BCE Inc (BCE) 2011 Q2 法說會逐字稿

Good morning, my name is Tracy and I will be your conference Operator today. At this time I would like to welcome everyone to the MTS All Stream second quarter 2011 results conference call. (Operator Instructions). Thank you, I will now introduce and turn the call over to Mr. Paul Peters, Vice President, Tax and Investor Relations. You may begin your conference.

Thanks, Tracy. Good morning, everyone. Thank you for joining us on our second quarter results conference call. Earlier this morning, we issued a news release for our second quarter 2011 financial results. The news release, MD&A, and additional supplementary information are available on our website at mtsallstream.com.

Yesterday MTS Allstream's Board of Directors approved a third quarter dividend which has been set at $0.42 per share.

On today's call our Pierre Blouin, Chief Executive Officer; Wayne Demkey, Chief Financial Officer; Kelvin Shepherd, President of MTS; and Dean Prevost, President of Allstream. Today's call will consist of remarks by Pierre and Wayne, followed by a question and answer session.

Today's comments may contain forward-looking information relating to the finances and operation and the strategies of the Company, including comments on revenue, EBITDA, earnings, cash flow, capital expenditures, sales and marketing activities. These statements are based on assumptions made by the Company and run the risk that our actual results and actions may differ from those anticipated. Statements made today reflect the assumptions made by MTS Allstream as of today and accordingly subject to change after that date. MST Allstream disclaims any intention or obligation to update or revise the statements, whether as a result of change in circumstances, a change in events or otherwise, except as required by law. These cautionary statements are made on behalf of each speaker whose remarks contain forward-looking information.

I will now turn the call over to Pierre.

Thank you, Paul. Good morning, everyone. The second quarter was a good quarter for our Company where we delivered solid results. Halfway through the year we see improved results from both divisions trending strongly compared to our 2011 guidance.

We continue to see MST defend and defend well and maintain its leading market position in Manitoba while Allstream continues to improve profitability and drive strong growth in IP sales. So based on our improved performance we expect to meet or exceed our original guidance ranges for the year. We're raising our guidance ranges for revenues, EBITDA, and EPS, and Wayne will provide more detail on this in a few minutes.

So let's start by talking about Allstream. Allstream's much stronger today than it was a year ago. We still have work to do, in particular in managing its legacy portfolio for maximum returns. But there is now clear evidence that our IP strategy is bringing solid results and that the Allstream business is improving. We have seen sustained operating improvements with a solid in on net IP revenues, continued lowered operating costs, and improved EBITDA in the second quarter. IP revenues in fact increased 10.6% in the second quarter.

Allstream also achieved its best quarter yet for IP sales and these IP contract wins will support IP revenue growth and continue to support solid results in the quarters to come.

In the quarter 47 new multi-tenant buildings were connected to Allstream's IP fiber network increasing the total to 2,211 fiber-fed buildings. Keep in mind that our network fiber built our on-net base with the large majority of these buildings connected with small capital investments because of the proximity of the extensive local fiber network built by Allstream's previous owners such as AT&T.

As you know, our net revenues deliver much higher gross margins for Allstream and as we get more of Allstream's sales on net and with continuing improvement with cost structure we're seeing and should continue to see solid increases to Allstream gross margins. This also translates into improved EBITDA. The second quarter marks the third consecutive quarter of year-over-year EBITDA growth at Allstream. These results are solid proof that the IP on-net focus is the right strategy for Allstream.

At MTS we're excited about the positive trends we have seen in the second quarter. More and more MTS customers are upgrading to higher value services. For example, we have seen more customers buy or upgrade to Smartphones from voice-only devices,opt for higher speed internet plans and subscribe to our premium ultimate TV service.

We're also pleased with the positive wireless results in the quarter. We believe MTS is maintaining its wireless market leadership throughout Manitoba and since the launch of our new 4G network over 65% of gross additions signed up for a data plan up from about 40% in the first quarter. We have also seen increasing demand from our Smartphone devices -- for our Smartphone devices resulting in wireless data revenues growing by over 45% when compared to the first half of last year.

Our new 4G wireless network has given customers in rural Manitoba the opportunity to access high speed internet using wireless devices and as a result we're seeing basic internet customers upgrading from their dial-up service to wireless broadband.

We continue to work hard at identifying and rewarding our high value, long-term customers as part of our customer differentiation program. By doing this, we achieved better retention rates for customers that generate the highest ARPU and our focus has enabled MTS, for example, to lower the number of broadband customers on promotional plans.

We're also announcing our broadband offering by investing in fiber to the home technology in communities where we do not already have DDSL. In 2010 we launched fiber to the home in Selkirk in Manitoba. Customer migrations to fiber to the home are going according to plan, and we have seen strong, very strong, interests in the community for our newly available services.

In the first half of the year 25% of customers eligible to receive our IPTV service on fiber have already signed up. This adoption rate is much faster than we had with our DDSL platform and bodes well for our future fiber to the home deployments.

In 2011 we're extending fiber to the home to four new communities in Manitoba as announced previously -- Steinbach, Dauphin, Thompson, and The Pas. We're on track to launch service including IPTV in these communities later this year giving MTS more growth opportunities in TV and broadband services.

In talking about Manitoba , these past few months have been very eventful for Manitoba. First, as I think all of you know, this spring Manitoba experienced one of the worst floods on record. MTS was well prepared and responded quickly. Our technicians worked tirelessly to maintain and restore service to communities where network connections were affected by flooding. And since the flood of 1997 we have implemented corrective measures to reduce or eliminate problems caused by flooding including raising MTS buildings in central offices to higher elevations and building permanent dikes around our facilities.

We recognize the devastating impact severe flooding can have on communities. MTS donated dozens of radios and air time to various emergency organizations involved in flood mitigation efforts. We also donated CAD 50,000 to the Canadian Red Cross in Manitoba to support their flood response. Our efforts helped mitigate the business impact of the floods, but they also further strengthened the MTS brand in Manitoba.

Before I turn it over to Wayne, I would like to talk about an exciting thing coming to Manitoba. We are thrilled about the return of the NHL to Winnipeg. We're excited to extend our partnership with True North Sports by securing the naming rights to the MTS Centre under a new ten year agreement. Since it opened in 2004, the MTS Centre has hosted over 1,000 events and welcomed over six million patrons to its facilities. As part of the new agreement, MTS remains the exclusive telecom provider for the MTS Centre, and we have the opportunity to extend our partnership past 2013. Combined with the prior sponsorship of the MTS Iceplex, the training facility for the Jets. This agreement opens interesting and exclusive opportunities for us in Manitoba. Our new agreement will enable MTS to showcase even more of our capabilities to Manitobans for years to come. There is a huge amount of excitement in Manitoba and in Canada about the return of the Winnipeg Jets and MTS is right in the middle of it.

I will now turn it over to Wayne.

Thank you, Pierre, and good morning, everyone. I am pleased to report strong second quarter results that build on the great results that we posted in the first quarter. As a result of our year-to-date performance and our expectations for similar trends in the second half of the year, we are revising our 2011 guidance. I will speak to the revised outlook at the conclusion of my comments.

In the second quarter we again achieved significant improvements in earnings per share and are reporting significant year-over-year growth in EBITDA. Revenue growth generated by our strategic services including wireless, high speed internet, IPTV and converged IP services exceeded our expectations and was partly offset by declines in our legacy products.

Earnings per share saw a 40.7% increase from CAD 0.54 per share in the second quarter of 2010 to CAD 0.76 per share in the second quarter of 2011. Partly due to a scientific research and experimental development tax credit achieved in the second quarter of 2011 relating to capital expenditures from prior years.

EBITDA grew CAD 12 million or nearly 9% in the second quarter due to improving margins at Allstream, revenue growth at MTS, and cost reductions as well as reduced restructuring expenses. These results are strong indicators that the actions we took last year are working.

At MTS revenue was up 2.9% in the second quarter of 2011 primarily due to the strong performance of our strategic services, wireless, high speed internet, and IPTV.

Wireless revenues were up 8.9% in the second quarter driven by a 3.8% increase in average revenue per unit and a 4.3% growth in subscribers.

Significant growth in wireless data revenues, up 45.5% year-to-date, continued to push wireless ARPU in a positive direction.

MTS's strategic consumer broadband products continued to perform exceptionally well. Our IPTV services achieved 17.8% growth in the second quarter mainly due to a 16.4% increase in ARPU resulting from fewer subscribers on promotional plans compared to the same period last year and select price increases. Some of the higher TV ARPU is due to the fact that over half of our subscribers or almost 50,000 customers are on our innovative ultimate TV platform.

High speed internet revenues were up 7.1% year-over-year in the second quarter driven primarily by a 9.1% ARPU growth resulting from price increases and fewer subscribers on promotional plans.

At MTS the focus on our strategic portfolio of leading edge services, disciplined cost management and unique bundling capabilities has positioned us as a top of mind brand when it comes to attracting and retaining high value, multi-service customers.

We are pleased to report that Allstream's results for the second quarter of 2011 continued to reflect improvements in its business. Strong IP revenue growth in the second quarter at 10.6% demonstrates the success that we have been achieving over the past few quarters in this important area.

The shift towards high margin converged IP revenues contributed to an increase in Allstream's overall gross margin from 54.8% in the second quarter of 2010 to 57% in the second quarter of 2011. Much of this increase is due to growth in our on-net IP services which have a gross margin in excess of 72%. The increase in Allstream's gross margin can also be attributed to a more favorable pricing environment for most enterprise services combined with our strategy to exit certain low margin lines of business and manage our legacy services for cash.

Total revenues year-to-date have declined by 3.7% over the prior year but direct costs are declining much faster at 8.1% compared to the prior year.

Through diligent cost management Allstream achieved a year-over-year decline in operations expense of 3.6% in the second quarter. With the margin improvement and decrease in operations expense, Allstream EBITDA increased CAD 4.6 million in the second quarter, up 19.7% over the same period last year.

This is the third quarter in a row of increased EBITDA year over year at Allstream. The sustained quarter over quarter upward trend in both gross margin and EBITDA is a result of the disciplined approach employed by our management team and the execution of our business plan.

MTS Allstream's capital expenditures for the first half of the year were CAD 122.3 million compared to CAD 153.9 million for the same period last year. The primary reason for the lower CapEx is the achievement of a CAD 20.7 million one-time investment tax credit for scientific research and experimental development, or SRED for short,relating to the 2005 to 2008 taxation years. The investment tax credits speaks to our focus on strategic technology investments and to the strength of internal processes which enable us to treat the extensive investments we make in a financially favorable manner. The SRED tax credit will be used to offset tax payable when the Company becomes taxable in future years.

CapEx is also lower this quarter when compared to the same period last year because we had higher capital expenditures in 2010 relating to our 4G network build.

MTS Allstream's free cash flow was CAD 57.8 million for the quarter compared to CAD 33.3 million last year. The improvement was primarily due to higher EBITDA and lower capital expenditures as I just described partially offset by higher wireless acquisition costs related to an increasing proportion of Smartphones in our customer activations.

The wireless cost of acquisition was particularly high in the second quarter because of the pent-up demand that we created with our HSPA launch and the introduction of the iPhone 4 into our handset lineup at the beginning of the second quarter.

For the year we expect COA to be approximately CAD10 million higher than it was in 2010 with a little more than half of this increase related to the iPhone introduction.

One other item that may be of interest to you, our DRIP program. Participation in our dividend reinvestment plan continues to be strong with 25% of the shareholder base participating in the program in July. This is the fourth straight quarter of strong participation by our shareholders.

And now turning to our outlook. With our better than expected results in the first half of the year we now expect to exceed our original outlook ranges for revenue, EBITDA, and earnings per share. The new guidance ranges are included in our second quarter results news release and MD&A.

Revenue growth for the first half of the year has been strong across all our strategic services. In addition, the favorable enterprise pricing environment has resulted in lower than expected enterprise legacy declines compared to our original assumptions. EBITDA's proportionately higher than expected due to the increase in revenue. Also, due to better than expected performance of our pension plan assets we expect our noncash pension expense for the year to be CAD 13 million lower than originally anticipated. This favorably impacts EBITDA but has no impact on free cash flow.

Earnings per share improved largely because of the increase in EBITDA along with a decrease in depreciation expense. Lower than planned capital expenditures in the first half of 2011 will be mostly offset by higher cyclical spending in the second half of the year. As a result our capital intensity ratio for the year is expected to remain within the original guidance ranges.

Free cash flow for the year is also expected to remain within the original outlook range. The expected net cash increase for the year that results from higher EBITDA will be partly offset by higher than expected pension solvency payments and additional COA charges.

The underlying theme and trend is that our free cash flow is strong and growing.

To conclude, we had a financially strong quarter for both MTS and Allstream bringing the first half of the year to a close on a very positive note. We believe that these positive results and trends validate our strategy, our execution, and position us to continue to drive future performance. Thank you.

We will now be pleased to take any questions that you may have.

(Operator Instructions). Your first question comes from the line of Maher Yaghi with Desjardins Securities. Your line is open.

Yes, thank you. I maybe wanted to maybe touch base on the trends we're seeing these past two quarters, seeing voice pressure ARPU on wireless. We have seen the Rogers, BCE and this morning TELUS. Could you maybe talk a little bit about what you're seeing in terms of your business outlook for wireless ARPU and if you are seeing incumbent contract repricing happening a lot in your territory and if not, are you expecting any pressure, any further pressure on voice ARPU than what you are seeing right now?

Maher, it is Kelvin here. I don't think we're seeing trends that are substantially different than the rest of the industry, certainly in some segments we are seeing some reprice pressure, some of the enterprise and business segments we're seeing some reprice in the base. Having said that, though, our ARPU has been up, continues to perform well, and so whatever reprice pressure on the voice side we're seeing the ability to more than offset that with data.

Yes, you're -- right.

Certainly the data opportunity going forward seems very positive.

So definitely, for you guys with the recent launches of new handsets and the new network you probably have a lot of leeway in terms of adding better subscribers to your mix. Can you maybe talk a little bit about how you're seeing your subscriber mix changing since you launched your new network and how much of the ARPU benefit is coming from these new customers that you are putting on the network?

I can comment on that. Certainly we're seeing a very strong percentage of our upgrades and additions are Smartphone customers. Our position in our base is probably a smaller percentage of our base than that some of our industry peers simply given that we've had a somewhat later launch of our 4G capabilities, so certainly we see good opportunity to continue to improve on that going forward. Yes, we are seeing that improvement flow through to ARPU where many existing customers are taking data and taking them as part of a bundle, so that combination of taking additional services in a bundle plus then taking data in the wireless part of the bundle is certainly delivering and supporting some stronger ARPU on the wireless side.

And just my final question on the same topic, could you give us a percentage of your subscriber base that have Smartphones?

Yes. I think if you look at our total wireless base today, the number -- I will just get it here for you. I think last quarter was probably either a 2% or 3% improvement there. I think 29% is the number that comes to mind. If you just look at our post paid base, we're at about the 33% of our post paid base is on a data plan or Smartphone plan.

Okay. Perfect. Thanks.

Your next question comes from the line of Jeff Fan with Scotia Capital. Your line is open.

Good morning. Thanks very much. I want to clarify a couple of things. You mentioned the COA for this year is going to be CAD 10 million higher than last year. Is that CAD 10 million per quarter or is that CAD 10 million for the full year because what we saw this quarter is already about an CAD 8 million increase I think year-over-year related to that number.

That's for the whole year, Jeff. The second quarter -- you really can't look at it by quarter this year because with the launch of our 4G network and the introduction of a very popular new handset we had very -- well, no increase at all in the first quarter and then all of that, the increase in the second quarter, so we don't expect that to be a trend because we are only launching the 4G network once this year, so that CAD 10 million is for the full year.

So you expect the year-over-year increase to come down obviously based on what we saw in Q2 already?

Yes.

And then a question regarding Allstream, if we look at the number of contracts that you guys have signed now in Q2, I mean, that has ramped up from the run rate that we have seen contracts signed in the past few quarters, so maybe Dean can address sort of the rollout between contracts to the timing when these contracts would start to generate revenue as well as the OpEx and whether there has been any changes with respect to rolling out these contracts and whether there is incremental OpEx that we should think about that would impact your Allstream margins as these revenues roll through.

Sure, Jeff. It is Dean here. It is an imprecise science figuring out the timing between a signed contract and on average when it gets installed but I will give you some general numbers to think about. So the signed contract comes after we typically get a declared win with a customer, so typically there is a hand shake, an agreement, and then some continuing work that goes on around design and specifics around SLA's before you get a signed contract.

From signed contract to turn up we're now typically running around 60 days. In fact, it seems to be dipping below that into the high 50s. If you parse that out a bit, about 80% of the time we actually deliver that closer to 38 days. We have a bit of a long tail delivery on some individual buildings that might require more difficult to get permits or longer to reach digs, but for the most part, the majority of them as in 80%, come in now sub 40 days which is really, really good.

In terms of the costs associated with it, we are still staying very tight in the CAD 30,000 to CAD 35,000 range per deployment of each triggered building, so it has been bang on where expected and hasn't been rising at all now that we're more than a year into the program. What has been changing though, I would say, is that the number of wins we are getting in buildings that we have already triggered, so into existing buildings, we did as many new wins in existing buildings in the second quarter as we did in the year prior, so what I like about that is that our -- we're kind of more effectively selling into buildings that we have already turned up which we should see the effect of that on the average install as you'd imagine because the time it takes to turn up an existing building, 10 to 15 days, is far, far less than it does to build a new one. I like the efficiency of that. I like what it says about our targeting, and I also like what it does in terms of generally driving down our average time to install.

Okay. Great. That's very helpful. One last question. Back to the new hockey team, with the naming rights, is MTS getting the mobile rights related to the games? BCE yesterday talked about the team, but they talked about the TV and radio rights, and I am wondering if you guys have the secured the mobile rights related to the arenas.

No, we haven't. In fact, all of those types of rights, TV rights, broadcasting rights, and the fact that what goes on mobile also is governed by separate agreements and the NHL has a lot of rights in there and it's part of their TV contract that both the team and the NHL have, so, no, it is not included. There are other things that we can do in particular having the two facilities as a sponsor that over time you will see us do.

Okay. Thanks.

Your next question comes from the line of Vince Valentini with TD Securities. Your lane is open.

Yes. Thanks very much. Before I get to the question I was going to do, just to clarify Dean, on what you just said. So this 60 days from contract to revenue, when you guys give us the sales numbers and you indicate you had two record months in the second quarter, is that -- does that relate to hand shake deals or does that relate to signed contracts?

That relates to hand shake deals. There's no leakage, Vince, between that hand shake -- or very little immaterial leakage -- between the hand shake and the signed contract, but those, the numbers we publish in terms of wins is the hand shake deals, so they have got to the stage of a firm yes which means we have put in for permits and we're beginning construction, so it tells you the level of confidence we have in that win, but there is still time from that date to the signing of the contract and the entering in the order.

And that time gap, can you give us any sense, is that usually two or three months?

It is not as long as that. It is typically -- to be fair let's give it 60 days. It can be sometimes less than that but also it can sometimes on a multi-site network can be a little bit longer as well.

Perfect. The main thing I was going to ask, probably more for Wayne, I am really confused on these SRED credits. In the quarter you got a benefit to EPS because your depreciation expense came down, but you also saw CapEx come down by the same CAD 21 million. Seems strange to me you'd get a CapEx and depreciation expense benefit in the exact same time period. And I am also confused about what the cash impact is. Because then you said you will benefit in terms of lower cash taxes at some point in the future when you become taxable, so is there a cash benefit today and then another cash benefit to your cash taxes several years down the road?

Sure, I can help you with that, Vince. So first of all, the impact on earnings per share in the quarter and for the year is CAD 0.12, and you're right that -- so first of all, the credit that we received was CAD 20.7 million, so that is -- has an impact on capital expenditures in the quarter. And the reason why it impacts earnings per share through depreciation expense is that the credit relates to the years 2005 to 2008, so the capital expenditures that were effectively now part of the SRED program and that we're achieving a recovery of the costs on is from past years, so we are doing a catch-up on the depreciation expense. So that had a CAD 0.12 increase to earnings per share. And then on the cash flow impact, this does flow through our free cash flow calculation as it has -- or based on where it is positioned in the statements. We will get the recovery in this case when we become taxable.

So sorry, you get a lower CapEx, actual cash CapEx number this year of CAD 20.7 million?

That's right. The way the SRED program works is that you get a credit on your taxes payable. In some cases there is a recoverable amount in cash, but not in the years in question for this particular time period, so this is due to an ongoing audit that the CRA was doing and we achieved more than what we expected from the recoveries from the program, but the years in question, 2005 to 2008, there wasn't an actual refund in cash available. There is going forward, but not in the years in question, so this particular recovery will be when we become taxable. In the future part of it will be because we obviously intend to continue with the program. We will achieve more immediate tax refunds or, sorry, cash refunds going forward.

Okay. So if I can round it up like this, the way you calculate free cash flow including CapEx in it, you're actually going to see this benefit in your number but really it is a noncash item that will come back out of the working capital because you're not getting the money until you're taxable several years down the road. Is that fair?

That's right.

Okay. Great. Thanks.

Your next question comes from the line of Dvai Ghose with Canaccord. Your line is open.

Yes, thanks very much. Wayne, if I can just follow up from that because I am a bit confused about your free cash flow guidance given all these variables. On the one hand you have a CAD 21 million credit which helps your free cash flow versus previous guidance. You mentioned about a CAD 25 million increase in EBITDA guidance on average of which about CAD12 million is cash and the rest is pension, non cash. You injected about CAD 10 million more into your pension plans in Q1 than you'd originally expected with guidance, so that's still a net positive delta of CAD 22 million, and you didn't increase your free cash flow guidance. Does that mean the full CAD 22 million is going to greater wireless equipment subsidies than you thought?

The one item you are missing is we are having wireless COA that's a little higher than what we expected, so that's a further offset, so we are expecting free cash flow to go up but not to exceed the -- where we had originally in the guidance range.

Right, the range is the same, but within the range, I understand, so it is a CAD 22 million delta but the wireless equipment costs aren't expected to be up by as much as CAD 22 million.

That's right.

Okay. That's fair. Okay. Thanks very much. Second question is related to Allstream. You have done a tremendous job in terms of increasing the margins by about 300 400 [beeps] from the old days when they were around 10%, but your CapEx has come up commensurately as well, so I am wondering at what point do you envisage your EBITDA margin to offset your CapEx to sales increase?

Well, I mean, on an overall basis we have talked about being slightly free cash flow negative this year and positive in the next year or two, so we are anticipating that that will turn over that period. Our capital intensity is not -- I think Dean described the building program that's very economically positive to add buildings at a relatively low cost due to the proximity to the network, so we're not anticipating a huge increase in our capital intensity. We used to be in past years around 10%, and certainly we're up from there, but we're not anticipating this to go higher in a significant way. We're talking about 12% or 13% on a yearly basis, so --

So it was unusually high at 15% last year because you were just starting the program.

That's right.

Okay. That's great. And then my last question is to do with restructuring charges. You guided towards -- you've done some great cost cutting, which is great, but you've guided to CAD 10 million of charges. You recorded zero so far, I believe, in the first half. Is that still the CAD 10 million target and therefore back end loaded or are you reducing that target and if so why given the fact that cost-cutting has obviously been a key hallmark of your success?

We're continuing, remember, that we're not recording -- first of all, the number is down significantly over the prior years.

That's right.

We are not recording that separately the way we have in the past, so our -- if you recall from our outlook conference call our EBITDA is all in and includes everything, so there has been some small restructuring costs that we have incurred in the first half, probably a couple of million are included in there, but we're not separately identifying it. First of all, it is not significant. Secondly, we want to make sure that everybody understands that our EBITDA includes all costs that we're incurring.

So that does include restructuring then, your EBITDA.

Yes.

The minimal ones that you --Okay. Sorry. Another last one, and I apologize. You placated all the pent-up iPhone demand in the quarter. You don't have a backlog of iPhone orders from your customers?

No, Dvai. I think it would be safe for me to say that we've had a very good launch, a very good quarter with that device, people that have wanted it we have been able to supply it, and have no real backlog at all, I don't think, in terms of people waiting.

Great. Thanks very much. Appreciate it.

Your next question comes from the line of Glen Campbell with Merrill Lynch. Your line is open.

Yes, thanks very much. First on the depreciation charge, a lot of moving parts there. Can you talk about how much the run rate on depreciation increased as a result of putting in the new network and service?

I wouldn't say that that's a significant increase, so I mean I think if you -- on the depreciation side if you just add back the -- I think it is approximately CAD 10 million for the impact of the SRED item that that would bring you back to what our run rate of amortization is.

Okay, but that would give you a number that is significantly above what it was the prior quarter, is that fair?

Yes, so CAD 10 million would get you to CAD 74 million versus the CAD 72 million last year on amortization.

Okay. All right. And then Pierre made a very interesting comment at the opening part of the call about the take rate on new services where the new fiber network has been deployed, the fiber to the home network. I think the statistic was 25% of those eligible. Pierre, I was wondering if you could elaborate on that. It is an impressive number and I want to understand the context there.

That was in Selkirk in fact, where we launched fiber to the home last year, so we have some data now after a few months of having the network up and customers taking our services. Maybe, Kelvin, you want to expand?

Yes, sure, Glen. I think probably just to put some context to it, Selkirk is a little bit of a unique situation for us in that in Selkirk we had quite old copper plant so we made a decision in Selkirk to essentially move the whole base of customers to fiber versus going forward and the new communities we're deploying. It is more like a homes past kind of model and so in Selkirk we have I think about half or maybe a little bit more at this point of the homes actually connected with fiber. We wouldn't have had -- didn't have TV service in Selkirk so of the homes we connected we have seen an initial 25% take rate for our TV service which is excellent. That's certainly a faster pickup than we saw with, say, our DDSL networks when we first deployed them and I think there is some rationale for that when you are connecting homes with fiber and we can market quite aggressively into the home with that connection and when I think about it we're -- the market is much more aware of us now as a TV provider and we have a stronger bundle and probably the leading TV service anywhere to offer, so that improvement over, say, our previous rollouts I think is a combination of those factors but certainly it is quite encouraging and provides some good insight, I think, in terms of the opportunity when you do take fiber into a new market.

And the take rate for the new service is stronger than what it was with DDSL when it was rolled out in Winnipeg.

Yes. If we looked at -- this is all timing based because when you go into a market first, but we're probably 7 points ahead in terms of take rate compared to where we would have been at a similar point in time with our Winnipeg rollout.

Okay, that's helpful. Thanks. And Kelvin, then, my follow-up was for you as well. You have been quite aggressively bundling wireless with your triple play services. If I recall a few months ago the offer was a free low end wireless subscription for triple play. Now that you've got HS pay plus network, you have got a more powerful wireless product to sell, can you talk about to what degree the new bundling is influencing people's choice on triple play, how much pull through you are seeing from your new wireless product into the triple play and can you remind us what sort of discount say somebody getting a new iPhone subscription would get on that if they had the triple play? Thanks.

Yes. So our new offer which is marketed as My Bundle, the big thing we have done this year with it is make it much more flexible for customers to package different combinations of services, so, for example, a customer can take up to three wireless plans in a four service bundle and that's been I think quite popular. As you might expect, the biggest portion of people on the My Bundle still have TV, internet, wireless, and home phone in the bundle, but we are seeing a good pickup of people that have two or more wireless devices in the bundle, and I think some really positive trends in that in that the ARPU actually is increased with customers that go on the bundle. We see a higher ARPU after they're on the bundle than previously, and that's mainly because they are taking Smartphones, they're taking data plans, and so while we're providing what we think is a very attractive discount for our four service bundle, typically a customer will save over $40 by taking a four service bundle. We're more than seeing the increased benefit from the additional services and the higher value wireless in the bundle, picking up and delivering improved ARPU even with that discount in the bundle.

Just finally, to illustrate that, if somebody has got a triple play today without wireless, and adds, say, an entry level Smartphone plan, say an iPhone with basic voice and data, I mean, what would that plan cost them incrementally taking into account the extra discounts just ballpark?

Ballpark, it obviously depends, but if they're taking an iPhone and data plan, typically they may spend another CAD 15 to CAD 20, so they're going to already have had some bundle with the discount with the three service bundle. They get an increased discount obviously by adding wireless in, but typically when they add that data device in, the incremental ARPU from that plan is a benefit to us. Customer sees incremental savings, but typically they are paying something on the order of another CAD 15 to CAD 20 for that wireless plan.

Okay. Thanks very much.

Your next question comes from the line of Greg McDonald with Macquarie Capital. Your line is open.

Good morning. Quick question on the Allstream revenue and then I want to ask a question on operating leverage in that division as well. First question on the revenue side. I can appreciate the strength in the converged IP services and that you are getting good growth traction there. But you actually also saw, as you point out due to probably reasonable pricing rationality on the legacy products, but better results of that as well, so here is a question I am going to ask on Allstream. Is CAD 204 million or something like that give or take a million or two, have we really seen stability in this business? That's the first question I want to ask, as a result of everything thrown together, mix included?

Well, we have seen that over the last couple of quarters where that has been the case in terms of our revenue declines have slowed down, and then in this case we're really almost flat quarter over quarter. It's hard to say on a specifically on a quarterly basis, but we still see the trends on the legacy side going down. I think that's something that all players are seeing. Whether we'll be able to continue to offset that with our IP growth as we almost did in this quarter is I guess a more difficult question to answer specifically on a quarterly basis. I think you will still see some declines in revenue overall, but I think what we're more focused on than that is really the -- on the margin side, so we are targeting whether it is legacy services primarily but looking at areas where our margins are lower, whether it is an off-net customer or whatever is driving a low margin. Those are the revenues that we're quite willing to shed or products as they reach the end of their life cycle, and concentrating on growing in the IP space, so our objective isn't to necessarily keep revenue flat but to continue to grow our margin and at the gross margin line is the more important goal for us.

So, Wayne, where are we in the timing of targeting businesses that aren't up to where you want them to be on the margin side? Is this still a multi-year issue or is it sort of something that will continue to see throughout this year?

I would say we're more than halfway through. Anything that was a very low margin has been addressed, and I think that we're trying to ratchet that up and attacking or I guess looking at a group of customers that has a pretty good margin but lower than our average is where we are now, and in some cases those are addressed by building rather than necessarily getting rid of the customer, so that wouldn't have as dramatic of an impact on revenues, probably more so looking for ways to bring that customer more on-net with new services, IP services, et cetera.

But no -- just to be clear, no unusual positive lumpiness in the quarter?

No, not on the revenue side in Q2. That's all just run rate type revenues.

And then on the operating leverage, the first question I want to ask is on restructuring costs. You mentioned there were a couple of million in the first half. I am going to assume kind of a million -- and I'm going to assume this is all in Allstream, so a million per quarter. Is that kind of what we're looking at? Are we still kind of in the CAD 10 million a year is kind of where we're at and because that's now a more stable outlook on restructuring, that's why you are including it and not breaking it out any more, is that reasonable to assume?

I think that's a reasonable assumption.

Okay. So CAD 28 million you're kind of flat first quarter versus second quarter, 14% margin, is pretty good. I guess the question I am going to ask is of the growth businesses, are those businesses higher or lower than the 14%? I am trying to get a sense of where operating leverage can go over the next year or so.

I think the amount where we are now is what we kind of expect to be for the year. We're looking at that as part of our 2012 and indeed our longer term outlook, so part of that is going to have to come from cost efficiencies as well as adding customers that are a higher margin, so part of it, for example, our IP portfolio is our highest margin areas and we show that in our supplementary package now. It is over, around 72%, so the more revenues we add there, that is obviously going to help with that operating leverage as you're calling it, and in fact is probably the biggest driver this year as well as the operating expense reduction, so going forward, those are the two areas where we're really focused on to bring that leverage up.

And are you prepared to say what kind of margins you are targeting multiple years out? Can this be a 20% or 25% business at some point?

We will be as part of our outlook for 2012.

Okay, so stay tuned, right?

We're obviously looking for improvement.

That would be our goal for sure is that we would look to see that number going up, but we're -- I don't want to get ahead of our planning process, so we're looking at that now and looking at an outlook or guidance event some time in a similar timeframe to last year.

Okay. Thanks a lot, guys.

Thank you.

We will now take the last question from Peter Raemy with BMO Capital Markets. Your line is open.

Two questions if I could and thanks for taking the question. One on Allstream and then one on views on LTE. On Allstream, Dean, I was hoping you could just a little bit -- you did talk about on net and off net buildings. I was hoping for you to be able to talk to us a little bit about on net revenues versus off net revenues and where the new contract ratio would be and I was intrigued to hear that you were quite pleased with the number of contracts you signed in existing buildings this quarter or the first half of this year, so perhaps you can translate that into what percentage of revenue in terms of contracts that you're bringing into existing buildings, as I imagine the margins there are extremely high.

They are. Yes. Margins in existing buildings, Peter, are, well, we're in the mid-90s already when we're turning up a new building. They're literally almost 100% in an existing building. The key is you shave such an amount of time off of it because you've got no permitting processes. At most what you have is a short fiber splice and sometimes even that's not required. It could simply just be access into the POP in the basement, so the turn up is incredibly fast, so the time from sale to revenue is compressed materially, and the experience is usually fantastic for the customer because you remove all of that middle ground of work in terms of construction and permitting and so forth.

In terms of the on net, I am really happy about that as well. We have seen basically at the revenue line overall two or three material shifts that are helping drive up this gross margin. The first is the movement away from one-time equipment into monthly recurring run rate business. That's been very helpful. Secondly, the move towards IPC with its higher gross margins and the third one which is actually pervasive across not just IPC but the connectivity business as a whole is we are now selling on net, and truly on net not on co-lo, or not on cost effective access but we're selling on net between 55% and 60% of every new sale coming in.

Is that number of contracts or is that a revenue?

That's circuits. Revenue is slightly higher than that because typically -- and that's true for the larger bids that is we do, the revenue for our on net buildings are typically the metros, so you tend to skew a little higher in terms of revenue, but the number I gave you, 55% to 60% is a circuit count, and that number in our base historically a year ago, where it now is 55% or 60%, in the base it was 20%. So we have almost tripled the level of on netness in terms of our new sales as compared to the base that we have. As you'd imagine, the percentage of on netness in the base has been on a steady march for the last year and change. And frankly, that just continues. It is again true for the past month, so I see that as a bit of dry powder for us in terms of our performance going forward in that all those things that we sold so much more significantly on net as they make their way through into the base and as we continue to turn new contracts into higher average on netness, that will provide some more support for that level of gross margin that we have and keep it moving up.

So when I look at the EBITDA in Allstream of CAD 28 million which down from the prior quarter of CAD 28.8, and that's probably revenue mix shifts going on, what's hidden there is that fact that you have this pipeline of on netness as you call it that should be -- we should get a sellup to absolute EBITDA at some point. Sounds like a Q4 event. Is that fair to say?

I agree. I think it moves -- it has -- I mean, we started this in the very first question of the day which is, there ends up being a relatively long period between bid one and dollars showing up on the income statement, so what that means is that these on net sales are remaining kind of as an in the funnel level of gross margin that we've yet to see, so they will show up later this year, early next year.

And to be clear on that, that was 60 days plus 60 days so 120 days to show or is it more 60.

No, it is typically 120 days and then as I was saying in the earlier answer there are some orders that extend far longer than that for understandable reasons but they can stretch much longer.

Very good. If I can switch tacts here onto the LTE, I'm not sure who wants to take this, whether it is Pierre or Wayne. It looks like in North America after a slow start carriers are embracing LTE for better or for worse on the network side and it is becoming basically table stakes to compete on a go-forward basis if you think a year out. How do you think about that, Pierre, with regards to your plans? Yes, you don't have as competitive an environment as many of your peers, but certainly Rogers is pursuing the LTE upgrade and you're partnered with them on HSPA?

Thank you. I will take the question. A few things, a few comments really. First, our agreement with Rogers doesn't include the LTE. I think everybody submitted comments for the [next spectrum option] that potentially is coming up next year, and we're all awaiting to see the growth. That's still a piece that has an impact on LTE, but we're like our peers where we do have the (inaudible) spectrum to deploy LTE if we were to decide to do so. However, as you have said, while I did agree that it is not a competitive market, it is a pretty competitive market, but, still, it is not something that's coming to our market as fast potentially as in the other major urban centers around the country. We feel that today we're very well positioned at the network that we have in the one that we just announced in fact to compete in that market. When you add to that our unique ability to bundle everything together which is enabling us to offer services and features that nobody else can match, we feel that's pretty attractive and we can continue to follow the strategy that the Company developed a long time ago which is not necessarily to be a leader in this but more follower in the adoption of new technology and try to get the maximum out of it's prior investment, so I think we're on the same strategy here. We're obviously watching it and monitoring it and if we feel that we need to make a move, whether it is with a partner or on our own, we will do that in the future.

Makes an awful lot of sense. Leap came up with an interesting statistic with their LTE build and I am not sure I quite believe it but they said less than CAD 10 per POP which would make it a very minor investment for you in the context of investors in your stock. Do you have a view on order of magnitude investment required? I think you did a lot of heavy lifting with the HSPA upgrade.

The HSPA you've also got to remember was done on a partnership basis with Rogers. I think that's down a bit. Now, I have heard some of these numbers, seeing them, and I think I have heard some others of our peers quoting pretty low numbers also. I think we're on that too early to talk about it, and it would really depend on what spectrum also we're using it and if we're doing it with someone or not, so probably too early to talk about a number, but what I can say is that it would be very similar than any of our peers around the country.

Very good. Thank you, Pierre.

That concludes the Question and Answer Session. Mr. Peters, please continue.

Ladies and gentlemen, we reached the end of our second quarter 2011 conference call. Once again, thank you for joining us today.

This concludes today's conference call. You may now disconnect.