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Executives

Paul Peters – Vice President, Tax and Investor Relations

Pierre Blouin – Chief Executive Officer

Wayne Demkey – Chief Financial Officer

Kelvin Shepherd – President, MTS

Mike Strople – President, Allstream

Paul Beauregard – Chief Corporate and Strategy Officer

Analysts

Dvai Ghose – Canaccord Genuity

Jeff Fan – Scotiabank

Glen Campbell – Bank Of America

Vince Valentini – TD Securities

Drew McReynolds – RBC Capital Markets

Greg MacDonald – Macquarie Capital Securities

MTS Allstream Inc (OTCPK:MOBAF) Q2 2014 Earnings Call July 31, 2014 8:30 AM ET

Operator

Good morning, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the MTS Allstream Second Quarter 2014 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Paul Peters, Vice President, Tax and Investor Relations. You may begin your conference.

Paul Peters

Thanks, Melissa. Hello and thank you for joining us today for review of our second quarter 2014 results. The news release, MD&A and financial statements can be found in our website at MTSAllstream.com.

Yesterday our Board of Directors approved the 2014 third quarter dividend which is been set $0.425 per share. This call will consist comments by Pierre and Wayne, followed by question-and-answer period.

Also on the call today, are Kelvin Shepherd, President, MTS; Mike Strople, President, Allstream; Paul Beauregard, Chief Corporate and Strategy Officer. Before we start, I'd like to remind all listeners that today's remarks may contain forward-looking statements.

A number of assumptions were made by us preparing these forward-looking statements, which represent our expectation, outlook today. As such, they're subject to risk actual results may differ materially from our conclusion, forecast or projection in such forward-looking information. Therefore forward-looking statement should be considered carefully and undue reliance should not be placed on them.

We disclaim any intention or obligation to update or revise any forward-looking statements whether is a result of new information, future events or otherwise except it is required by law. For additional information about such material factors and assumptions. Please refer to our second quarter 2014 MD&A released this morning and our 2013 annual MD&A, which are available on our website.

I will now turn the discussion over to Pierre.

Pierre Blouin

Thanks, Paul. Good morning, everyone. Hope your summer is going well. It's gorgeous and hot day today in Winnie Peg, so hope wherever you're that it's the same thing. So our results for Q2 reflect what were focused on, IP sales at Allstream, which continues to make progress towards best performance levels, showing improving results this quarter.

A strong focus at MTS on retaining customers through value services and innovative bundles and strong overall cost management in the company. We are happy about the growing strength of our IP business in Allstream and about our broadband business in Manitoba and while it's currently facing some price pressures.

Our wireless business in Manitoba remains healthy, with a very low postpaid churn of 0.94%, strong wireless data growth with more run rate to grow as we increase our smartphone penetration. And postpaid customer growth of 2% maintaining our wireless market share at 53% in Manitoba.

Wayne will take you through the results in more details in a few minutes. Another bright spot in the second quarter was this strong Manitoba customer response to our data center built and our corresponding product offering.

We now have a pre-sale funnel at more than 50% of our data center capacity and that well in advance of the centers opening in 2015. This validates the demand we expected for IP solution and will position MTS as the leading provider within Manitoba bringing new revenues and added profitability to MTS in future years.

The Company also continues to generate strong free-cash flows supporting our dividend. At the end of Q2, our annualized cost reductions were at $21.7 million already reaching the range of our annual target and demonstrating our ability to meet or beat our cost reduction target year-after-year.

And as we discuss previously on this call, our strategy is to get those cost savings as quickly as possible in the year, so we can realize that maximum impact from them. And the team is already, at work developing innovative cost reductions programs for next year, so more to come in this area.

Just a few words on the proposed rules on the AWS-3 spectrum option that have been announced earlier this week. I think it's positive to see that industry Canada is using a simple auction format and that it includes regional bidding.

Based on the fact that we already have an inactive and competitive market in Manitoba, with four wireless carriers today. We don't expect that this auction will change the competitive landscape in our province.

There's not much more to say about the auction. The spectrum does not have an ecosystem device for now and I think, you have to consider both AWS-3 auction and the BRS spectrum auction, when evaluating value for each participant.

As you would expect will participate in the upcoming industry Canada consultation on the auction rules. In Manitoba, part of growing our position as market leader is continuing to invest in both our broadband and wireless networks.

With the addition in 2014, to our LTE coverage of 11 new communities. Along with our Wi-Fi hotspot network including some of the most popular community centers. Our wireless network provides the customer experience that is second to none in the province.

Our extensive VDSL2 class coverage combined with our fiber to their own coverage, with 14 new communities connected to it now represents almost 80% of our high-speed internet footprint. And we are continuing to see strong demand for all our strategic services and MTS is the only provider in the province who can bring all those services together, with its unique bundling capabilities.

And I would tell you that it's working, customer's signing up for our bundle increased by close to 5,000 in Q2 and our four service bundle now accounts for over 57% of our total bundled customers. And starting this July, customer can now choose to bundle up to six services with MTS and because most also have more than one wireless device.

We have extended our bundling mix to now include up to five postpaid wireless plans in a six product bundle. This is a very unique offer in our market. It reflects our focus on delivering more value to our customers and recognizing and meeting their needs.

During the last couple of months, certain areas of Manitoba have experienced severe weather resulting in rural overland flooding and forcing people away from their homes. Our employees have been working hard to keep our customers connected. Maintaining services throughout the province and restoring services as quickly as possible, when impacted and I'm proud of their dedication and their help, that they have provided to people in need.

We also offer defected wireless customers' credits for user's overages for the duration of the flood evacuation. So let's hope at these difficult times do not linger and that all those impacted by the flood can return soon to their normal lives and with that, let's discuss results in more details with Wayne. Wayne?

Wayne Demkey

Thanks, Pierre and good morning, everyone. Our Q2, 2014 results reflect strong growth in wireless data, high speed internet and IPTV in Manitoba as well as converged IP revenues in Allstream.

Offset by legacy revenue declines and lower wireless wholesale and voice revenues. Despite lower wireless pricing resulting from the four player wireless market in Manitoba. We achieved solid growth in wireless subscribers continuing growth in wireless data revenues and industry leading low churn.

Our Manitoba business once again delivered strong free-cash flow in support of our dividend and the strong IP performance at Allstream indicates that we are making progress towards past performance levels.

Before we get into the details, let me quickly go over a few one-time items that occurred in Q2, 2013 which affect our comparative analysis of Q2, 2014. As you recall, Allstream operations were reported at the summary level in Q2, 2013. When Allstream was classified as held for sale under IFRS accounting rules.

Since Q3, 2013 Allstream operations have been reincorporated into our consolidated results and the comparative numbers for Allstream in Q2, 2013 are now shown in detail. I'll quickly go over the one-time items affecting Q2, 2013 results for comparative purposes.

First we incurred a $12.9 million in transaction and restructuring cost last year related to the proposed sale of Allstream. Which impacted Q2, 2013 EBITDA, free cash flow and earnings per share? We also saw a $107.7 million impairment loss relating to a write-down of Allstream's long-term asset, which affected earnings per share, but was partly offset by lower depreciation and amortization expense.

As IFRS does not allow amortization of assets, while being held for sale. You can find additional details and the reconciliation in our Q2, MD&A. please feel free to follow-up for this after this call, if you have any additional questions. So now let me give you some insights into Q2, 2014.

For the quarter, consolidated revenues were $403.3 million down 1.7% from Q2, 2013. As growth in revenues from strategic services was offset by legacy decline. At MTS revenues were up 1.1% as strong growth in revenues from strategic services including wireless, broadband, converged IP and information solution services more than offset legacy decline.

Revenues from strategic services now account for 62% of MTS revenues. Excluding wireless wholesale revenue, wireless revenues decreased 1.9% in the second quarter or 0.8% year-to-date. Due to lower wireless pricing in Manitoba, particularly in voice or more features are now being included in the base plan.

On the plus side, wireless subscribers are up 1.3% postpaid churn is at an industry leading low of 0.9% and wireless data revenues are up 17.3%. Since Q2, 2013 subscribers with data plans increased by almost 42,000 reflecting the value of MTS's feature-rich data plan offering.

A growing proportion of our postpaid subscribers have data plan, 71.2% at the end of June, 2014 up from 62.3% in Q2, 2013. With continued smartphone adoption, we expect strong growth in wireless data revenues to continue. MTS achieved strong growth in internet revenues in Q2, up 12.1% over Q2, 2013. Driven by 7.8% growth in our residential high speed internet subscribers and a 6.8% increase in ARPU.

IPTV revenues were up 2% in Q2, as a result of a 7% increase in IPTV subscribers. Overall 107,000 Manitobans are now enjoying our IPTV service. By the end of June, 88% of our increasing IPTV customer base subscribed to our premium IPTV service, Ultimate TV up from 82% at the end of June, 2013.

Revenues from EPIC were $5.3 million in Q2. EPIC was acquired in September, 2013 and provides a new source of revenue for MTS and a trusted source of IT services for our customers. They will also be responsible for running our new data centers, when it opens in 2015.

Partly offsetting this strong growth in strategic services, were expect to declines in revenue from local access, long distance and legacy data, which decreased by 4.2% in aggregate and now represent 31% of our overall MTS revenues.

At Allstream, we saw strong growth in revenues from converged IP, up 7.2% over Q2, 2013. Which was offset by decreases in legacy lines of business? The impact of solid IP sales in the lighter part of last year are now contributing to revenue growth and this trend is continuing with a 1.8% increase in IP sales achieved in Q2, 2014 over Q2, 2013.

I also want to mention that Shared Services Canada circuit installations are now 66% complete and are expected to be substantially finished by the end of 2014. Revenues from this contract were $1.6 million in the second quarter and once installation is complete will account for over $4 million of revenue in each quarter.

Allstream sales staff continues to implement a more focused approach targeting additional customers in already connected building. Allstream again achieved a significant increase in installations pertaining to subsequent sales which were up nearly 44% over Q2, 2013.

Converged IP revenues continue to account for larger proportion of Allstream's total operating revenues reaching our 2014 target of 40%, up from 35% in Q2, 2013. Increased EBITDA is attributable to restructuring and transaction cost recoded in the second quarter, 2013. As described more fully in our Q2, MD&A.

Due to 2014, EBITDA was impacted by lower legacy revenues at Allstream and lower wireless wholesale and voice revenues partly offset by cost reduction and strong revenue growth from wireless data, broadband and converged IP services.

At Allstream, Q2 EBITDA was $24.7 million up $11.4 million over Q2, 2013. When it incurred $10.4 million in transaction and restructuring cost excluding this transaction and restructuring cost, EBITDA is up 4.2% over Q2, 2013.

At MTS, Q2 EBITDA was $117.3 million down 3.5% due to the decline in legacy revenues and wireless wholesale and voice revenues partly offset by cost management, strong growth in broadband and wireless data revenues and the impact of EPIC.

Earnings per share $0.37 was up $1.15 from Q2, 2013. Mainly due to the one-time items in Q2, 2013 are I referred to earlier. Capital expenditures were $5.2 million from Q2, 2013 resulting from the timing of capital project in line with our plan. Year-to-date CapEx is lower than last year and we would expect that to continue for the balance of the year. Due to an SR&ED tax recovery that we talked about in Q1, which should offset a slight increase in capital spending that was included in our plan.

Free cash flow was $34 million, up $9.6 million over Q2, 2013. Mostly due to transaction and restricting cost incurred in Q2, 2013 and lower deferred wireless cost, this quarter partly offset by higher capital expenditures as I just mentioned. Our cost management program includes initiatives such as workforce, attrition and retirement, reductions in supplier contract rates, increasing traffic on our own network, consolidation of real estate and our continued focus on discretionary spending.

As you saw in our news release, the final actuarial valuation was completed and confirmed a solvency deficit of $235 million at January 1, 2014. Down nearly $400 million from a year ago. Even including the January, 2014 Supreme Court ruling on the pension law suit.

The MTS plan solvency funded ratio was 90% as at January 1, 2014. We continue to work with the planned members, through undergoing negotiation to finalize the implementation plan for delivering the enhanced benefits.

The Allstream planned solvency funded ratios is 98%, at this level. We do not anticipate any significant solvency funding requirements at Allstream for year, if ever given the expected rising interest rate environment. I should also note, that while interest rates have fallen about 50 basis point since the beginning of year, this is been partially offset by strong asset returns in the plan.

So that our current solvency deficit in not significantly different than at the beginning of the year. And now turning to our outlook, based on our year-to-date results, the Company's revenues, EBITDA and earnings per share are trending at the low-end of the 2014 financial guidance.

The primary factors include that MTS's wireless subscriber revenues down 0.8% year-to-date are expected to stay flat through the balance of the year compared to our expectations, which had been for low single-digit growth.

Also Allstream's legacy revenue declined while expected is a little higher than planned. We are partially offsetting these impacts with disciplined cost management. Free cash flow guidance remains unchanged, partly due to the SR&ED tax recovery that we discussed in Q1.

At this level, we are generating more than enough cash to fund our dividend while at the same time making important investments for the future. Thank you, we'll now be pleased to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Dvai Ghose from Canaccord Genuity. Your line is open.

Dvai Ghose – Canaccord Genuity

Pierre as you know in the past Allstream has really been the focus of concern for investors and you're showing some good traction in terms of both EBITDA as well as reducing free cash flow losses, but if I look at the incumbent division, you've now reported three consecutive quarters of EBITDA declines, albeit in part because of the wholesale revenue issue.

Your free cash flow hasn't really grown in that division and on a pro forma basis for the EPIC or in organic basis. Your revenues were down 1%. So I'm wondering whether you think that the incumbent EBITDA and free cash flow has maxed out despite your considerable cost cutting effort, whether you see cash flow growth potential in that division.

Pierre Blouin

Good morning, Dvai. Good question, few things. We are clearly with the wireless wholesale being impacted enough for a little while and that's something that we've tried to size for you and show you where it's going. Added to that, you know the current price pressure that we may have in the market, but I think you have to look further than that and look at the strength of the base business.

Our broadband is growing, all of our market shares are holding even, considering our comparative. The market is, our bundle is growing, our increasing bundle services increasing the number of wireless account in it. Our churn is low and now that we're continuing to reduce our operating expenses and adding the IT business into it, which we expect growth and strength over the next few years.

When you put all of this together, I think you have some pretty good strength in the business to support our current cash flow and more cash flows in the future. Clearly, right now it's under pressure, but you have the sign and the foundation with some of the investment that we're making, all the pretty solid business that has some strong operating metrics.

Dvai Ghose – Canaccord Genuity

Yes, now you've certainly been resilient. On the strategic question, you referred to AWS-3 auction proposals and your participation. So on the good news side, there is no qualified new entrant bidder for the AWS-3 spectrum in Manitoba, unless someone builds very quickly between now and January 30.

On the bad news side, as you know there is a lot of speculation since BC announced its privatization bid for Bell Aliant, regarding their strategic interest in your company. Given the current government focus on four players and yours is one of the few province that has four vibrant players, what do you think about this?

Pierre Blouin

I think, Dvai. I don't want to speculate this, but lots of speculation about that. I really don't want to comment on those speculation. We have a very active market. I don't think the auction or the auctions in fact will bring changes to this market and we are gearing for both auction and we'll see what happens.

Dvai Ghose – Canaccord Genuity

That's fair and last one for Wayne, very quickly. Thank you so much for the pension update, it's good to see that your return on assets are offsetting the lower interest rate. So you talked about Allstream and the fact that it's near fully funded. Can we continue to assume on a consolidated basis, the 2015 at least will be a further funding holiday, when it comes to pension solvency?

Wayne Demkey

Well, what's we've said about funding in MTS, just to remind you that the wish respect to the law suit issue, that will be any funding would be impacted by the negotiations with the plaintiffs as orders by the Supreme Court. So we are not able at this time to really say with any clarity what our funding will be with respect to that.

Dvai Ghose – Canaccord Genuity

And that said, do you have any idea when that will be resolved by the Supreme Court?

Wayne Demkey

While we're hoping to have further information available by the end of the year.

Dvai Ghose – Canaccord Genuity

Okay, thanks a lot.

Operator

Your next question is from the line of Jeff Fan from Scotiabank. Your line is open.

Jeff Fan – Scotiabank

First question is on Allstream, the converged IP revenue was a little bit weaker than what we were looking for, wondering if you can just update us on the progress there with respect to the Shared Services contract and the revenue pick up there and how we should be thinking about that through the rest of the year?

Pierre Blouin

Jeff, good morning. We'll let Mike, give you some info, but we are happy about the results on IP. So, Mike you want to give us some – put some color into this?

Mike Strople

Sure and thanks for the question. We are happy with the IP revenue up 7% on a year-over-year basis, comes from strong sales. Also coming out of the first half of the year, as Wayne mentioned we are past halfway on the installation of the Shared Services contract, but work on hand is also sitting at 10% on a year-over-year basis. So we look to see that growth continue in that high single-digit range for the balance of the year on converged IP.

Jeff Fan – Scotiabank

Okay. On the margins and maybe for Allstream as well that came in a little bit lower than might what we were looking for, I'm wondering if you can talk a little bit about the margins and how that may trend through the year as well?

Mike Strople

The margins on converged IP in the 73% to 75% range where we expected, there is always a mix and particularly as large contracts come online like CNS4. They come with the size and scale, that's a little different, but also has some efficiencies in our cost operations too, which is what we consider when making those arrangements. So the margins are in line with what we had been expecting.

Jeff Fan – Scotiabank

And off net, on net progress there with respect Allstream, can you just update us on where you're at?

Mike Strople

Our on net circuit installations for IP in Q2 were over 45% that's the highest they've ever been and from a base perspective, that's bring base over 33%.

Jeff Fan – Scotiabank

Okay and lastly on the strategic side for Allstream. Pierre, if you can just revisit for us what the opportunity is in the near-term, medium-term on maybe relooking at the divestiture opportunity, whether that exists or whether for now, you're just going to continue to operate and maybe generate some progress there?

Pierre Blouin

I think, on that same messages, we've delivered before. We are focused in getting Allstream back to its' past performance working on and making good progress as you're seeing, it's a long process but making good progress that's what we are focused on, with Mike's team.

Jeff Fan – Scotiabank

Okay, thanks very much.

Operator

Your next question is from the line of Glen Campbell from Bank of America. Your line is open.

Glen Campbell – Bank of America

First I'd like just a clarification on flood impacts on OpEx in region, if there were any during the quarter and then my second question is on wireless.

Kelvin Shepherd

Glen, it's Kelvin here. No real impacts in Q2. Most of our operating expenses associated with the flood were in July and they're pretty much contained to fairly short period of time in the months. So you'll see them in Q3.

Glen Campbell – Bank of America

Okay, great. Thanks. So first on starting with the auction, as I understand the proposal there's a single block available, no new entrant block. So is that how you see it for Manitoba and if so, are you going to argue for change and then turning to pricing. It seems that you've changed up the bundling terms to increase thickness.

We see the term guidance, can you walk us through those changes. Perhaps how much of your basis take advantage of that pricing and how much more you might expect and then just from a background perspective. Say the more benign pricing we are seeing in the rest of Canada that kick in from March, is that also the case in Manitoba, can we expect some ARPU benefit from, let's say better pricing going forward, not the case?

Kelvin Shepherd

I'll try to take that, Glen. So let me kind of parse through these, if I miss anything, you can come back. You know the AWS auction, I don't think we really, so first of all there is some good things in there as Pierre mentioned in his remarks.

We are going to participate in the consultation and we will make our views going through that process, but certainly – there's encouraging that there's regional bidding and it is a simpler auction format. Obviously this is been, well accelerated from what we've would have anticipated going into the year.

So we are going to take our time to the rules and we will participate in the consultation. On the bundle changes, as you know we've had a very successful four service bundle, which is a lot of customers to bundle up to three wireless services in the bundle for a quite a period time.

I believe, we have just probably over 60% of our base, of bundle customers now on that four service bundle. What we've done is introduced options for customers to go to a five or six service bundle and if you look at our base of bundle customers. There is probably about 6% or 7% of the base today that would be eligible for the bundle.

So we know from our research that there are a base of customers out there, with more services that potentially we can pull up through, into bundle we'll see demand for that and so it's kind of a logical evolution of what we've been doing to try to get more of those household services into our bundle and capture more of that share.

And I think it will be interesting to see, where that goes but certainly already, we know there is reasonable percentage in customers that are looking for that and we think, there'll be more. In terms of pricing and I think you're probably referring to wireless pricing.

Some of those changes you've might have seen in other markets, really haven't flowed through in Manitoba. We've got a pretty robust competitive environment here with three national providers plus ourselves and so pricing has been stable here, this year. It hasn't really changed from what we've seen through the last half of 2013.

Glen Campbell – Bank Of America

Great. Thanks very much.

Operator

(Operator Instructions) Your next question is from the line of Vince Valentini from TD Securities. Your line is open.

Vince Valentini – TD Securities

Couple things at, I'm wondering the university [ph] auction obviously a bit messy in your market. There is no fourth player to or new entrant to bid on the 30 megahertz, but instead of getting a new bidding war for that. I'm wondering why, somebody in your market or you haven't just gone out and bought wins that AWS-spectrum.

If there's already four players, they clearly aren't using that spectrum and they seem desperate for cash or to sell their business. Is there some reasons, why that hasn't happened yet in your mind?

Pierre Blouin

Well, good morning, Vince. Well first, I don't think it's messy. I think in fact that, when you look at the comparative situation in Manitoba or other market already competitive, so we've always said that it's very challenging for a new entrant to come into a market like ours and that's probably one of the reason, why over the past 20 years, probably theirs is not been a new entrant building in Manitoba or operating in Manitoba because it's very competitive and low population density.

I don't want to speculate on the wind. You're assuming that spectrum is for sale. So can't really speculate on that. Would say that's potentially not on the table, but you should ask them, if it's for sale.

Vince Valentini – TD Securities

Another spectrum question, correct me if I'm wrong, but you guys bought the G-band spectrum in 2008 in Manitoba as well, are you actually using that at this point?

Pierre Blouin

We did buy a spectrum, we aren't using it at this point, I don't believe but obviously it's something that we're glad, we acquired. We think it was a good acquisition at the time, I think it will be good spectrum going forward.

Vince Valentini – TD Securities

Okay and last one, the data centers or the data centers, you're building. So 50% pre-sold, can you give a more color on who's buying that, is this customers who are saying, we'll switch our data center business to you, once you're ready because we want to be bundled with you and we like the service, we get elsewhere or is this, people are saying, we expect to have needs for more capacity, a year down the road. So we'll preorder from your new data center.

Kelvin Shepherd

Vince, let me start by really just qualifying the pre-sales funnel language. So by that what we've meant is that we've been out and we have been talking to customers actively, we're meeting with customers and we haven't actually got a obviously a center to sell, yet. It's not going to turn up until the middle of the next year, but by pre-sales funnel.

We mean, we have active expressions of interest from customers, we've kind of qualified in terms of the size of their requirements and our ability to meet them and we've got some strong interest. So I wouldn't say, pre-sold that's too strong a word, but I would say is that really the market demand and the shift, with the market is clearly there.

And over the next year, six months, 1 year leading up to the opening of the center. We would expect to see some of those customers move into sole position. The types of customers, there are, what you would expect a big chunk of the interest comes from larger organizations, government some large enterprise customers, but there is a mid market, small market in Manitoba and so there is a large base of, I guess what we would call medium sized customers and then other markets you would call small customers that have requirements that have expressed interest.

So it's pretty encouraging when we've met with these customers. They're certainly, they've come forward and there is some really strong, good qualified demand that fits with our timing and capabilities.

Vince Valentini – TD Securities

Great. Thanks.

Operator

Your next question is from the line of Drew McReynolds from RBC. Your line is open.

Drew McReynolds – RBC Capital Markets

Three questions from me, just first on the NPS margins, certainly a little bit lower than what we would have been looking for, is that largely the wireless flow through or are there any other things you can kind of flush out on that one and then on the wireless side, when we look at, kind of think the comment on, more features bundled with the base plan.

Is this now, based on what you can tell in the market working through recalibration of pricing in Manitoba, so we should see that pressure flow through for the next couple of quarters, until everything gets recalibrated? And then just lastly on Allstream, with respect to signing up the second customer in the buildings.

Is there any color you can give us on what kind of revenue contribution that second customer is making relative to the first customer, when you connect buildings and obviously relative to some of the bigger contracts like as you see that you're bringing on stream? Thank you.

Pierre Blouin

Good morning, Drew. Maybe we will start with Allstream and I think it's not in the revenue but also profitability of the second and third customers and more, Mike?

Mike Strople

Certainly, so the second and third customers in a building and we would acquire in a couple of different ways. Either is part of a larger contract or we are in fact targeting buildings, where we have network today and they come highly profitable kind of almost regardless of their revenue contribution and I can't characterize the revenue contribution because it's kind of all over the map and would be consistent with, the rest of our revenue, some are large, some are small, but the most important thing for us is, we'd like to see that metric because of its profitability attached to it.

Pierre Blouin

Wayne, you want to speak?

Wayne Demkey

Sure and maybe Kelvin can add in, in terms of the MTS margins, I guess a couple of things. So one, when you look at our information solutions revenues where we are seeing some good business there, that comes out of lower margin and the Telco revenues and so it's not an offset on the margin percentage when you see a change in mix.

So the wireless revenue decline, which was primarily wholesale, does flow through to the bottom line, when you – we also had, if you look at the expenses, little bit higher expenses in this year, due to some restructuring cost that are included in there for some changes to the management structure in the MTS operation.

And when you look at, when you talk about wireless pricing. I think, I mentioned in my earlier notes that the primarily, you're seeing more things included in the base price and so the decline is not necessarily in the pricing, but in the overages that you would otherwise, charge since the – what's included in the base price is higher.

So that pricing is probably been in the market for about a year now and so you wouldn't have seen that, the impact as much in the first couple of quarters of that transition, as there wasn't a whole lot of customers that had moved there, but now given that probably close to half of the customers have, are on newer plans with bigger buckets and so on, that is starting to have an impact on ARPU.

Kelvin Shepherd

May, Drew just to add to what Wayne was saying, you probably if you recall back, even as 2008 or as early it's 2012, there was some of the national providers move to incorporate a lot more features and calling in their base plans and really in Manitoba, we really only did that in the fall of 2013.

So those plans that we have in the market are certainly competitive and they're resulting a good subscriber results and their churn is little. So that's positive, but there is certainly is some ARPU pressure, primarily in the voice part of the plan, as you see things like call display and voice mail and some distance calling and text messaging charges that might have been or would have been optional features and charged extra for now, in that base voice plan.

Drew McReynolds – RBC Capital Markets

Thanks very much.

Operator

Your final question comes from the line of Greg MacDonald from Macquarie. Your line is open.

Greg MacDonald – Macquarie Capital Securities

I'm thinking mostly of the Allstream local and long distance or legacy type businesses, when I asked the question, but wondering if you're seeing any marginal negative impact from the slowdown in the Ontario and Quebec economies and or as you seeing any marginal changes in the way that Bell and Telus are competing in those markets?

Mike Strople

So it's been a very competitive market in telecom for the last number of years and we haven't really seen the resilience in the economy since 2008. So it's been competitive for sometime and you're seeing that in the result particular on the legacy revenues and the decline there and we continue to be active in the market place and happy with the progress, we've made on converged IP, which is where our focus is and driving those sales forward.

Greg MacDonald – Macquarie Capital Securities

So to be clear, we are not seeing. There is no reason to believe that there could be an increase in that competitive activity or in the overall volumes. It's negative trend, but it's a steady negative trend, am I reading that correctly?

Mike Strople

You're reading it correctly on the trend and I would – I mean I would say, not a change in the competitive environment, but I would highlight it's already very competitive.

Greg MacDonald – Macquarie Capital Securities

All right. Okay, thanks guys.

Operator

That concludes the question-and-answer session. Mr. Peters, please continue.

Paul Peters

Well ladies and gentlemen, we've reached the end of our second quarter 2014 results conference call. Once again, thank you for joining us today.

Operator

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

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