unified communications and professional services. So you do have a mix factor that you have to consider in terms of the overall impact in terms of the financial contribution through gross margin. But we don't see anything that would significantly alter the bottom line EBITDA percentage as a total-- the total revenue over the next (inaudible) as we contribute to migrate more and more customers to the growth services.

Okay, so just if I can understand you correctly, when you say strong, i.e. higher than current right? So converged IP has higher than current gross and unified communications has lower than current gross. But generally speaking forward gross margins should remain relatively stable.

Yes I think that's fair Greg. And I mean the numbers in terms of your question, we have been projecting and continue to see reductions from Rogers and AT&T in the neighborhood of $40 to $60 million for the year or about $10 to $15 million per quarter. And that is continuing. We're probably a little closer to the bottom end of that range but we're basically still on that track.

And at what point do you anticipate that they will be completely off your networks?

Well I think we'll continue to see some revenue from them for quite a long time. But basically by mid 2008 we'll probably no longer be seeing that level of big reduction.

Yes it doesn't mean that the revenue goes to zero for both parties. So with Rogers for example, we will continue to do business if we have a competitive offer for services that they can't supply themselves. Then we'll continue to do that. But there's services that they can provide or put on their own network. And those are the ones that we're referring to here.

Okay so let-- so if I were just to say by mid-2008 the marginal impact of the Rogers and AT&T business should be relatively stagnant. If I were thinking of when the national division could see a stable i.e. flat revenue year over year, you're thinking mid-2008, late 2008. I shouldn't be too far off if I estimate that right?

Yes I would say even sooner. I mean if you looked at our Enterprise Solutions divisions we've been relatively flat revenue for each quarter for the last number of quarters. And just marginally down from last year. But I would say yes we expect to see growth in 2008 including all customers.

Okay and not to hug the puck I just want to ask one last quick question. Can you give us an update on pricing activity in the quarter on the national side John? Has it changed marginally relative to 2Q or 1Q?

It's hard to characterize that overall. Aside from saying that all the indications we would see would lead me to conclude that there's less pressure overall from a pricing perspective. Now I tend to see all the big ones that are everybody's going after them fairly aggressively. But once again when we flush through what you're seeing in terms of Rogers and AT&T, I would say that I'm somewhat encouraged as to what I see in terms of the prospects, in terms of some degree of rationality, returning to the Enterprise side of things.

Now, of course, what you have to realize that we're talking about some, particularly the large contracts that come for renewal every three years or so and everybody wants to go after them quite aggressively. But there's a lot of business in the mid markets and that really doesn't have that kind of exposure. And what we're seeing in many cases is the ability to migrate customers from legacy services onto next generation services, holding the margin performance up and holding the total revenue. And in some cases, increasing the revenue from that particular customer as we sell them more services.

So it's once again it's hard to characterize it at a point in time, but I'm somewhat encouraged in terms of what I see overall in the marketplace.

Alright. Thanks guys.

Your next question comes Andrew [Calder]. Please go ahead.

Hi, good afternoon. Question is around wireless. And you seem pretty convicted on taking a look at the opportunity. And it's an opportunity that many investors find difficult to see a positive business opportunity given the [intrans]positions of the incumbent. So to current shareholders what are the, if you're talking to them, what are the key success factors that they'd be interested in hearing about this opportunity? And where exactly do you see this opportunity? And how quickly do you believe a new entrant could begin operating?

Okay there's quite a few questions. Let me try to address them. First in terms of some in the opinion by some people that the-- it is not possible for MTS Allstream to successfully enter the national wireless market. And I think it's a bit premature to conclude any of that not knowing really what would be the rules of the game. But one thing that at least the people we are talking to both strategic and financial and I would tell you very credible players in my opinion and I come from that sector. They're seeing in our company that we would not be starting from nothing. That on the contrary we would be leveraging a whole lot of assets and skills that we have in the company.

And you have to realize that we've been looking at this initiative for a long time with advisors both financial and strategic that we've talked with current service providers around the world about how they've launched in some cases a third or fourth or fifth or sixth wireless players in different market. That we've been in discussion with network vendors to look at how a network could be built in Canada. That we've looked at business plan. That we've talk and been in discussion with executives that launch wireless service providers in Canada.

All this to say that we've done and we're still doing a whole bunch of homework on this. And that we believe that it is an opportunity that we have to take a serious look at but it is very highly dependent on the spectrum auction rule. And again as I said in my remarks, our preference would be if the rules or assuming the rules are positive to do it with partners to bring really strengths and skills to what we have. And they are quite a few that seems to be interested in working with us under very creative model.

So, all this to say that there's a whole lot of work to be done on this. There's a whole lot of numbers being put forward by many people. I consider many of these numbers though reflective of what has happened in Canada many years ago and not necessarily what could happen in the future. But anyhow first things first. As we got to wait for the spectrum auction rules. And from there, do a whole of analysis on the possibility and also the confirmation that partners are indeed interested in this and in working with us or not under all kinds of model that are more or less risky depending on the structure.

So, I would say a whole lot of work to be done on that. I think many of our shareholders do understand that as well. And do understand the potential value and/or the potential risk. I think we do that. We do understand that as well. The board does and we will continue to do our homework on it and clearly the more intense period will be once the spectrum auction rules are known. And again as I said and we've said many times, if the base requirements is not included in those spectrum auction rules, we're just not going to bid. And that's very simple.

And so we believe that we're trying to be very disciplined, we're prudent towards all of this. And we understand the profile of the company. And we move forward in a very disciplined approach.

And should there be preferable rules that would meet your criteria, how quickly do you believe a new entrant could begin operating?

Well again it's hard to speculate depending on the rules, in particular when the auction is. But you can suspect that and it would be for I think any new player whatever their regional or national considering this, the time to build a network across the country it would be in stages. So the first stage which would be some major urban center. If you look at the rollout that have been done in other countries is now pretty fast considering what it was many years ago. So you're talking the beginning of a few cities in about a year let's say, something like that. Depending how much prework has been done before you start to build.

Okay well I appreciate your thoughts. Thank you very much.

Thank you.

Your next question comes from Bob Bek of CIBC World Markets. Please go ahead.

Thanks, good afternoon. Just to clarify your answer to Greg on the transition from Rogers and AT&T, how that plays through to mid next year. Cause you've been pretty consistent on revenue decline and EBITDA decline at the Enterprise group. Would you expect that to be consistent for the quarters through to next year or given that we're not that far from mid 2008, would you expect that to start to taper as far as quarter over quarter decline?

Yes well Bob I mean we expect that for the last quarter of this year to have about the same level. We will be providing guidance for 2008 later in the year as we normally do. So we'll probably be able to give you a better picture there. But given that the total volumes are down, we expect that the decline would be less next year than it is this year.

Okay and just on the local line situation, again very consistent on line losses and some success on bundling as you've mentioned. Can you talk a bit about how the forborne situation in Winnipeg might help that even further in the quarters to come or whether you think this 3000 level sort of losses per quarter will persist for a little while still? And then related to that do you think that the television product has the opportunity to kind of push past sort of natural ceiling levels of penetration given that it's in this bundle and the bundles have had success?

It's Kelvin Shepherd here Bob. I'll take a crack at that. I mean in terms of the forbearance question, we're clearly doing some things we couldn't do before or will be doing some things that we couldn't do before because we are now forborne. Many of those things are things like simplifying our offers and looking at how to better include services that previously couldn't be included in our offers in there in a more effective way. You know simplifying some of our billing and those types of things. So I think the benefits from those are real but they're incremental. They won't cause a dramatic change. And I think we expect to see results continue fairly stable going forward. I mean we're going to obviously continue to push forward and expect to see some slight improvement but not dramatic. Certainty not just from the forbearance effect alone.

In terms of the TV question, I'm not quite sure what the natural ceiling is.

I was hoping you'd mention that.

But it's clearly not 30% so we're going to go past that.

Okay that's a fair answer. And just lastly on that before I hand over, the average revenue per customer on the television it's kind of holding steady at $47. Given that that's in a bundle in a lot situations is that the-- how do you count for the $47 basically in the bundle. I'm just trying to get a sense as to pricing for that product?

Well that does include the effect of both promotional pricing and discounting. And so you're seeing there the full kind of competitive effect of actually increasing penetration on the market through promotions. Over a period of time, we would expect to see some improvement in that ARPU just as we have customers come off promotions and we get the opportunity to see the full effect of the retail pricing.

Thanks. I'll leave it there for others. Thanks very much.

Your next question comes from Dvai Ghose of Genuity Capital Markets. Please go ahead.

Yes thanks very much. John, I'm a little confused because the Allstream story seemed to be as exposure to Rogers and AT&T declines so revenue declines will moderate. And we did see that Q1, it was 5.9. Q2 was only 5. That was a good improvement. It spiked up to 6.1% in terms of decline in Q3. Could you explain what some of the factors were? Was there more of a decline on the wholesale side or was it because of other revenues? And perhaps more importantly I'm really confused about the margin issue. Because in Q1 a 6% decline in revenue led to a 7% decline in EBITDA. In Q2, a 5% decline led to a 13% decline in EBITDA. And this quarter is your worst ever in terms of EBITDA decline, 6% led to 19%. That clearly implies that the non-wholesale revenues are much lower margins that are replacing the wholesale revenues. I'm not quite sure how they can comparable margins?

Okay Dvai, it's Wayne here. I'm just by the sounds of the question you're looking at what was the national division revenues and if you look kind of quarter over quarter in terms of revenue, we are down about 6%, 6.1%. And in, for the nine months about the same, roughly 6%. So I mean I think our decreases have been relatively steady. The margin issue is going to fluctuate from quarter to quarter. I think that included in there though you have Rogers and AT&T revenues, which are declining. And if you take those out, the revenue structure is pretty close, well much less of a decrease and pretty close to flat year over year. Still some work to do there but we are making significant progress. And basically our strategy there is to continue pushing with our growth services where we are seeing significant increases to offset the impact of those two customers as well as re-pricing and churn in our legacy business.

I guess my only question Wayne is if you're talking about a steady say 5, 6% decline this year, how does that suddenly become growth next year? Shouldn't it be improving?

Yes the difference is two things. One is that our growth services are becoming a much bigger percentage of our overall revenue picture. So we are getting close to 40% now in terms of our proportion of revenues that come from growth services. So they do not suffer from anywhere near the pressure in terms of pricing and erosion in that we see in the legacy businesses. So that's part of it. And then also we expect to see lower declines from Rogers and AT&T next year. So it's a combination of the two that we expect to create overall growth in revenues in our enterprise division next year.

Okay and then a couple of quick strategic ones for Pierre if I may. Now you're kindly given us the numbers if you exclude Rogers and AT&T, not be facetious, but if you exclude Allstream you would have reported 6.4% revenue growth and 10% EBITDA growth which quite frankly is amazing for an (inaudible). It wasn't your strategy to buy Allstream. You inherited it. Would you consider monetizing Allstream as a strategy for financing wireless?

Well first we will have to decide if we were to do wireless.

Definitely

Yes so that's the first part of the answer. I think the second part, we've gone through this in the business review. I think we've tabled the conclusion even the one link on monetizing Allstream at that time. And we always look at the business on how to maximize shareholder value but as you remember the conclusion of the business review we felt that the EBITDA and the cash flow profile of the enterprise business was worth much more to the company, in particular as a turnaround and as it improved as you're being advised in some of the numbers that Wayne is giving you.

Right.

And that's worth much more than whatever Allstream may have been worth in the market. So I think that decision was looked at, at least at that time. And again we're always looking at ways to improve shareholder value but in terms of wireless first let's get to the point where we make a decision one way or another.

Yes that's a fair point and you may use it the same for my third and last question which is a GSM CDMA question. Most potential new entrants are suggesting that they would employ a GSM technology standard. While CDMA is a great technology, it has some definitive cost advantages over CDMA. You have a regional CDMA network and potentially national GSM network. How will that work?

Well I don't think that we've said that we will have a national GSM network.

Sure.

Again our wireless business as you know in Manitoba is very successful and we're pretty happy about it. And that one too we'll see as we go. There are two good technologies and they have both their advantages and their disadvantages. So I guess if ever we do wireless, we'll address that by that element for sure.

Understand. Thank you very much.

Thank you.

Your next question comes from Peter Rhamey of BMO Capital Markets. Go ahead.

Yes thanks. At the risk of beating a dead horse here, Pierre on the wireless you're mentioned three major principles. You've done your-- outlined that with your board and you mentioned principle of maintaining your dividend, ownership structure, and financing that you consider any and all options. And that you would have your plan together several months after the auction rules are released. And I was just wondering when you look at the dividend issue versus your participation in any entity, how important is it? Is it one of your other principles that you would consider a minority position versus having control given that presumably any entity that you participate in would be using an awful lot of your assets in terms of just backbone and obviously wireless within your own province?

And I think there are very hard for me to say right now. The one thing I can tell you is that we-- when we look at the scenarios, we haven't established when we look at wireless that we must absolutely be a majority owner. I think it will depend on the situation. It will depend how favorable the rules are. And it will depend on our contribution. So if we make just a small contribution, well I don't expect that we could be a majority. If we make a bigger one, then maybe we'll see. So I think right now we'll wait for the spectrum auction rule, we'll wait to confirm what can be done if anything. And we're going to move forward. As for the dividend, I think in my remarks I've been pretty clear that this is something that the board and management both realizes the importance of for the shareholders of the company. And we will act accordingly.

So it sounds like you'd adjust perhaps your interest in any joint venture with a view to maintaining your dividends.

Well if it's your conclusion I think I've been pretty clear on that and we're going to have to wait and see how it goes in the future.

Fair enough. On the-- one operational question on the enterprise side. I think you have about $50 million of new contracts signed in the quarter. I was wondering if we get a flavor for how much of that is existing business being rebid back in and I know the Primus deal sounds like it was an extension. And how much is incremental? So is it 75% existing, 25% incremental? And if you give us some flavor on that, that would be terrific.

And just one thing before John Primus though is just a week ago and so that's not in the quarter.

I agree, yes, yes.

And with the Primus one by the way just as an example, that's the situation where there was some re-price on a unit basis associated with some of the services that were offered as part of that contract. But also the total number of services went up. So there's actually a net increase in terms of the yearly value from that contract. And certainly that's our expectation.

But if you looked at the-- I think it was in Pierre's remarks, he talked about like we're actually adding new customers this year. We've added about 330 or (inaudible) new contracts. Some customers would have-- new customers would have multiple contracts, so it's a slightly smaller number than that in terms of new business. The other thing that we see an opportunity is not just to renew an existing contract with an existing customer and move that customer in a new technology, but our share of wallet for an existing customer can also be improved. So for like one large financial institution that we provide services to, we provide pretty much 50% of their total core network services. But there's an opportunity for us to offer more professional services and security as well as unified communications as more customer premise, IPPBX kinds of services as well. So you're going to see more of a focus from our division on actually not just growing new customers but we've indicated through our ring maker initiative this year, but also increasing our cross sell opportunities so that we sell more products and services into any individual customer. So we're seeing some success in both regards this year.

It sounds promising. Is there any way you can quantify a rule of thumb. You tend to get 10% more business every time you renew these folks or is it a 20%?

No there are examples where I could point to where we actually do increase the total number. But on a like for like basis, there-- what we're seeing is that if a customer was buying a certain amount of capacity for a certain rate, they either expect the same capacity for a lower rate or they want more capacity for the same rate or and the other variable is they want a wider variety of services. So it's that mix that we're working with. But the unit prices aren't going down. There's no question about it. So what you have to do is either get the units up or you have to increase the scope of service that the customer's buying.

Thank you very much.

Your next question comes from Vince Valentini of TD Newcrest. Please go ahead.

Yes thanks very much. A couple more questions on wireless from a different angle. Pierre I guess when you think about keeping the dividend or making that a high priority, I think there's two ways that could be accomplished. One is to limit the amount of investment or perhaps take a minority interest as Peter was alluding to. The other one is to adjust the dividend payout policy temporarily while you went through a period of heavy investment and perhaps funding the new venture with debt and letting the dividend payout get even over 100% of free cash flow for a period of time. So when you're saying you're committed to the dividend and that's a high priority, are you also committed to the reasonably realistic and conservative payout ratio you have or is that something you could sacrifice for a short period of time?

Well again all these questions are much more specific. And I understand guys that you may be a bit unhappy by the lack of specificity in some of the answers. But until we really know what we're facing, it's very hard to say. The one thing I can say is that with various partners we have looked at very creative scenarios have been put on the table by credible partners. So and we'll continue to study that and evaluate that. And the scenarios you're mentioning are part of a large series of scenarios that are more demanding or less demanding for the company. And we get less return potentially in the future or more or less participation or more in the venture or in a consortium. So I think all of that we will see with time. And again the real big first step is the spectrum auction rules themselves to see if we even have an opportunity to do anything.

Okay can I follow up and you mentioned the timing. In terms of getting funding and partnership type arrangements done before the auction, the original expectation I think was for a January or February type auction. It doesn't seem realistic that could happen anymore. So assuming the rules came out in the next month, how long do you think it would take you to get this done? I mean if the auction was going to happen in February, does that mean you just-- you say we can't get those partnerships done in time and you throw your hands up? Do you really need till next June to accomplish all of this difficult negotiation in front of you?

Well as I said, we expect to have the ownership structure and financing arranged by the time of the auction. You know we're a very agile company. So we can move pretty fast if there's something interesting on the table.

Okay and the last thing is if you don't get the auction rules you like or if you can't arrange the funding and partnerships to your satisfaction, would you commit to spending the rest of the money on the buyback on an accelerated basis perhaps through a one-time buyback rather than a gradual normal course (inaudible) bid.

It's very hard for me to commit on anything before seeing things. What I would say is what Wayne said which is if the opportunity's in front of us and there's not only wireless. So some of you may think that we-- there's only national wireless on the table. But we are looking at a few other opportunities. And should none of these opportunities materialize, the full intention of the company to quickly move forward and complete the buyback program. And as we have talked about in the past, our plan is to continue to give back to shareholder between 70 and 80% of our cash flow.

Okay thanks.

Your next question comes from John Henderson of Scotia Capital. Please go ahead.

Yes thank you. A question on MTS TV. Just wondered if you could comment on the geographic expansion plans there and then also the possibility-- I guess now that you're at, so correct me if I'm wrong, 650 meter loops, is the next evolution to shorter loops? Say a fiber to the prem build? Or and how far away from that would be in terms of years?

John in terms of expansion beyond Winnipeg we haven't announced anything yet and really are not at a stage where we would really inclined to announce anything at this point. But clearly it's something we continue to look at given the success in Winnipeg.

In terms of the loop question, the majority of our loops in Winnipeg are at 650 meters. I think when we talk about our coverage we talk about 95 or 96% of homes pass. That's actually at about a 900 meter loop. But we have sort of about 85% of the loops at 650 meters. Kind of the next logical evolution of our technology would probably be to go to a higher BDSL technology. We're using BDSL 1 today, which is a 26 meg technology. BDSL 2, which is going to appear in the next probably 18 months or so, offers speeds in the 30 to 40 megabit range. So that's kind of the logical next evolution step we would take. Certainly fiber to the premise is something we're actively looking at for Greenfield applications. But it's a little ways out I think for anything beyond that in terms of what we're planning.

Okay that's great. And then I had a follow-up on the AT&T, Rogers revenue erosion 10 to 15 million a quarter, call it a $11 million or so this quarter. How much of that might have hit the EBITDA? I mean what sort of margin should we expect was on that business?

Yes our margins on that are sort of in the let's say 60, 70% range.

Right.

Depending on the service. I mean it's not all one service. Some of it might even be higher than that. But somewhere in there you'd be pretty close.

Okay that's great. Thanks very much.

Ladies and gentlemen we currently have time for one more question and it is from Jeffrey Fan of UBS Securities. Please go ahead.

Thanks. Just a quick one actually. The B.C. non-compete agreements, I understand there's a six-month requirement. Have you had any contact from them about that agreement? And secondly can you just review briefly what the terms of those agreements are on the non-compete?

Jeffrey, it's Kelvin here. We continue to have discussions with Bell. Obviously we're closely aligned with them in terms of our respective mobility wireless businesses. So we've had talks for really quite a few months now. Those talks continue but neither party has moved to terminate the agreement and certainly I don't know what Bell might be, might have to talk to them. I can't really get into the details of those agreements as you might expect, they're fairly complex.

Mr. Chadsey, please go ahead.

Thanks Patrick. Today's call will be archived and available on the investors section of the MTS website. Thank you very much. That concludes our call.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.