BCE Inc (BCE) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTS 2008 first 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 you to queue up for questions. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Friday, May 9, 2008 at 8:30 a.m. Eastern Time.

I will now turn the conference over to Ian Chadsey, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Joanne. Good morning everyone, and welcome to the call. Earlier today we issued a news release with our first quarter results for 2008. The news release, along with our MD&A and other supplemental information, are now available on our website at MTSallstream.com. I should mention today along with the release of our results, our Board of Directors approved the first quarter dividend, which has been set at $0.65 per share.

Today's comments may contain forward-looking information relating to the finances, operations and strategies of the Company, including comments on revenue, EBITDA, earnings, cash flow, capital expenditures, and sales and marketing activities. These statements are based on assumptions made by the Company, and run the risk that our actual results or actions may differ from those anticipated.

Statements made today reflect assumptions made by MTS as of May 9th, accordingly they are subject to change after that date, MTS disclaims any intent or obligation to update or revise these statements, whether as a result of changing circumstances, changing events, or otherwise. These cautionary statements are made on behalf of each speaker, for their remarks containing forward-looking information. On today's call we have Pierre Blouin, Chief Executive Officer, Wayne Demkey, Chief Financial Officer, John MacDonald, President of the Enterprise Solutions Division, and Kelvin Shepherd, President of the Consumers Market Division.

With that, I will turn the call over to Pierre.

Thank you Ian, and good morning everybody. Thank you for joining our first quarter conference call.

This morning, I will quickly review the highlights for the quarter, and then I will spend more time on the solid performance of our Enterprise division, and the continued success of our Consumer division. I realize that we're getting close to the wireless spectrum auction, and that there is a lot of interest in this initiative. I will provide a brief update, but I would like to focus my remarks today on the performance in our core business.

To summarize the results for the first quarter, revenue, EPS, EBITDA from continuing operations all increased significantly over last year. Revenue from growth services were up close to 18% year-over-year, and growth services now represent 43% of our total revenues.

Our cost reduction initiatives continue to deliver strong results in-line with our guidance, and we are on-track to deliver on our guidance for 2008, with overall revenue growth of 1 to 3% for the year. Taken as a whole, these results speak to the significant and sustained performance gains realized over the past two years. I will take a closer look at things from a divisional perspective beginning with the enterprise division.

(Technical Difficulties)

Sorry about the interruption there. I don't really know what happened. Maybe we will just continue a minute or so back, from where Pierre was speaking.

I am sorry about that, everyone. We seem to have problems this morning. Anyhow, just, let's just take it back to where we were.

So the fourth quarter of 2007 marked returned to growth for the division, the enterprise division, and this positive momentum is continuing in 2008. Total revenues in the enterprise division for the first quarter were up 2.6%. While EBITDA was up 0.6%, and we are delivering growth in both revenue and EBITDA, in-line with our 2008 guidance. And there are a number of drivers of this improved performance.

In 2007, we launched a mid market initiative call 'rainmaker', and started targeting the mid market business segment in specific urban markets. This initiative picked up considerable momentum in 2007, that continued through the first quarter of 2008. For the quarter, it has resulted in 133 new contract wins. This includes a new 2.4 million contract, to provide security and case management services to Passport Canada.

The value of total new contract wins for the Enterprise division in the first quarter was 76 million. Growth in this division is also supported by the strong performance of our Growth services, notably Unified Communications and Converge IP services, which grew by 27% in the first quarter. These performance gains are the product of the strategy we adopted in December 2006.

At that time, we committed to transform our enterprise business, by playing to the strength of our national IP network, our growing suite of innovative products, the deep relationships we enjoy with our customers, and by being very focused on profitable revenues. We also said then that we expected revenues from the Enterprise division to grow on a year-over-year basis in 2008. We achieved what we set out to do with that plan, and we are excited about the future, and about how the Enterprise division, or what is known as AllStream, is performing.

I will now turn to our Consumer division, which continued to perform well in the first quarter. In Wireless, we achieved strong overall results with revenues increasing by 11%, and customers by 10.8% in the quarter. Our Q1 wireless ARPU decreased by about 1%. This reflects the success of our Q4 wireless plans and spending up aggressive pricing by our competitors, but the large number of new customers joining MTS impacted our ARPU. However, these plans generated stronger revenue growth without impacting our profitability. We have since removed these Q4 plans from our lineup.

Also delivering strong performance in the first quarter, our consumer high speed internet customer base increased by about 10%, contributing to a year-over-year revenue increase of 21%. At quarter end, we had over 169,000 high speed internet customers, maintaining our market share in Manitoba. We also delivered steady television growth, increasing our customer base by 13%, and revenues by 23% from a year ago.

At the end of March 2008, we had over 78,000 digital TV customers in greater Winnipeg, which is a 32% market share. This is the highest TV market share achieved by a change in telecom company against a cable competitor. We also continued to solidly perform in the residential telephony market place, residential access lines again remained stable for the quarter. This extends our trend of fewer line losses over the last six quarters.

Our winback strategy continues to be effective. We are in the unique position to be able to offer our customers a Quadruple Play bundle of Broadband, Home Security, Television, and Wireless services, in addition to traditional voice services. It is something our competitors in the Manitoba market cannot match, and it provides us with a strong competitive advantage.

In all, total ARPU from bundled customers was up 5% in the first quarter. Overall, we believe that these results continue to represent the best performance by an incumbent facing a cable competitor in North America. As for the Enterprise division, the gains we are making are the result of the steady execution of our strategy, and the delivery by our people of a strong value proposition.

Now I would like to turn to our potential Wireless initiative. We are continuing to work with our consortium partners, CPP and Blackstone, to finalize plans and definitive agreements between the parties. As you all know industry Canada has placed strict rules on what we can say about our strategy going into the auction, so we want to be careful not to compromise our competitive position, or our bidding strategy.

I will simply say that we remain committed to being disciplined at the auction, and that while we see this as a potentially significant growth opportunity, it is by no means our only opportunity for growth. I am confident that with the momentum we have developed in our Enterprise business, and in the continued strong performance of our consumer business in Manitoba, we can continue to grow this Company, with or without a new Wireless initiative.

With that said, we are moving towards the auction in May, with world-class partners, with a clear and disciplined strategy, consistent with our previously stated goal of maintaining our current dividend policy, and all of the advantages that flow from MTS AllStream's position as a leading telecommunications service provider, with significant wireless assets and expertise.

In summary, MTS has achieved solid and improving financial and operating performance over the past nine quarters. We are on-track to deliver our guidance of 2008, and we are well-positioned for further growth in 2009 and beyond.

I will now turn the call over to Wayne.

Thank you Pierre, and good morning everyone. We are pleased to report another quarter of solid financial results, building on two years of steady progress. I will highlight first, our consolidated results from continuing operations, and then look more closely at the growth services and the legacy services businesses, for our Enterprise Solutions division and our Consumer Markets division.

Those who have been on these calls before know that we discuss results from continuing operations, because we believe they assist investors in assessing the performance of our Company. Our reported results include a number of items which are not from continuing operations, such as the cost of our restructuring over the last two years. These items are outlined in our first quarter results, news release, and MD&A.

EBITDA from continuing operations in the first quarter of 2008 was $168.7 million, 2.2% higher than the first quarter of 2007. Revenue from continuing operations for the first quarter was $478.8 million, up by 2.4%. These results were driven by strong increases in our growth services revenues, which were up by 17.8% in the first quarter.

Revenues were ahead for the second consecutive quarter, confirming that we are on-track to achieve 1 to 3% overall growth in revenues this year. Additionally, earnings per share from continuing operations was $0.84, which is up by $0.10, or 13.5% from the same period in 2007, driven by growth in EBITDA, and the results of our share buyback program last year.

We are pleased with the steady improvement of our Enterprise Solutions division, with revenues up by 2.6% in the first quarter, the second consecutive quarter of year-over-year growth, while at the same time in the first quarter this year, also achieving growth in EBITDA. This solid performance demonstrates the growing demand for this division's products and services and starts us off in a good position to achieve our full year objective of overall revenue and EBITDA growth.

Next generation data services revenues, which include Converged IP and Unified Communication services, achieved strong year-over-year growth in the first quarter at 27%. Breaking it down further in this quarter, Converged IP services revenue was up by 15.1%, and Unified Communication services revenue increased by 57.1%. Enterprise Solutions generated over 20 million of incremental revenue from it's growth services products, of which organic growth represented 85%.

The other 15% of the growth came from our recent acquisitions of ICU and Multinet, which will increase our Unified Communications revenues by approximately 3 million per quarter this year. This growth is partially offset by 14 million of legacy revenue decreases.

In our Consumer Markets division, wireless revenues for the quarter grew by 11.1% on the strength of a 10.8% increase in new cellular customers since the first quarter of 2007. This increase in subscribers helped offset a 1.1% decrease in average revenue per user. This decrease resulted from our response to some competitive price points that were in the market in the fourth quarter of last year, as well as a decrease in wholesale revenues over last year.

Our high speed internet revenues also showed significant growth, with consumer internet revenues up 21.3% year-over-year. This increase in revenue was driven by an increase in new subscribers of 9.7% since the first quarter 2007, and an increase in the average revenue per subscriber.

Our digital television services continued their strong growth, with revenues up by 23.2% in the first quarter, driven by a healthy 12.9% increase in our customer base, and a $4.05 increase in average revenue per subscriber. We now have over 78,000 digital television customers in Winnipeg, which equates to a market share of 32%. Net adds were a little slower in Q1, partly due to Q1 being a seasonally low period for TV adds, and partly as a result of our continuing focus on profitability.

Importantly, ARPU is higher due to changes in pricing, along with an increase in revenues from video on-demand and pay per view, while churn was also better than planned in the quarter. Looking forward, April was a strong month for net subscriber additions, at almost 1,200 for the month. Legacy declines in the first quarter are flattening out, with only a 1% decline in local services, and a 7% decline in long distance. We have made significant progress, stabilizing our legacy business in both our divisions.

Overall, our proportion of total revenues attributable to growth services hit 43% in the first quarter, and this number is expected to increase to 45% for 2008. As the percentage of revenues from our growth services continues to grow, the impact from the decrease in legacy services revenues will continue to diminish. Today, MTS is operating with a positive revenue growth outlook, and positive momentum in both divisions. EBITDA is also growing, demonstrating that we are disciplined on our cost structures as well.

We are continuing to work diligently on aligning our cost structures to the realities of our market, identifying and executing on potential inefficiencies throughout both of our divisions. Our target for the year in cost savings is 20 million to $30 million. In the first quarter of 2008, we achieved over 50 to 60% of our goal by generating 16 million in annualized cost savings, demonstrating our ability to manage costs. We expect to continue to achieve these savings by gaining new efficiencies organizationally, and decreasing our usage of competitors' networks.

Capital expenditures totaled 55 million for the quarter, which is higher than the same quarter in 2007, due to differences in timing compared to 2007. We are targeting 2008 capital expenditures to be in-line with 2007 expenditures, representing capital intensity of 14 to 15% for the year. This is below the levels that you are seeing at other telcos, as we continue to benefit from our significant investments that we have made in recent years, within both divisions and state-of-the-art networks.

Free cash flow from continuing operations for the first quarter was 78.7 million, compared to 94.5 million in Q1 '07. Cash flow for the first quarter was down, as a result of the timing of certain capital expenditures and pension funding payments. These items are unique to this quarter, and are not expected to impact our guidance for free cash flow for the year.

For 2008, we are expecting free cash flow of between 250 and 280 million, showing growth over last year. This more than covers all cash requirements, including nonrecurring items, like restructuring costs, and pension solvency payments. Additionally, we have unused and available tax deductions that will shelter us from paying cash taxes until 2014, which will have a continuing positive impact on cash flow. As Pierre mentioned, we are continuing to work with our consortium partners to finalize definitive agreements.

We remain committed to a clear and disciplined strategy pursuing this initiative, in such a way as to preserve MTS's current financial profile, and protect our current dividend policy. Before I continue, I would like to offer a point of clarification on the total cost of building a network, buying spectrum, and start-up losses for a new entrant in general. As Pierre mentioned, we are constrained in terms of what we can say on this subject, but I will say this.

I have seen a wide range of analyst estimates, that have suggested that the total cost to build a new entrant national network, would be at the high end of the 1 billion to $2.2 billion range, based on our internal analysis, and the considerable due diligence performed by Blackstone, CPP, and André Tremblay's team, as well as their consultants and advisors, we believe the total investment cost for a new entrant of that scale, would be much closer to the low end of the range, and would be correspondingly lower for regional scenarios. We also believe there are synergies with our existing network infrastructure, that have not been properly factored into many of the current estimates.

Finally, I want to conclude with a comment on segmented reporting. In our supplemental information, we have included our results segmented by customer, consumer versus enterprise, and by geography, national versus Manitoba. We plan to discontinue the reporting we make on geographic basis by the end of 2008. It simply no longer reflects accurately how we operate the business. We now segment by customer, regardless of geography, assigning consumers and small business customers to the consumer markets division, and the larger business customers to the Enterprise Solutions division.

And in 2009, our disclosures will include only that segmentation. For those of you who are using the geographic segmentation numbers, I can tell you that we have achieved growth in both revenue and EBITDA in the first quarter of 2008. The revenue growth is not as high as the Enterprise division, due to the inclusion in national of our small business customers, where we have been grooming our revenue base, to shed unprofitable revenues. Additionally, we have seen an increase in Unified Communications revenue for our Enterprise customers in Manitoba, which are included in the Enterprise division and not in national.

With our continuing strong results and positive outlook, the Board of Directors has declared a second quarter 2008 cash dividend of $0.65, which is payable on July 15, 2008 to shareholders of record on June 16, 2008. On an annualized basis, our dividend ranks us as one of the highest yielding stocks on the Toronto Stock Exchange.

Thank you, and we will be pleased to answer any questions you may have.

Thank you. (OPERATOR INSTRUCTIONS) And your first question comes from Glen Campbell, Merrill Lynch. Please go ahead.

Yes, thanks very much. Wayne, you made an interesting comment about the projected cost of a national wireless buildout. I wonder if you could give us just a bit of clarification on that figure of around $1 billion. Does that include just CapEx? Does it include the initial operating losses? Does it include financing or not? And does it include spectrum costs? And if you could, is that coverage in the sort of 60 to 70% range, or higher than that? Thanks.

Yes, Glen, I would say that that includes everything, all of the items that you are talking about.

Okay. That is helpful. And on coverage, are we in the sort of 60 to 70% range on those assumptions?

You are talking in terms of population?

That is right. Sorry.

Yes, I would think that is a reasonable estimate.

Okay. Thanks very much.

Your next question comes from Jeffrey Fan, UBS Securities. Please go ahead.

Thanks very much. Just want to ask you about your mobility agreement, it looks like in March you guys have given them a notice of termination, can you just give us a little bit of color on what the disputes Bell is making with respect to that, and give us a little bit of color on when you think this would be resolved, and how this could impact your Wireless business?

Jeffrey, it is Kelvin Shepherd here. I don't want to comment a lot on the details on the dispute, but we have entered into a transition agreement with Bell, and so in terms of operational considerations, there are no issues. Those are resolved, and we continue to go forward. But in terms of the dispute or disagreement over the actual notice, and those issues, I can't really get into those details.

Maybe perhaps we can step back and just review for everyone on the call, what the original agreement allowed you to do, what it allowed Bell to do, just so we can have a better understanding of, maybe what the issues could be?

At a high level, Jeffrey, I mean it was an agreement where we work together to serve national customers, and obviously as part of that agreement, we also procured certain services from Bell, and I think as we have indicated, we will be making alternative arrangements, to procure those services, equivalent or similar services from alternate sources, and those arrangements are well under way.

And just to be clear, this was a notification that was initiated by you guys?

Yes.

Okay, thank you.

And your next question comes from Greg MacDonald, National Bank Financial. Please go ahead.

Thanks. Good morning, guys. Manitoba Tel is somewhat unique in Canada with respect to the size of the Enterprise business as a percentage of your total business. I wonder if you would answer, and I have two quick questions for you to answer from the perspective of an enterprise customer. Number one, if you were to guess as a percentage of ARPU what data may represent in three to five years, would it be closer to 20 to 30%, or could it possibly be as high as 50 to 60%? I am sort of in a back way asking what your estimates are, or how encouraged you are on the potential for data growth in wireless?

And then secondly, LTE versus WiMAX, we saw a big deal this past week with Sprint and Clearwire. I know a lot of people are criticizing it, but what I would point out is the structure of this deal looks quite familiar to Manitoba Tel, vis-a-vis the one you just struck. Does WiMAX represent a threat in your view to the existing wireless players, given the potential for wireless data, in particular, wireless broadband to have higher demand going forward? Thanks.

Well, let me try, let me try to take a cut at it. First, on the LTE, WiMAX, I think it is too early to call right now. I don't think we see this as a threat, in particular in our situation. Having a national footprint, and depending on what happens through the spectrum auction or not, it could be an opportunity for us, but I think we have to see a bit more of this evolve, and it is going to be interesting in fact to follow Sprint there, and see how customers behave in the economics of that business. I think more to come on that side, still too early to call.

On the potential data side, if we were to be successful to access wireless on a footprint that would match our current footprint on the wireline side to AllStream, that is something, you are right to pinpoint, that could bring an interesting upside. I don't know what the numbers are though but it is potentially because of the way the Company is set up, as you are noting, where we are kind of 50/50 or 55/45, in fact, in favor of enterprise customers. That is something that could bring an interesting upside for us, and probably more in percentage than the larger incumbent in the market.

Just as a quick follow-on to that, and thank you, Pierre, for that, AT&T when you are asking about this will say, yes, wireless is a focus for us, because our wireless customers are demanding more wireless products, i.e., productivity for employees, blah, blah, blah. Are you hearing the same things from the enterprise guys in Canada?

Yes, I think we are hearing the same thing. We have been talking about this, I have at least for many years, and you can see that the wave is starting. The data is really picking up, and it is on their mind, wireless data on the mind of a whole lot of people as well, and it bodes well for us, not only as we are currently looking at a potential wireless initiative, but also because of who we are, and some of the work we are doing with customers, and not being concerned to develop, applications and services that would integrate wireless and wireline, regardless of a wireless offering at the end of the day. It is what behind, also interesting and we are not concerned of generating reprice, or things like that, because, it is a greenfield for us. So it is pretty interesting.

Okay, thanks. Thanks for your thoughts.

And your next question comes from Vince Valentini, TD Newcrest. Please go ahead.

Thanks very much. I find it a bit ironic, you are going to take out the national reporting, or the old Allstream reporting, given you are finally showing some good results there. But with that being said, can you try to clarify for us what the real underlying growth rate was for the national segment this quarter? If you back out the 9.3 million of AT&T and Rogers revenue, but then also adjust for 3 million of acquisition revenue, I get about 4.5% underlying revenue growth. Does that make sense with you guys?

That is probably about right.

Okay, and obviously that is a tremendous improvement from what we have seen in the past couple of years. Can we talk about, are there any one-time items of any kind? We sometimes see construction revenue and wholesale revenue pop into their numbers. Is there anything like that this quarter? And then also, looking forward, does this business have any sort of economic sensitivity in your mind, if there is a bit more of a slowdown in the general economy, is that something that would concern you specifically on the Enterprise and AllStream front? Thanks.

Maybe I could take the first part and let John have a crack at the general economic, as he sees it. But there are no one-time items in our revenue base that you are talking about. We do have sales that are, like things like equipment and in our Unified Communications, as part of our Unified Communications portfolio, and our security and professional services portfolio. So those revenues will fluctuate from quarter to quarter, but there is nothing that is individually significant as a one-time item.

And just on your second point in terms of the, whether the Enterprise segment is immune from what's happening in prevailing economic conditions, well obviously, there is a relationship there. But what we are finding is that we are really not seeing much in the way of any impact when we look at the nature of deal flow in the Enterprise segment.

As a matter of fact, you could find that customers' willingness to invest in some of these Converged IP products and services, is actually driven by a desire to improve their individual economic position, in terms of cost reduction and better performance and enabling new applications, et cetera. So we have been watching that quite carefully, but we have not seen any change in terms of what the funnel looks like at this point.

Okay, thanks.

And your next question comes from Rob Goff, Haywood Securities. Please go ahead.

Thank you very much. Good morning. In your release you noted you are continuing to work with your consortium partners to finalize definitive agreements. Can you give us a bit more description there? Are those talks, or agreements with respect to the partners themselves, or the vendors?

No, the talks are, they are negotiation to basically build the consortium, so we are negotiating the shareholder agreements, and finalizing a business plan, and bidding strategy, and all of those types of agreements.

So does that mean there is the potential for additional partners, and could you also discuss whether or not there are put-call provisions within the agreement?

Well, I can't discuss anything that are in the agreement until they are final. Potential for other partners, we are getting into the time where we are very close to the auction, so I think that would be a very low probability.

Okay. Thank you very much. Good luck.

Thank you.

And your next question comes from Dvai Ghose, Genuity Capital Markets. Please go ahead.

If I could follow up, before you announced your partners, you had alluded to the potential for a foreign strategic partner, one hasn't developed, I guess you are suggesting now that one won't develop, I am wondering why, you obviously tried. On a related point as well, with the, the appointment of André Tremblay as the leader of your JV, I am wondering what that means vis-a-vis your view like unlimited price plans, like City Fido, obviously Pierre, you were the adversary to City Fido when you were at Bell, are you now embracing that sort of strategy? And then I have a quick follow-on.

I think we are too early to talk about strategy. I don't think we are embracing anything really, and I will come back with my comments of discipline, because I think you know our Company, and we have tried to be a very disciplined player in the market over the past few years, and I think it is with that type of mindset that we are finalizing our arrangement with our partners, and looking into the auction.

And in terms of André, I think that when you look at trying to put as much strength and expertise on our side, if we are considering a wireless venture, I think having André Tremblay, and the part of his team working with us is really bringing experience, and experience of a new entrant in Canada, and a lot of learning from the past. So I see that as a benefit and strength on our side.

As for a foreign strategic, we did indeed as we said many times, have a lot of discussion with a number of international wireless providers, and the results are the results right now. However, I would tell you that even if we are where we are right now, that doesn't foreclose in any way, the possibility that after the auction, we can pursue those discussions. So I am not focused that much on it. I think we have the arrangement that we think is good for the Company, and we are going to move forward with that.

Okay, thanks. You have one-third currently as your structure stands, you have one-third of the upside from national wireless expansion, only one-third, and yet potentially you have 100% of the downside associated with the retaliation in Manitoba. We haven't even entered the auctions yet, and as you correctly point out, Telus and Rogers have pursued some very aggressive pricing. It could get worse, because I assume now that Bell can come into your market, and indeed Shaw may as well. Isn't there a risk by just taking one-third of the upside, and 100% of the downside that you are a net loser from this equation?

I am not sure what the 100% of the downside, because you are seeing our performance facing those tough conditions. I can't stop anybody from coming to Manitoba regardless of what we do on the other side. I think we have said in previous call that our guidance for 2008 assume an entry of other competitors in our market on the wireless side, so we are prepared for that, and I think that is going to be the world regardless of if we like it or not.

And I think in terms of a one-turn partnership, it is a way for us to have access to wireless, obtain quite a bit of the upside as well, when you think about what it could do to the balance of our business, but at the same time make sure that we are disciplined financially, and I have structured it to try as much as we could not to create impact on our financial profile, as well as to our dividend policy. So I think all-in-all, it balances out and we end up I think if everything is successful through all of that, through where the auction is, into something that could be meaningful for the Company.

I appreciate that. As a final observation, as Glen pointed out, the billion dollar number you threw out in national wireless in interesting, but not that useful until you give us your assumptions, and as you know, in the past new entrants, including in Canada, have underestimated the amount of capital required. So if you could give us any clarification on a going-forward basis, that would be of great value to us.

The only thing that we can see, and Wayne mentioned it, is that there has been a huge amount of due diligence and analysis, by very serious people looking at it right, left, and center. So I would tell you that is why you don't have the detailed assumptions. You could assume that all these people knowing the past experiences, not only here, but all over the world, would have introduced some of these things in their calculations.

That is fair enough. My only point is they also underestimated the amount of capital that was required in the past though.

Potentially.

Thanks.

Indeed, you are right. Once we have finalized agreements, we would disclose with regard to be disclosed, hopefully to give you more confidence.

That would be great. Thank you.

And your next question comes from Jonathan Allen, RBC Capital Markets. Please go ahead.

Thanks very much. Good morning. Just a couple of questions. First, as far as the wireless partnership, has there been any discussion about, you mentioned the 1.2 billion as being the low end of that, is Manitoba actually going to contributing cash to this venture, so $400 million of cash to capital? Or is there the potential to actually provide services in kind, for example, when AllStream in the Inukshuk partnership, they were initially just providing services rather than actually capital over?

A second question, over to John, is looking at the AllStream and legacy business, the decline that we have seen sequentially in the last few quarters in the legacy business seems to be improving a little bit, though the MD&A was still talking about some repricing and discounting that is happening in the market. Can you give us a sense of I guess where first of all things are improving in the legacy market, and where perhaps the biggest repricing or competitiveness is happening in that area of the market? Thanks.

Jonathan, just to make sure I understood your first question, did you talk about a 2 billion number in your question?

No, I said you put out a range of I think 1.2, or 1.2 to 2.2, so if we used $1 billion, and then Manitoba is responsible for one-third of that, would you be providing say, 300 or $400 million of cash to the venture, or would you be providing perhaps a higher mix of services, so back haul, termination transportation?

Sorry to have you repeat the question, I did not understand it. Unfortunately there, Jonathan, we are going to have to wait until we finalize and announce the conditions of our agreements to give you those details. So once we are done, we will indeed give you those details.

But it is still a possibility though?

Well, I really don't want to talk about it until we have it all.

Okay, fair enough.

In terms of the legacy business, we see a pretty, pretty much across the board some improvements in the overall characteristics of that market. And we are quite happy to have customers continue on with legacy contracts if they so desire to do that. But we are talking about access line growth, PRI growth, for example. We have seen significant improvements year-over-year in that regard.

We are seeing some slowdown, although I hesitate to say that it is going to continue relative to cross-border [bilateral] relationships with AT&T, in terms of erosion and migration to some of the next generation services. And as you get closer, and more active products in the lower price points, in things like LV, I mean there is less room to go quite frankly. So it is pretty much broadly based, and as I said earlier, we are quite happy to have that business.

But once again, recognizing that it is ultimately customers that are going to be migrating from those services over to next generation services.

So is there a possibility that perhaps the legacy service decline actually picks up over the next little while, since AllStream is so focused now on the mid markets, is there a possibility that you are going to start losing more and more of your large enterprise contracts that you have had that are existing customers?

Oh, no, I don't think so. Focusing on mid market does not in any way, shape or form indicate or presume that we are not focusing on some of the large customers that we value as well. So we are catering to those needs, but we are looking at acquisition and cross-sell opportunities in the mid market, primarily. But not that we are turning our back on large enterprise at all.

Okay. Thanks very much.

And your next question comes from Peter Rhamey, BMO Capital Markets. Please go ahead.

Good morning. I want to talk a little bit about the competitive environment, consumer, one other analyst was asking with regards to competition on wireless, and some of the targeted promotions by your competitors, perhaps as punishment for getting into a national wireless business, the break with the others.

And the second thing is on MTS TV, you mentioned that you had lower churn, you had increased rates, and you are a little bit disappointed, I guess, on the growth. What is happening here? Do you see a line being drawn in the sand by companies like Shaw with regards to, if you start to promote growth, it comes to the detriment on other services, or do you see this as a transition in your business to focusing on profitability versus growth? And if you could talk to us a little bit, whether that business, and when it is possible to say that it is EBITDA positive? Thank you.

Okay. I certainly got the second question there, Peter around the TV piece. Actually I am quite pleased with the way TV is performing. I think with 35 some-odd percent of share, clearly there is a bit of a transition there where we have been more balanced, I guess, but not focused solely on growth of subscribers, although that continues to be part of our focus, and we continue to be I think reasonably successful in doing that, and certainly a low Q1 was a little softer on that side, I think there is some good reasons, including really the fact that we did not have a heavy advertising or promotional campaign in the market, with so much wireless activity in our channels, it didn't make a lot of sense to us to drive TV customers to the channel, when we were really focused on other parts of the business.

So going forward, though, no, I think we have had a balance, we have increased prices in our TV business on a reasonably regular basis, as we saw the value of the service continue to grow, and the popularity grow, we have been doing that over the last two or three years, and I think it is in pretty good shape for the rest of the year going forward.

We will see some continued growth in subscribers, but I think we will also see us maintaining some focus on ARPU. It is EBITDA-positive, so it is making a positive contribution to the business financially, as well as of course all the other benefits, in terms of our bundling strategy.

How do those margins compare to your core business?

Without getting into all the details, obviously they are going to be lower. The very nature of TV, where a sizable percentage of your revenue is of course more or less COGS, because you have the cost of the content, which is fairly substantial, means that TV is not going to have the same margins as a business like wireless or the voice part of the business. So it is not going to have 60% EBITDA margin, but it is still a strong contributor to the business. Yes, I think--

Sounds promising. Could I just ask you about the changeout in platform. I think you are considering you got a Motorola-based system that is not being supported anymore. Could you just enlighten us on what the transition would like look like?

Yes, we are continuing to grow on the existing Motorola platform and it's continuing to be supported, certainly in terms of being able to add customers, and to do what is needed to sustain it over a fairly long period of time. So we don't see changing that platform out per se.

What we are doing though, is investing in additional broadband capability and we have been, have announced that we are working with the Microsoft IPTV platform, and we do plan very late in the year to launch an initial location with initial deployment of the IPTV platform, and we do see it being a platform for future expansion, and addition of services like HD and PVR, and some of these capabilities down the road.

So it gets overlaid and them new customers will come onto that platform as appropriate?

Yes, that is a fair statement. And we certainly see the existing Motorola platform being in place for many, many years. But we don't see extending that to new cities, and clearly as we deploy substantially more advanced services, they would be on the new platform.

Perfect. Thank you very much.

And your next question comes from John Henderson, Scotia Capital. Please go ahead.

The vast majority has been answered already. I will just ask a simple one. You have pulled your wireless price sort of aggressive promotions in the quarter. How have your competitors reacted? Have they also?

Competitors still actually have their lower price plans in the market. So we are not overly concerned about that. I think you can see from our results in the quarter, and I can tell you the results in April also look strong, in terms of our wireless, that we are not seeing any real impact from us not having that lower price point in the market.

I believe they probably pull back a little bit on their promotion of those plans. They are still out there. They are still visible. They are advertised occasionally, but we are doing well against them, and don't believe that that would change in at least the near term.

That is great. Thank you very much.

And your next question comes from Peter MacDonald, GMP Securities. Please go ahead.

Thanks. I have a few small questions. First, on the AllStream division, I thought the margin improvement was pretty good there. Could you just talk about the drivers to that? And how much of the cost savings you talked about earlier in the call were directly related to the national business?

Yes, the cost savings are a big part of that, and probably I would say the majority of the cost savings would have been in the Enterprise division. So we have a couple of opportunities there. One is the direct costs, and then the other being operating efficiencies, where we have opportunities in both divisions, but clearly the direct cost one is probably the nicest one to where we get to gains, because we are just turning off suppliers, which quite often are our competitors, too. So that is always nice.

Additionally, we have been focused over the last couple of years on working on higher margin customers and opportunities. So we are focused more on net customers, and we effectively are not pursuing revenue growth for the sake of this growth in revenues. It is always with a focus towards profitability. So over time, that is having an impact.

Now, there is impacts that go the other way. As you know, we are losing some legacy revenues, and those are higher margin services. So there is a balance here, and I think the other thing that we mentioned earlier was that as you have a higher and higher percentage of your revenues coming from growth services, you are going to see a lesser and lesser impact on your margins from that loss in legacy revenues.

The other thing, too, is that if you look at some of the higher margin parts of the growth portfolio, like our Converged IP, we really do think that we have a superior offering in the marketplace, when we look at your MPLS offer, relative to what the competition has. So for example, we launched added functionality to that portfolio, with something called Secure Connect, which we actually embed Security within the core platform.

And we are increasing the dimensions and breadth of the offer as well by our partnership with Secure Works over the United States. So we do win more than our fair share, I would suggest, relative to the Converged IP and MPLS marketplace. And that certainly helps our profitability as well. Okay, and the Rogers and AT&T, how much business is left there, and how much is that risk for the rest of this year? We talked about earlier, we are expecting to, and this isn't, it largely depends on estimates than we've been given rather than, from them, rather than something that we're in control, but we expect to lose about 40 million in revenue this year, which was all factored into our outlook, and including that we expect to, in spite of the decreases in those revenues, have overall growth this year. So we saw in the first quarter revenue decreases that were in-line with that estimate. And the 40 includes the 9 in this quarter? Yes. Okay, and just on the Bell mobility termination agreement, why was it necessary that it was terminated?

I guess the simplest way to describe that is that if you look at, at the rules established by AI industry Canada, we clearly can't be a partner of Bell going forward, and compete with them.

Or bid --

And bid in the auction.

Okay, and that was necessary prebid, or would that have been necessary just preoffer?

No, the rules are pretty clear, if you go on the Industry Canada website, you will see the rules are pretty clear on associations, and the rules to allow bidding, and they are supplied to everybody.

Okay, all right. Thank you.

Your next question comes from David Lambert, Cannacord Adams.

Thank you. I have a bit more strategic question, aside from the wireless auctions that, have any of your customers, such as CIBC are running out of data center capacity, and I understand you have a small data center business inside AllStream. If your customers requested you to, or looked at you guys to work contracts in the data center space, would you consider investing in that area?

It is John here, David.

Yes.

Actually we are like many other people when looking at data center, the data center business and really characterize it as the power business. In many cases, the issue is that people are not running out of physical space in real estate. They are running out of ability to cool, and get the power associated with powering those centers.

Right.

So what we have done is looked at our hosting business, and decided that the best way forward is to actually partner with another vendor, marquee vendor in that regard, and when our customers need a hosting solution, we actually provide their facilities. So for us to actually go into that particular business, it is a very difficult one, because quite frankly, it attracts a huge amount of capital, relative to the revenues that can be earned.

Now where there are opportunities to bring network along with that, then we are quite happy with that. As a matter of fact, we see some of the data center constraints that are existing with our customers, as an opportunity to sell more higher bandwidth services, like wave length services to those secondary centers.

Okay. So you don't see a shift from them using sort of the primary providers like IBM and HP?

Not to us, I don't think. I mean we would see it as a continuing significant, but a dimension to our offer on the marketplace. But I am not going to go whole, hell bent for leather, into the hosting and data center business. It is a brutal business in terms of things just like power consumption, I mentioned as well.

Yes. Okay, great. Thank you.

Ladies and gentlemen, we have time for one more question. And your next question comes from Glen Campbell, Merrill Lynch. Please go ahead.

Yes, thanks very much. I had a question for John. When you look at your business, and let's leave aside the Rogers and AT&T legacy revenues. Do you think the revenue gains you are getting a function of market share gains overall, or are you actually seeing customers spending more? And I am not saying just in the growth areas, but overall across the whole portfolio of revenue and legacy. And as a follow-up, we have seen margins expand pretty nicely. I am wondering as you look out a few years, do you think margins have the potential to continue to go up, or should we view this sort of 19% margin quarter as being a bit of a peak and above the long-term norm? Thanks.

Yes, I do believe on your second point there are continuous opportunities for us to manage our costs, as to how we deliver our services so that we can quite hopeful, and we are not just lighting candles on this, we are actually doing things in terms of our direct cost line as well as OpEx, and actually ensure that we can continue to improve our margin performance as time goes on. So I see that as something that is not just a short-term aberration. I mean it will always have ups and downs as we go forward here, but overall, the trend is to increase both the top line, as well as making sure that we have the profitability to go along with it, through all the disciplined actions that Wayne has alluded to.

Pardon me, your first question again, Glen?

Are you gaining share within your customers overall, or do you think they are spending more or both?

I think it is a little bit of both. I think in some of the key portfolios such as Converged IP, we are going a little bit faster than the market. I think in Unified Communications, I would say the same thing, so I believe that we are gaining share, and also are focused on how we address the market, not only in looking at new customers through our acquisition program, something we referred to last year as 'rainmaker,' but also looking at the cross-sell opportunities, like tearing a page from Kelvin's playbook, in terms of looking at ways to actually offer more services to customers.

So we have a number of customers that are single-product customers. And when we have that established relationship, we are being able to upsell and provide some additional opportunities to those customers at every opportunity, I think will also help.

Thanks very much.

Mr. Chadsey, please continue.

Thanks, Joanne. Today's call will be archived and available on the Investor Relations section of our website. That concludes the call. Thanks again for joining us.

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