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Shaw Communications, Inc. (NYSE:SJR)

F1Q 2009 Earnings Call

January 15, 2009 3:30 pm ET

Executives

Jim Shaw – Vice Chairman, Chief Executive Officer

Peter J. Bissonnette – President

Bradley S. Shaw – Senior Vice President of Operations

Steve Wilson – Chief Financial Officer

Michael D’Avella – Senior Vice President of Planning

Ken C.C. Stein – Senior Vice President of Regulatory

Jim Cummings – Vice President of Operations, Star Choice

[John Brasso] – Senior Vice President of Regulatory Affairs

[Jay Mehr Group] – Vice President of Cable Operations

Analysts

Bob Bek - CIBC World Markets

Greg MacDonald - National Bank Financial

Jonathan Allen - RBC Capital Markets

[Jeffrey San] of UBS Securities.

Peter MacDonald - GMP Securities

Vince Valentini - TD Newcrest

Rob Goff - Haywood Securities

Dvai Ghose - Genuity Capital Markets

Glen Campbell - Merrill Lynch

David Lambert - Canaccord Adams

John Henderson - Scotia Capital

[Unidentified Analyst] – Merrill Lynch

Operator

Welcome to Shaw Communications fiscal 2009 first quarter conference call. Today’s call will be hosted by Mr. Jim Shaw, Vice Chair and CEO. (Operator Instructions)

Before we begin, management would like to remind listeners that comments made during today’s call will include forward-looking information and are risks that actual results could differ materially. Please refer to the company’s publicly filed documents for more details on the functions and risks.

Mr. Shaw, I will now turn the call over to you.

Jim Shaw

Thank you operator and welcome everybody and thank you for joining us here today. With me today are Peter Bissonnette, our President; Brad Shaw, the Senior Vice President of Operations; Steve Wilson, Chief Financial Officer; Michael D’Avella, Senior Vice President of Planning; Ken Stein, Senior Vice President of Regulatory; Jim Cummings, Vice President of Operations for Star Choice; John Brasso, Senior Vice President of Regulatory Affairs; and Jay Mehr Group, Vice President of Cable Operations.

You should have received our results and had a chance to review them, so I won’t go through a lot of the numbers in any kind of detail. But before we start our discussion, I’d like to make a few more general comments.

The current economic uncertainty requires discipline and prudence. We at Shaw are exercising on both that discipline and prudence and we have a strategy that is working for our stakeholders, and we intend to stick to it. We are concentrating on our core businesses that deliver consistent returns rather than chase gold mines with unsure returns in the future revenue streams. Our strategy is to deliver quality products and services at competitive prices, stay focused on our customer, and manage our capital structure in an efficient and responsible manner.

We recognize that as our customers hunker down to ride out this recession, there will be growth opportunities for us and I think this quarter you’ve just started to see that. Our sub-numbers were strong. Our basic additions exceeded additions in the same quarter even a year ago, when the economy was a lot stronger.

We introduced the digital rental program or option to our customers at the end of October. This program and the continued adoption of HD and HD PVR by our customers helped contribute to that 100,000 digital customer additions, now being over 1 million digital customers. Driving digital growth revenue streams and opportunities, reduce customer churn and represents to us what we see as an attractive return on capital invested.

Our digital phone business continues its steady and impressive growth. This is the fifth consecutive quarter where our quarterly customer additions have exceeded 50,000. Currently, one-third of our cable customers now take our digital phone service product.

Financial results for Q1 were strong and we believe the growth rates are attractive in the context of current economic climate. We are managing our capital expenditures and have a tight control on costs. Our margins remain best in class when compared to other North American cable operators.

Free cash flow of $113 million gives us comfort with our ongoing guidance of $500 million for the year, the largest free cash flow target we have ever set for our company. In these tough times, we feel that cash is king and we will not be deploying our cash flow in anything but a prudent and efficient manner.

Operationally, we remain in great shape. Our customer base gives us the opportunity for solid growth and will help us ride out this economic uncertainty. We continue to have significant liquidity available to us under our existing credit facilities and we have no debt maturities until 2010 and 2011. And our leverage matrix remains conservative.

S&P recently upgraded our corporate debt to Investment Grade. Considering the economic and capital market environment today, this upgrade further validates our operating characteristics and the outlook for our business and our moderate financial risk profile. We are now rated Investment Grade by two of three agencies.

The board believes we are well positioned in the current environment, and earlier today we announced a dividend increase of 5% or $0.84 per share. This is further evidence that the outlook for our business and our shareholders is only positive. We have started the year with solid results. We are committed to that strategy; serving the customer with a solid value proposition that is more appropriate to today’s consumer sentiment than ever before. Value, reliability, service, and a multitude of range of products all on one bill.

Excuse me. Before I conclude, I want to note on the passing of Ted Rogers. He was a giant of the industry, an exceptional Canadian entrepreneur. He will be missed by all of the people at Rogers, his many friends in the industry, and by all of us here today, especially the Shaw family, the Shaw Board of Directors. He set a high standard that drove all of us to dig deeper, compete harder, think more, and hustle faster. So Ted, good-bye my friend.

Thanks for joining us today. I would now like to turn it open to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Bob Bek - CIBC World Markets.

Bob Bek - CIBC World Markets

Good afternoon. Jim, could you perhaps give us a bit more color on the landscape? Obviously you had a very strong quarter, but you mentioned in your release about increasing Teleco competition. I guess you talked about that last quarter, having some aggressive offers from TELUS in the market on the TELUS TV. Could you update perhaps on that environment, on any changes as far as how aggressive your competitors are being? Thank you.

Bradley S. Shaw

Well, just to give you an idea we saw in compared to Q1 2008 to this past quarter of Q1 2009 both a 60% increase in TELUS TV disconnects. So we’re viewing this as impressive competition but we still see in challenging some of the technical challenges in getting that into the homes. So that number’s around 4,000, so that gives you an idea of just where that number’s gone.

Bob Bek - CIBC World Markets

Just I guess part of the view out there is obviously strong numbers for yourselves and from other peers through November, and then concern perhaps that the December numbers might be a little tougher. Anecdotally it looks like you’re still talking fairly strong tone and I guess on the digital side when we inspect December, it’s probably pretty solid. Any broad strokes you’d want to characterize on December, Jim?

Jim Shaw

You know, I think that when you look at it across the board we’re in great shape. I mean, some of the matrix we achieved in first quarter were year-end analysts’ targets, so you know that’s the way I like to start out a year. So I can only go better from there. And at least if nothing else, I’m only even. But the way we look at the market right now, the take up of our new digital rental program product which is really designed for what we’ll call the average consumer, the value bundle across the board.

We have seen very little slowdown and in turn we’re seeing our Internet data traffic increase as people move to spending more time at home, more time on You Tube, more time doing online shopping or whatever they do. And so we’re actually seeing the Internet matrix go up as they migrate up from high speed to Nitro or Extreme and so we’re seeing a lot of migration there. We’re seeing a fairly strong keg of a BOD and increased digital product across the board.

So you know I mean what we see right now, it’s looking strong, and I wouldn’t call for a large weakness. We think that in Calgary in the marketplace that while there’s been a lot of wealth devaluation for a lot of people in the marketplace, the job devaluation, there hasn’t been a lot of job loss here and I think that’s reflective in how strong our numbers are.

Bob Bek - CIBC World Markets

The [inaudible] fees that were in this quarter but not a year ago, do you have a ballpark guess as to the amount in the quarter? We’ll see that again in Q2 as well, right, where you’re paying fees that weren’t there a year ago? Is that correct?

Steve Wilson

The variance year-over-year in the quarter is $4 million in total.

Bob Bek - CIBC World Markets

And just on your taxes, I guess the same sort of broad commentary for the cash tax for the year, at some point during the year, sort of $1 to $200 million, does that still apply to you?

Steve Wilson

It will be somewhere probably towards the lower end of that range. And I think what we’ll do at this point in terms of – as we said last time, we haven’t provided specific CapEx guidance. I think we still need flexibility in the business to be able to adjust. You can see how well the digital program is running and we want to see how that sort of plays out. So when we come to the next quarter conference call, I think we’ll be maybe a bit more definitive on where we’re going to be. But for now for CapEx and taxes, we’ll just defer the guidance. But you’re not far off the range there.

Operator

Your next question comes from Greg MacDonald - National Bank Financial.

Greg MacDonald - National Bank Financial

After today’s 5% dividend increase the payout ratio on free cash is just a little over 70% on your current $500 million guidance. That’s partially non-cash taxable. And assuming for next year fully cash taxable somewhere toward 80% and so number one I want to know if I’m correct in the cash tax assumption there and number two more importantly I’ll admit to being a little surprised to see another dividend increase. Could you comment whether you actually have dividend payout target and if you do could you share that with us?

And secondly, where is the board getting the comfort? Obviously there’s some flexibility on CapEx with respect to demand. As time goes on I’m anticipating that you should see an absolute increase in CapEx as subscriber demand starts to diminish but you know I would also think that there’s a possibility of significantly higher upside on the operating cash flow. I think you’re probably thinking both of those things. But either way I would be interested in knowing where the company and where the board is getting its comfort level on the dividend payout; seems to be where the company’s free cash is right now. Thanks a lot.

Jim Shaw

I guess that while we couldn’t put it in our original release because of course the board didn’t meet until the next morning and I think by regulation, Steve, we had to have our statement [showed] yesterday and not today. So just a little bit of a timing thing on regulation reporting; otherwise it would have been in there so you would have gotten to see the whole picture all at one time. So it’s a little more awkward even for us.

I think when we looked at the growth and you know the board looks at the five year model, they look at all the models, and we continue to update and they update it quarterly I can tell you we had some board members that thought it was not high enough. But I think the general consensus was that in a company like ours that a modest or moderate return that returned basically half of the increase that we received year-over-year back out to shareholders, the company’s in the second half of the year. Right Steve?

It was a fairly moderate thing to do and I think that they also felt that in looking at the company’s financials and growth prospects going forward, they have like pretty serious confidence that everything will be there because you know dividends are easy to get in but they’re hard to get out. And I think that just reflects their position on, you know, the internal workings of Shaw and what they know about the company and where it’s going.

So they look for that as a consistent approach not to generate the stock to maintain a certain level, so people can exercise or do whatever. They don’t worry about that at all.

Greg MacDonald - National Bank Financial

So obviously you’re not going to give me any indication of on the target, right? But can I ask this? Does the board and the company think about Teleco, for example Teleco targets on free cash and earnings payout somewhere in the 60, 70% range? Do you think about those sorts of things?

Jim Shaw

You know, I cannot – here I’ll just give you a little scenario that we spend, even though at the odd time we probably – I would never do it, but people here take shots at other competitors. It might be [Auerbach]. I’m probably a little kinder and gentler than that. But the basically we spend all of our time focused on what we’re doing. And so we don’t look at matrix for Roy Rogers, Kay’s, or what they do. The only thing we would like to know is are we in the margin range? Is there some specific like capital input that they’re doing that we haven’t thought about?

Is there some competition? Like when Rogers’s numbers came out our big worry was that our numbers are quite a bit different than theirs. Is there something happening in their marketplace that we should know about? Like something that, you know, that Auerbach came up with that makes us or made Rogers usually not as competitive over the quarter when we’re seeing something different. So that’s the only time we really have a good hard look at it. And other than that, you know, it’s usually we’re talking Auerbach it’s usually almost always them catching us.

Greg MacDonald - National Bank Financial

The release itself makes reference to the IFRS accounting changes expect in 2012. Steve, I’m happy to take this offline if the answer’s too detailed but I’m wondering if at first blush you could say whether you know if this will have an impact on the capitalization versus extent issue, vis a vie, customer in fill costs?

Steve Wilson

Well, I’ll say two things real quick. One is that we have first of all concluded on IFRS or the potential of growing U.S. GAAPs we haven’t made that final conclusion yet. We’re still studying IFRS and the implications of that or the implications of when U.S [inaudible], as most of the comparatives in North America are reporting on U.S. GAAP and will be doing so for quite some time going forward.

We’re also still studying the issue of what you asked there about capitalization of the subsidy under IFRS and we have no conclusions on that at this point.

Operator

Your next question comes from Jonathan Allen - RBC Capital Markets.

Jonathan Allen - RBC Capital Markets

You mentioned actually in the last remarks about benchmarking some of the competitive differences between yourselves and some of your peers and looking at Rogers in particular and whether something was happening specifically in their markets. I’m curious what the conclusion was that you came up with on that.

Jim Shaw

I don’t know, you know. I mean I think that we concluded that we couldn’t see any material difference. Maybe our only conclusion was that the economic slowdown in Ontario was a little bit stronger on the job loss side and that might have slowed people. People might have got a little more hesitant to change within that period. You know, when your family goes into a lot of turmoil, change is not something you really kind of adopt very quickly.

And then our other conclusion was maybe the value proposition that they proposed to the consumers is maybe not there. Maybe it was there. You know we don’t get quite that deep in there, but we wanted to make sure that at first blush we hadn’t missed something that would come back and a quarter from now I would just find out or in a month from now I’d find out well this happened and they did this and Rogers lost that and we didn’t know about it. So it’s just that kind of thing.

Jonathan Allen - RBC Capital Markets

Well, do you worry that maybe there’s just a lag between what’s happening in Ontario where manufacturing and autos were hurt a little bit more through the course of 2008 and maybe there’s still lag as we start looking at job losses starting to pick up? At West I think half of the national job losses last week came from the West Coast. So you’re not really seeing any signs yet?

Jim Shaw

We haven’t seen any signs of it and our numbers would not reflect that.

Jonathan Allen - RBC Capital Markets

But as far as dividends and all the rest, you – I assume you’re taking a little bit of a cautious internal forecast.

Steve Wilson

I think we’re still very comfortable with our forecast of in excess of $500 million of free cash flow for the year. And just go back to the dividend question as well. Remember that at the rate we’re going to pay now for the year, we’ll pay $350 million out in dividends. That still gives us $150 million of cash head room on an aggregate dollar basis. I think as Jim said the Ontario economy must be in a job led recession where in Calgary we’ve come up from 3% unemployment to 4% unemployment which is still effectively [inaudible] out here.

So it’s a well known fact things may change going forward in the future but I think the circumstances are a little different between the two regions.

Jim Shaw

Yes. And we’re just not seeing it yet. I’m not saying that next quarter in the call when we see it we’ll tell you when we see it. We just haven’t seen it and our numbers don’t reflect it at all.

Jonathan Allen - RBC Capital Markets

One follow-up question for you, Jim. Since digital was just doing so well this quarter and from the numbers you disclosed in January and in December, have you seen any sort of flow through or cross sale opportunity like the digital sold so well so customers are picking up other services as well? Did we get a bit of a boost this quarter that may not be sustainable?

Bradley S. Shaw

Yes. I think you’ll see some of that pick up. You know, our digital plan is focus rate at the analog base so we’re really going after our core and protecting that. So we have opportunities to up-sell the Internet. You know with our speed changes increase rate across the board except our [light] is really a nice enhancement for people to jump in there. And we’re finding some good opportunities.

Jonathan Allen - RBC Capital Markets

Can you give us any numbers to sort of flow through or up-selling?

Jim Shaw

Do we have any? Not in not by turn, but I mean, you know, our first market with DOCSIS 3.0 comes up in a month? This month. That comes up this month so they’re the first ones and as we said we’d have them all on in ’09 so we’re really looking forward to bringing that product out especially if you have to hang around home and job hunt from your house.

Operator

Your next question comes from [Jeffrey San] of UBS Securities.

Jeffrey San of UBS Securities

First question is regarding ARPU. I know you guys don’t disclose the individual product ARPU’s but I was wondering if you could just discuss qualitatively what you are seeing across the various products. And the second part to that question is regarding pricing. From my records it looks like the last time you guys made any meaningful price change was back in April of 2008. I just wanted to verify that you guys haven’t done any since then and just the general plans around that. And I’ll leave it there and maybe have a second question follow-up.

Bradley S. Shaw

Hi Jeffrey. Yes we will continue to as we have in the past have regular increases in our product pricing and it’s constantly a balancing of value and we think by doing the kinds of things we do in terms of enhancing our products, that is increasing our speed of our Internet, increase in the actual quantum of services that we carry on our digital services, that customers still appreciate the values proposition irrespective of the fact that there might be a slight rate increase.

Jim Shaw

But the increases with – I remember when there were differences. So April would be the cable one and as recent as September on the satellite side. And we’ve brought the gap together on some bundles and spread it on others. You know, as we see competitive things happen in the market we do a little fluctuation on promotion and you know what you get. You know you get a couple of movies free if you sign up, that kind of thing. But that’s just more of a market driven process.

Jeffrey San of UBS Securities

So it would be reasonable to expect some price increases in this April –

Jim Shaw

I don’t know if that will be when but it’d be reasonable to expect that once a year the product numbers would change.

Jeffrey San of UBS Securities

Okay.

Jim Shaw

But the timing you’d have to leave to us because we’re going to have the temperature of the market, competitive type of issue, that has us doing a little comparison around and saying now’s the time or now’s not the time. And we could do it two ways. We could do it by increasing the top price but we could also do it by consolidating the margins when you’re a double-play or triple-play customer.

Jeffrey San of UBS Securities

And any color on the individual products ARPU in the current quarter in terms of year-over-year trends?

Steve Wilson

Well the overall ARPU for all of our products is beginning to go. It’s a rate trend. And if you go way back from Q1 ’04 all the way up to current times, you know, quarter over quarter ARPU continues to increase. Some of our products like on the telephone product I think you can see that the ARPU might diminish as we’re getting into more competitiveness but it’s actually a factor of how you consolidate that ARPU into an overall product bundled ARPU which is going up.

Bradley S. Shaw

And then on the digital before I think we’ve said about $20 ARPU and we’re a little early in this stage I think on the digital rental program so we’ll have to see how that goes forward. But I wouldn’t suspect much difference I mean going –

Steve Wilson

Brad is right. It’s early days on the digital rental but the ARPU on digital is running over $20 and we’ll see how that lines up and how well it bundles as well. There’s some great opportunity there.

Operator

Your next question comes from Peter MacDonald - GMP Securities.

Peter MacDonald - GMP Securities

Just before I get to my question a clarification. In the beginning in your comments, Jim, were you suggesting that your strong growth is more of a market share benefit for you rather than market growth in general?

Jim Shaw

I think maybe market share of the products. You know a lot of, a lot of talk about HD TV. A lot of people expanding into it even over what I’ll call a slow economic time only because they’re spending more time at home so it’s becoming more of a priority. Star Choice has done a great job with their HD promotion on their product across the board. Cable is doing quite good on theirs and digital enhancement so I’m saying within market expansion rather than market growth expansion I think.

Peter MacDonald - GMP Securities

On digital what were the digital terminal adds in the quarter end? And I would assume, tell me if I’m wrong, that those would be primarily leased versus sold.

Steve Wilson

Yes. We’ve decided, Peter, to stop reporting digital terminals because the figure has largely become meaningless over the years. If you look, for example, we did 60% better at retail activity on digital boxes this year primarily HD in December than we did last year. We’re one of the few people selling pieces of consumer electronics equipment that did well. So that digital figure, when you start to look at it with the HD in there now and the addition of the rental boxes and all that, it’s really become a figure that doesn’t mean an awful lot. So I don’t have that figure for you and we won’t be reporting it going forward.

Jim Shaw

What would be – would the majority have been rented or sold?

Steve Wilson

Rented.

Jim Shaw

So I mean we’re probably like 80%? Okay, 95%. Just the one box line that we’re doing. We’ve only done one box line on the rental program so far and I would assume down the road you’d look toward us to do more than one box rental program.

Steve Wilson

But what I mean is that where we’re selling HD boxes, a lot of those are to existing customers who are upgrading so that’s why the terminal figure is becoming less relevant.

Jim Shaw

Because they take the [inaudible] back in and we re-have them and we give them a little credit and then they take – you know, it’s just getting to be kind of a churn thing.

Peter MacDonald - GMP Securities

I’m looking at digital in general so you know we’ve had a number of quarters with good results, great results, and it looks like that flowed through into December and maybe a bit into January. I assume a lot of that has to do with the leasing program but you still have a very large penetration gap compared to the other cable companies on digital. So should we be looking at this as a pent-up demand in demand for digital, possibly enhanced by the Christmas selling season? Or should we expect that you will continue to have strong loading in digital and maybe close that gap up a lot more from where it is right now?

Jim Shaw

I think it’s our intent we’ll close that gap, right?

Steve Wilson

Yes. We’ve already said over the years that if we want to put the pedal to the metal and really focus on digital we could. The time is right now with the advent of the [DCP 700] boxes. It’s a low cost box. It’s a terrific time for us, an opportunity for us to get into those analog customers that have never experienced digital, that haven’t taken the opportunity to get an HD box or one of our previous DCP boxes and there is a pent-up demand.

And we see that demand continuing to – you know, there’s no reason why given the same kind of circumstances that we wouldn’t have the similar kind of penetrations that they do in other cable systems. We think in fact that our plan that we can exceed that.

Bradley S. Shaw

And to be clear, sir, so you’re not confused. We’re only renting the DCQ 700 today so when we talk about retailer activity and the high definition side, all those boxes are still being sold to customers at this point.

Jim Shaw

And it’s a really easy installation. That’s the other thing. So a lot of our boxes are just mailed to our customers and they either install it themselves or it costs them about getting the boxes at home are very low.

Operator

Your next question comes from Vince Valentini - TD Newcrest.

Vince Valentini - TD Newcrest

First I wanted to clarify, Brad, when you said before in the 4,000 disconnects from TELUS, is that how many subs you lost to TELUS TV or how many came back to you from TELUS TV?

Bradley S. Shaw

I’d have to dig a little deeper for that, Vince. I just have an overall number here. So I think that’s taking in and [inaudible] the whole flow, back and forth, you know. I’d have to follow up and get you more detail.

Vince Valentini - TD Newcrest

Is 50% of the customers that call us to go to TELUS actually end up not going to TELUS?

Bradley S. Shaw

Yes. And some customers going. And then we’re finding certainly with the technical challenges a certain number of customers are coming back.

Vince Valentini - TD Newcrest

They can’t get it installed.

Jim Shaw

Yes, or there’s a limit on the number of boxes or you know I thought it was this and I didn’t think the speed would change over the network and it does. And I’m on the Internet while my dad’s watching NFL and that kind of thing.

Vince Valentini - TD Newcrest

Also a clarification for you, Jim. In your opening comments you sort of emphasized a couple times how cash is king and you guys are going to be prudent with free cash deployment going forward. Are you giving us any sort of signaling here with regards to wireless in the future? I know you said those investments would be minimal in 2009. Are you at this point thinking that even in 2010 you wouldn’t be spending any money to deploy that wireless spectrum you bought?

Jim Shaw

I think that what we’re going to do is we’ll have a good look at that probably oh in another quarter or so. You know, I think that what we do see is we see a big opportunity on the digital rental side. We see some good opportunities within the Star Choice group and in the cable group, too. We want to do some different kind of bundling. We have a couple of new products ideas that are available there to return cash to investment capital that returns cash flow right away to shareholders and stakeholders.

And you’ll see us do that first. I won’t say we won’t do anything in ‘010. We haven’t made that decision but we’re still sticking by that we’re not doing anything in ’09 and we’re going to consider ‘010 what we’re doing then.

Vince Valentini - TD Newcrest

And last on that, with the dividend increase, spending more money on the dividend this year does that imply you may be a little less aggressive with share buybacks? Or is there room still to do both?

Jim Shaw

Well, if you can tell me the price I can give you the answer.

Vince Valentini - TD Newcrest

The price right now is around $20.60.

Jim Shaw

Yes. Well, I mean you know I’m not allowed to trade till tomorrow so maybe I can tell you, but then I’d have to tell you right after. I think the question and no different than always we’ll be prudent with our capital. I mean, we like to kind of nibble away at everything. We felt it was time for a dividend and that’s why we moved ahead. So Steve and I and the team will evaluate the share buyback going forward. I’d always look for some. I wouldn’t look for a huge amount.

Operator

Your next question comes from Rob Goff - Haywood Securities.

Rob Goff - Haywood Securities

There’s a lot of talk on the economy. Can you actually use that to your advantage in that the tough times actually make the heightened consumer value proposition position that you may be able to offer may get more traction as wireless within a bundle? And also, given the tight or tough capital markets, your financial strength is more of a competitive advantage. So is there a different way of looking at the economy and seeing our reason to perhaps push the wireless ahead?

Jim Shaw

I think what you’re seeing is exactly that without the wireless. And our big debate would be whether we include the wireless within that or not. But that’s where you’re seeing our total focus is on our internal bundle and how we take everything and lock and load them all together. And that’s why I think we’ve had such a successful quarter is that the team here has come up with a way that we’ll continue to lock and load all our customers across the products we have in front of us today.

And that’s why they’re so excited about DOCSIS 3.0 and some of the other products we have coming towards us. Barring the wireless, yes or no, either way it looks to us like our value proposition is so strong that we’ll be really successful whether we have wireless in the mix or we don’t. So now it’s just a matter of taking our attention and what do we want to focus on more and we’ve tended to go to we focus on the dollars that are in front of us, not the dollars we could possibly get.

Operator

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

Dvai Ghose - Genuity Capital Markets

First of all, your margins remain very good, especially given your strong subscriber growth but they’re relatively flat year-over-year, albeit last year was artificially high because of past due fees. Have your margins now rebounded to sort of as high as they can get on both the cable and satellite side or do you see further margin gains?

Steve Wilson

Well, first of all on the satellite side as we’ve said before, you know we’ve seen satellite in a fairly consistent range over the last couple of years, anywhere in the sort of 33, 34, 35 kind of range. On the cable side we’ve seen solid growth over the last couple of years up from 47.4, 47.8, 48.5 last year. We’re down a little bit in the first quarter this year and that’s because you know we have our normal salary increases at the beginning of the year. We have some network fee increases. We have a little bit of additional advertising and maintenance.

But certainly, Dvai, there’s room for some further growth in margin improvements. We’re still seeing improvement on the digital phone side. That’s doing very well on the margin side across all of our various products. And as the digital rental model comes on, and we get the ARPU [inaudible] from that, all of that is opportunity for us. And remember we’ve got the biggest opportunity in North America in terms of our digital penetration. So there’s lots of potential growth there, which is profitable growth for us and will drive margins.

Dvai Ghose - Genuity Capital Markets

My second question is as it relates to CapEx, obviously the success based CapEx on the quarter was very high which is a reflection of your success. Having said that, how religiously do you take this $500 million of free cash flow guidance? Because you can perhaps this is just an area where you continue to add far greater subscribers than you have in previous periods and therefore incur the CapEx and depress the free cash flow temporarily. Is $500 million of free cash flow the be all and end all, or will you sacrifice that for growth?

Jim Shaw

What would you rather we did?

Dvai Ghose - Genuity Capital Markets

Well, you know, the dividend makes it a little bit difficult and that’s why [inaudible] have the dividend. Personally I would sacrifice the $500 million for growth.

Jim Shaw

Okay, let’s go with that.

Dvai Ghose - Genuity Capital Markets

I’ve got a couple of other quick ones. The AWS license. Have you got your license yet or are you still waiting for Industry Canada?

Jim Cummings

We filed our application with Industry Canada. They’re now examining it and we’re waiting for their response to it.

Jim Shaw

I’m assuming that if they want to give us back the money we might give them back the spectrum.

Dvai Ghose - Genuity Capital Markets

Last question, Jim. This is more of a rhetorical question about some of the insider selling we saw at the end of last year. Your family and your board have accumulated a huge amount of stock over the years. There’s been some chatter because of some insider selling at the end of last year. I don’t see it as particularly material myself, but perhaps you can address the audience and give some color around it.

Jim Shaw

Sure. I’d be glad to do that. You know, these – we had some options that some of the execs here have that are all expiring within a year. We have very little timeframe so we can exercise within the Shaw family. I’ll just talk about the family because I know that one the best. It’s core holding is still running about 49 million shares is what we hold, I think, somewhere in that range. Steve? I think we’ve bought in the last couple of years 9 million.

I think if we took the whole exercised amount, after you’ve got to pay for the shares and everything, it turned out to be how many shares? One hundred and twenty-three thousand?

Steve Wilson

One hundred and twenty-three million.

Jim Shaw

No, it wasn’t that high.

Steve Wilson

Oh, it was under 1 million shares that were exercised.

Jim Shaw

Exercised but we don’t get all the shares. You only get the up tick in them from the granting, so when you’ve kind of got it down there may be a couple hundred shares. And mainly most of the people were just [tax]. And so you’re going to see a little more down the road from my father when the window opens. He has some that come up within a year. And I think he’ll exercise them and do them sometimes. Some of the other people here do. But nothing I’d get alarmed at. And you can tell as the price rode up to $22, $23, I don’t know much about timing anyway.

Dvai Ghose - Genuity Capital Markets

And Ron Joyce obviously just stepped off the board today. He’s a huge shareholder. He sold a little bit, but I see that’s for similar reasons rather than he’s going to [enlarge] his position.

Jim Shaw

I think Ron’s really supportive. He’s a big component of the dividend increase as you can understand. But he also is – he’s 80 years old and he said you know, I’m going to want to sell off and on as I go. And I think probably partially the reason that he stepped down one, was his age and two, that he’s a little more freer there because he’s not restricted as you are when you’re a board member, to do whatever he wants with his holding. And I think at his age and he probably needs to kind of get focused on the future sometime.

And you know he has a lot of toys to pay for, too. So you know it’s his money. He’s been in a long time. He’s been a good shareholder. So I can’t say anything bad there.

Operator

Your next question comes from Glen Campbell - Merrill Lynch.

Glen Campbell - Merrill Lynch

I joined late, so tell me if you’ve covered these already but timing on rate hikes for the current year. Can you tell us anything?

Jim Shaw

We will have them but you know we haven’t decided the timing on everything.

Glen Campbell - Merrill Lynch

And a follow-up on capital intensity. If you look at Cablevision, they’ve been able to run their CapEx through revenues in the low teens and I’m thinking Shaw being a very efficient operator, do you see that sort of level as being achievable if you leave wireless out? If you leave the small business initiative out, you know, once the business starts to mature?

Jim Shaw

You know, I don’t know if I’d look to them specifically. The one thing that I would tell you is all the 3 million are located in one city with a lot different operation than like us where all of ours are located in 70 or 100 cities or towns or whatever.

Glen Campbell - Merrill Lynch

So the density is probably –

Jim Shaw

And the number of hubs and how they can architect the network. So there’s a lot of difference there. And one thing Cablevision also has been able to do is – I haven’t looked at it for awhile, but their revenue per sub was very high. And so that might also make their CapEx look artificially low. But you know I haven’t spent a lot of time looking at it, so that’s just off the top of my head.

Glen Campbell - Merrill Lynch

You know your sub growth is quite strong in the quarter and revenue growth’s low. Can you talk about anything that was going on with pricing or promotions that might explain that?

Bradley S. Shaw

No, I don’t think there’s anything unusual going on in terms of pricing or promotions. We had no unusual promotional activity.

Jim Shaw

Other than would be standard for the pre-Christmas period, so it wouldn’t be a lot different than the first quarter of the year before.

Bradley S. Shaw

And part of it is mix as well, Glen, right?

Glen Campbell - Merrill Lynch

Yes.

Operator

Your next question comes from David Lambert - Canaccord Adams.

David Lambert - Canaccord Adams

From your leasing the digital boxes and the price on your [PDR] that you dropped to $300, I can’t help but think that you’re departing from your old strategy of not subsidizing boxes to starting to subsidize boxes. I was wondering if you can talk about how much you’re leasing your digital boxes for? And are there bundles in there where the customer’s not paying for the digital box? And also how much it costs for these PDR’s that you’re selling at $300?

Steve Wilson

Yes, so, first of all we haven’t strayed from our post-subsidy approach and our boxes right now are $498.

Jim Shaw

You may have retailers at some center drop the price lower, but our price is $498.

Steve Wilson

Yes, so we’re $498. And sometimes retailers have like boxing day specials where they blow out loss leaders and those types of things to get people in there to buy TV’s, but you know we’re still maintaining the no subsidy approach on our boxes. And we’re able to do that. Customers still see value in an HD DVR in that $498 range. If you recall, a couple of years ago they were $700 plus.

And then the DCT is less than $100 and our monthly rate for that is very attractive, and customers are happy to pay that low fee to get those boxes and we’re seeing a good return on that investment.

David Lambert - Canaccord Adams

So you’re not distracted by the sight that TELUS is now giving away a PDR?

Steve Wilson

No, we’re distracted by other things than TELUS. You know, we’re looking at being prudent in terms of where we spend our CapEx. We always have had an approach which is we prioritize when priorities exist and as Jim has alluded to in the next six months we’re going to be launching DOCSIS. We continue to segment our hubs so that the number of customers being served in the same hub continues to go down, which means their service liability and their [inaudible] goes up.

And as we’ve recently just increased the speed on our Internet products and customers seem to have really enjoyed that, because it differentiates us one more degree from our competitors in addition to the customer service that we offer.

Jim Shaw

We, you know, I mean if they want to – we’ve competed against them before, too, but we just fail to understand why here you’re trying to keep tighter price [disks] when in the southern network you’re not because you can’t get any traction on the TV, and you drop it down to nothing. So now they really make nothing on nothing. So we don’t totally understand it. But if you want to give them away, give them away and we hope they work and maybe one day they will work well.

Operator

Your next question comes from John Henderson - Scotia Capital.

John Henderson - Scotia Capital

I just have a follow-up on the ARPU question and by my math I guess the last couple of quarters your ARPU growth has been really good at 6% or even better. This quarter’s still good ARPU growth, but 3% it does show a slowdown. And I wonder to what extent that might be due to the economic climate, maybe fewer on demand rentals or what else you might point to that could cause that.

Steve Wilson

Are you referring to overall ARPU, John?

John Henderson - Scotia Capital

Yes, I’m just taking your cable revenue divided by your total RGU’s.

Steve Wilson

Well, I mean, ARPU has consistently increased every quarter over the last five years here. One of the reasons that you’re seeing it coming down a little bit as he alluded to of course on the digital phone product as we increase the segmentation of that product, we’ve offered customers new alternatives at lower prices. And so we’re seeing the ARPU on the digital phone product come down. At the same time, those are all great products for us and we’re seeing the margin for example this year compared to Q1 last year substantially higher and still riding well in excess of that 40%.

So it’s partly that segmentation of new opportunities in the digital phone market, there are lower additional phone ARPU and that’s sort of softening maybe the increases you’re seeing in overall ARPU. But everything else is holding in very steady or growing.

Operator

Your next question comes from [Unidentified Analyst] – Merrill Lynch.

Unidentified Analyst – Merrill Lynch

Could you please update us on your plans for DOCSIS 3.0 deployment?

Steve Wilson

So I think Brad had indicated that next month we’re actually launching DOCSIS in one of our markets in the prairies in Saskatchewan and we have a plan to start deploying that over the next six months – Calgary.

Bradley S. Shaw

Yes. All the major markets.

Jim Shaw

All the major markets in ’09 and whatever else we can do from there. You know, I mean we wanted – the majors are the most important for us to get up and then we can harvest from around.

Okay, operator, that’s it. We’ll see you guys next call. See you next quarter.

Operator

Ladies and gentlemen this does conclude your call for today. We thank you for your participation. You may now disconnect your line. Have a great rest of the day.

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Source: Shaw Communications, Inc. F1Q 2009 (Qtr End 11/30/2008) Earnings Call Transcript

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