Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Shaw Communications Inc. (NYSE:SJR)

F1Q2011 Earnings Call Transcript

January 13, 2011 3:30 pm ET

Executives

Brad Shaw – CEO

Steve Wilson – SVP and CFO

Jay Mehr – SVP of Operations

Paul Robertson – Group VP of Broadcasting and President of Shaw Media

Michael D’Avella – SVP, Planning

Peter Bissonnette – President

Analysts

Tim Casey – BMO

Bob Bek – CIBC

Vince Valentini – TD Newcrest

Glen Campbell – Merrill Lynch

Jeff Fan – Scotia Capital

Phillip Huang – UBS

Robert Goff – Northland Capital Partners

Maher Yaghi – Desjardins Securities

Dvai Ghose – Canaccord Genuity

Peter MacDonald – GMP Securities

Operator

Welcome to Shaw Communications fiscal 2011 first quarter conference call. Today’s call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. (Operator instructions) If the press has any questions, please contact Mr. Shaw’s office after the call.

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

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

Brad Shaw

Thank you, operator, and thanks to everyone for joining us today to discuss our results for the first quarter of fiscal 2011. With me today are members of our senior management team, including Peter Bissonnette, President; Steve Wilson, Chief Financial Officer; Michael D`Avella, Senior Vice President of Planning; Jay Mehr, Senior Vice President of Operations, FCI; Ken Stein, Senior Vice President of Regulatory; Jean Brazeau, Senior Vice President of Regulatory; Paul Robertson, Group Vice President of Broadcasting and President of Shaw Media; and Jim Cummins, Group Vice President, Shaw Satellite Operations.

This is my first opportunity to speak to our shareholders as CEO. JR started this company in 1966 and he took enormous risk and worked tirelessly. His leadership and guidance are constant source of inspiration to all of us. Jim took over as CEO in 1998 and continued to grow our business and create value for all of our stakeholders. He led many transformative acquisitions, and he oversaw the development of highly successful businesses such as digital phone, Internet, and digital cable. The legacy and stewardship of JR and Jim provide a model and source of motivation that will guide me as I take on the leadership of Shaw.

We just concluded our Board meeting and AGM, and we are pleased to announce a 5% dividend increase to an annual rate of $0.92 per share. Before discussing some of the highlights of our first quarter, I wanted to begin by outlining some of the key priorities that we will focus on throughout the year.

Focusing on our core. We are first and foremost a cable and satellite provider. We will stay focused on our core business and continue to provide an exceptional customer experience through both technology enhancements and differentiated customer service. The cable and satellite business continue to be highly profitable and generates significant amounts of free cash flow. The environment remains competitive, but we feel that we are well positioned to protect and grow our business.

We continue to believe that we have the pricing power, and we will focus on our high value and profitable bundled customers. We have a technology roadmap in place to ensure our core products and services continue to deliver our leading customer experience, and we believe the enterprise market in Western Canada provides attractive growth opportunities. We have committed additional resources to ensuring that we grow our market share in that area.

Wireless deployment. We remain committed to wireless and are excited about the opportunity it represents for our company going forward. As with all of our other significant investments of Shaw, we believe it is best to take a disciplined approach. We expect to incur between $150 million and $200 million in fiscal 2011 on our wireless initiatives, and we now expect to launch these services in our first major market early in calendar year 2012, which is approximately three months later than previously anticipated.

There are tremendous opportunities in wireless, and we know that the competition will extremely fierce. Our wireless strategy will be driven by us offering a reliable and unique product at a price point that creates value for our customers. As always, we will continue to strive to provide exceptional service that the customers have become accustomed to.

Shaw Media. We are excited about the performance of our newly acquired broadcasting assets. We closed the transaction on October 27th. And on a full year basis in fiscal 2011, we expect Shaw Media’s EBITDA to improve by approximately 10% over the prior year to $290 million and generate free cash flow of approximately $100 million. Integration is currently underway, and we are impressed with the quality and aptitude of the management team we have in place at Shaw Media. Our task will be to ensure Shaw Media is integrated into Shaw and that we find creative ways to enhance and build new revenue streams.

Before answering any questions, we will briefly turn to our Q1 results. Including Shaw Media, our revenues increased 19% to $1.08 billion and EBITDA increased 18%, excluding a CRTC Part II fee last year, to $473 million. Free cash flow for the quarter was $145 million. From the close of the acquisition, which occurred on October 27th to our quarter-end on November 30th, Shaw Media contributed $125 million in revenue, $55 million in EBITDA, and $40 million to free cash flow. This business continues to outperform our expectations, and we believe we have substantial opportunities to combine distribution content for the benefit of our customers and shareholders.

Our preliminary guidance provided on Q4 call has not changed. We expect our core cable and satellite asset to generate $550 million of free cash flow. We expect our media asset to contribute $50 million for the ten-month period, bringing our consolidated free cash flow figure to approximately $600 million.

We have an experienced management team in place to help guide our 13,000 talented and motivated employees. We all recognize the challenges that we faced with respect to the competitive environment, but we are also excited about the year ahead and the future of Shaw. Shaw will continue to lead and innovate within our industry and assure that we remain a leading entertainment communications company in Canada.

Before we open the lines for questioning, I would now like to turn it over to our CFO, Steve Wilson, who is going to provide some more detail regarding the financial results for Shaw Media. Steve?

Steve Wilson

Thanks, Brad. We thought it would be helpful to have a more fulsome discussion on the Shaw Media results, which may answer some of the questions that you have and assist with your modeling going forward. Shaw Media’s performance has been strong since we originally announced that we had entered into agreements to purchase the 100% of Canwest broadcasting assets last May. For the one month period since we closed the acquisition on October 27th, the assets generated almost $60 million in EBITDA and $40 million in free cash flow.

For informational purposes and clarity surrounding the financial performance, we wanted to provide some additional detail and commentary regarding the results for the quarter ending November 30th. For the three-month period, Shaw Media generated almost $310 million in revenue and $130 million in consolidated EBITDA. This represents an increase in revenue of 8%, and EBITDA, excluding the impact of the one-time Part II fee recovery, improved by 19% compared to the first quarter in 2010.

Shaw Media free cash flow after consideration of CRTC benefit obligations and minority interests for the first quarter was $85 million. Although we have reported $40 million in free cash flow in our Q1 results for the one month period, it’s very important to point out that the cash flows generated by the broadcasting assets since we announced the acquisition in May have all accrued to the benefit of Shaw. And in fact, on closing, there was over $80 million of cash at the closing balance sheet.

The broadcasting business obviously has some seasonality compared to our core and cable/satellite assets. The seasonality is mainly attributable to the cyclicality in advertising sales that occurs within the broadcasting industry throughout the year. The first quarter is typically the strongest due to the fall season, which includes the largest period of advertising sales and campaign and the launch of new programming schedules, while Q4 is typically the weakest due to lower summer viewership audiences and repeat programming schedules.

Shaw Media’s first quarter EBITDA margin exceeded 40%, and we expect the margin to normalize throughout the year and to be between 26% and 30% on a full year basis. As stated in our press release, we expect Shaw Media’s 12-month consolidated EBITDA to improve by 10% to $290 million and free cash flow for fiscal 2011 to be approximately $100 million. This free cash flow amount once again is after taking into account $30 million of CRTC benefit obligations as well as $28 million of minority interests.

Besides seasonality in the broadcasting industry impacting quarterly revenue and EBITDA results, the capital expenditures and CRTC benefit obligations were not material in Q1, and we expect these expenditures to increase throughout the remainder of the year. Our guidance regarding Shaw Media free cash flow contribution for the ten-month period of $50 million takes these into account.

As we previously stated, we are excited about the acquisition from both the financial and strategic perspective. Based on an investment of $2 million, the pro forma transaction multiple on expected consolidated 2011 EBITDA is less than seven times. Also for the entire year, Shaw Media increases our consolidated free cash flow by almost 20%. And as Brad stated earlier on the call, we believe there are many opportunities ahead to enhance and build new revenue streams through the integration of content and distribution.

I’ll turn it back to Brad.

Brad Shaw

Thanks, Steve. And thanks, everyone, for joining us today. We would now like to open the phones to answer any questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question comes from Tim Casey from BMO. Please go ahead.

Tim Casey – BMO

Hi, thanks. Two questions. One, I know you’ve been fairly consistent, say, you take a disciplined approach to launching new products, but could you provide us with any more details or color as to the reasons for the delay in the launch of wireless? I know it’s just three months, but the investors are focusing on that. And second, could you talk a little bit about your ARPU mix? You know, ARPU was up nicely again in the quarter and there is some concern about pressures on your ARPU. I’m wondering if you could just help us out on what continues to drive ARPU so early this year. Thanks.

Brad Shaw

I’ll start with the wireless and one of the other guys can jump in the ARPU. I guess, Tim, a couple things on wireless. One, for sure it is strategic for Shaw and we are committed to rolling out wireless. We’re not stopping getting towers and acquisition. What we certainly feel we need a disciplined approach to the business in ensuring that, as we go along, we’re learning and we’re understanding how the market works in the wireless customer because there is some differences there for us, but we’re excited about the opportunities. It’s our track record. And everything we’ve done before with new products is that market-by-market disciplined approach, and we see this as no different.

Jay Mehr

Tim, it’s Jay. In terms of ARPU, there are a number of positive forces happening in the marketplace. Certainly, as we step up promotionally and add customers at higher price points, that’s going to help us with our focus on everyday value. Another thing that you may not be able to see as clearly is we’re really differentiating a number of our products at market. And certainly, within the Internet space, there has been really nice movement from light to high-speed and from high-speed to extreme, and a little bit more interesting, some of our higher end products like Warp. So we see lots of upside on the Internet side, differentiating our market.

Tim Casey – BMO

Is the delay in wireless – is it an issue beyond your control? Is it with respect to acquiring equipment or is it purely your call?

Brad Shaw

Well, we’ve always had this plan to build out on this process and take these steps, but it is our call and that we feel very comfortable with this approach and the Board feels comfortable, and that’s how we’re going to pursue it.

Tim Casey – BMO

Thank you.

Operator

Thank you. The next question comes from Bob Bek from CIBC. Please go ahead.

Bob Bek – CIBC

Thanks. Good afternoon. I can ask some questions on the media side, perhaps for Paul Robertson, more on operational. Can you give us any commentary at all on how you are seeing the ad market response to the change in ownership and just commentary generally on the conventional? We see a lot of specialty commentary out there, but there is not much conventional commentary in the public markets these days. So Paul, perhaps give us a bit of an update on what you are seeing from advertisers in response and in demand.

Paul Robertson

Sure, Bob. Thanks for the question. First of all, from an overall standpoint, the advertising industry has been growing a really nice bounce-back. In the first quarter, we saw overall growth of the industry at about 7.5 or 8.0 points. And we beat that with a plus 10. What was really encouraging about the first quarter results is that the conventional within that mix was really, really strong. And we had over 7% growth in the Global TV, which was really, really terrific. And we really do believe that the programming is strong, the assets are strong, but I think we are also getting an ownership bounce in that conventional number. And this is really because a year ago at this time if you think the assets with PCAA [ph] and people didn’t know when they invested in Global, what was going to happen. And now with Shaw ownership, everybody feels a very strong sense of stability. So our customers have no reason not to invest wholeheartedly. So all the fundamentals are right, and then there is a little bit of bounce on top of that. So it’s very encouraging.

Bob Bek – CIBC

Could I ask you – geographically, are you seeing – what kind of split are you seeing between the west and the east on the health of the demand?

Paul Robertson

It’s pretty even, but because automotive was up nicely, it tends to have Ontario a factor to it. So Ontario was particularly up. The other category that was up was retail. But again, that was kind of more typically across the country. So we’re seeing a pretty even recovery.

Bob Bek – CIBC

And you had a good response even with – obviously the upfront market was a bit confused I guess with the ownership change. Do you feel you have some opportunity for upside there as you get some legs under the programming and have it under control?

Paul Robertson

Well, the upfront – I think we’re pretty successful in locking in on the upfront. By the time we got to that point in time, I think people are getting a sense that it was headed towards ownership by Shaw. But really the key now is the way in which the programming fairs in the marketplace. And we’ve been pretty fortunate by the way the new program – the existing programs have held on. We’ve got about three or four of the top ten and we’ve got a new program in the top 15. So we're in good shape there. We’ve got a couple of new ones coming on. They both have a slot nicely in the simulcast, which is perhaps more good luck than just planning, but this is all good. And we think that will continue to get – be able to continue to show these kinds of revenue list as the year proceeds. We certainly know as we get into the second quarter that we are having a similar kind of growth track that we had in the first quarter.

Bob Bek – CIBC

That’s helpful. Thank you. I’ll leave it there for others.

Operator

Thank you. The next question comes from Vince Valentini from TD Newcrest. Please go ahead.

Vince Valentini – TD Newcrest

I have couple of questions, maybe, Paul, I'll keep you going here first. You mentioned Q2, I’m wondering how big an impact Olympic on GTV would have had on Global's revenue in February last year. Is it possibility for a big snap-back?

Paul Robertson

Well, no, we really didn’t see a huge Olympic effect on the global numbers a year ago. So, no, we wouldn’t expect any kind of an extraordinary change. We’re kind of looking at more of the same that we experienced from a growth standpoint as in Q1. I think we need those Q1 growth results, then we’ll be really happy, but we’re in that sort of range.

Vince Valentini – TD Newcrest

Okay. A wireless question as well. I don’t know, maybe for Mike D’Avella, if he is there. The CapEx that you spent so far, is it all just sort of on site preparation and towers? Are you actually buying base stations and putting those out in any sort of significant fashion at this point? And if you are, I assume those must be HSPA base stations. So, is there any – that probably leads to the question you can probably imagine I’m trying to get at. I mean, if you’re delaying, are you thinking back your minds about announcing e-network now or still going forward with HSPA?

Michael D’Avella

So, the CapEx that we’ve spent today is really around core network. And the IT systems that are required for the wireless. It also includes obviously the radio systems and base stations that will reside on various poles and towers. So it’s all of those elements. And yes, what you buy today is essentially HSPA+ for the migration path to LTE. But if you return out the network tomorrow, it’s going to be HSPA+. We are not waiting for LTE. There is a logical migration, which will be driven largely by the requirements that we have massive (inaudible) the US and other countries. So when the time comes, and we’ve already made the investments in terms of infrastructure, we’re going to be well positioned to migrate to LTE. And there are other factors in terms of what you’re going to have by way of spectrum at that time. 700, as you know, is coming. We don’t know exactly what the options are and frames are going to be, but that’s another consideration in terms of LTE planning.

Vince Valentini – TD Newcrest

But suffice to say, whatever you build now, whatever money you spend, you wouldn't be wasting it if you had to quickly move to LTE two years down the road. You'll be building something that's forward compatible?

Michael D’Avella

Absolutely. We never waste money.

Vince Valentini – TD Newcrest

Okay. And last question, I don’t know if this is for Steve or if Brad wants to chime in. But in terms of cable EBITDA growth and outlook progressions through the year, I mean, you noted you had these pretty aggressive promotions through most of last year and those had a bit of a drag impact on your ARPU and margins. You saw 5% EBITDA growth in your cable business in Q1. As the timing progresses through the year and you start to compare against some of those Q3 and Q4 quarters when you already had the aggressive promotions in there, is it fair to say that probably your EBITDA growth gets a little bit better on a year-over-year basis with each passing quarter?

Jay Mehr

Yes. It’s Jay. I think it’s broadly fair to say what you just said. If you look at the 12-month period, certainly you see 12-month promotions coming off. We moved to six-month promotions last July and we keep coming up on price in terms of those promotions. So, as you see the effect on EBITDA, you don’t really have customers coming. Well, customers are coming on on much less promotion. You really don’t have customers coming off. So I think your timing there is broadly defined correct. And of course, we’ll be anniversarying the current competitive environment or perhaps an environment that will be even more competitive last spring as we come into next spring, whereas we’re going to anniversary numbers that are a different competitive environment. But you’ve seen our guidance, and we can see our guidance too and certainly the model works throughout the fiscal year, and we’re going to be there.

Brad Shaw

So I’ll just add, Tim, in terms of margin question in the first quarter, we had 46.7 last year. We’re reporting 45.9 in cable this year. About $6 million of that difference was an accrual that was based on a CRTC decision with regard to methodology and allocation of poll rate, which is a retroactive accrual that we’ve stated in the quarter that goes back to a year ago last July. So that is in our number for the quarter. If you add that back, we come back to both the 46.7 that we had last year and 7% cable growth. And it’s I think important, as Jay pointed out, we still are confident in our guidance at this point of the year, borrowing some unusually heavy promotional activity that’s more than what we’re seeing today. And that guidance of just modestly under 7.5% for cable and satellite are one of the strongest in the North America market.

Vince Valentini – TD Newcrest

Excellent. Thank you.

Operator

Thank you. The next question comes from Glen Campbell from Merrill Lynch. Please go ahead.

Glen Campbell – Merrill Lynch

Yes. Thanks very much. First, a question on wireless, a forward-looking question. Michael, you talked a little bit about what you’ve spent so far. You’ve got $150 million to $200 million budgeted for the current year. Could you talk a little bit about where you expect to be at the end of the fiscal year and sort of the types of the areas you will be doing the spending?

Michael D’Avella

Well, it’s essentially network build. I mean, we haven’t been specific about the coverage area, but we’re talking about launching our first major market by the first quarter of next year. So we’re talking about building network here. So that’s really what the capital is all for. Slight acquisition is the element and it’s – if you want to build a robust data of the US network and you lost sites, and that’s what we’re focusing on right now.

Glen Campbell – Merrill Lynch

Okay, thanks. And a follow-up on wireless, could you talk on long-term about what sort of market share and ARPU expectations it would take to make this investment work from a short standpoint?

Brad Shaw

I think we’re a little early in that, Glen. There is – it's pretty hard to say when we got this little bit of a jigsaw puzzle in front of us. And as we’re seeing things, but as things change here as we go forward, we continue to be clear and – but it’s two moving pieces. It would be hard for us to say right now what exactly that looks like going forward. Well, go ahead with the next question.

Glen Campbell – Merrill Lynch

Thanks. A quick one on high-speed Internet. You mentioned a positive trend in terms of people migrating to higher tiers. Could you talk a little bit about the dynamic there? Is the question of people incurring overage charges and then deciding that they are better served? Or looking at over-charges or better servers is just a question deciding that it’s worth the higher month fee to be at the higher tiers, or is it kind of promotional here?

Peter Bissonnette

No, it’s actually experientially driven, Glen. This is Peter Bissonnette. And as more and more customers are streaming more and more video content, they recognize that the lighter speeds that we attribute to, our Lite-Speed Internet doesn’t have the same experience that you’d have with our high-speed or Warp speed kind of Internet. And to the extent that we are seeing almost doubling, if you will, of the kind of streaming target that our customers are enjoying, they are seeing the benefits of – first of all, there is a reliance now greater than there ever has been on having an Internet service that is robust and fast. And we’re seeing the benefits of that as customers move up through the various trends, through the various tiers of services. We haven't in fact started – we’re just starting the user-based approach to things, and so we really haven't seen the effect of that on customers who maintain the same speed tier and are paying overages. It’s just – that’s not happening. What we’re seeing is they are moving to higher level of services just to get that great experience.

Glen Campbell – Merrill Lynch

Okay. Thanks very much.

Operator

Thank you. The next question comes from Jeff Fan from Scotia Capital. Please go ahead.

Jeff Fan – Scotia Capital

Thanks very much. Just to follow up on the high-speed question. Wondering if you can give us a mix on – of the type of subscribers on various buckets of speed, just kind of some general understanding of where people – or where those speeds are at, at the moment in each various levels and what the ARPUs are on Internet at the moment?

Brad Shaw

That’s a great question, Jeff. As you know, we've always resisted providing kind of a breakout of the various tiers of services. And so I think we’ll continue to kind of take that approach. We are happy with the mix that we have and we're happy with the way that customers are moving from lower speeds, whether they are – or old traditional high-speed up into nitro and Warp Speed Internet. But as Jay indicated earlier, we are seeing that kind of reliance translate into higher ARPUs on Internet.

Jeff Fan – Scotia Capital

Okay. And on the – sorry.

Jay Mehr

I'm just going to give you from a – certainly from a retail perspective, our opening price point is $20 a month on Lite bundled. High-speed, which is our 7.5 meg service, is $38. So we're little less in Eastern Canada. And Extreme, which is where we're seeing all the positive momentum on our 15 meg service, is $48. So there's great value for customer in a bundle of that $40 Internet. We are also seeing some nice interesting moment on Warp at $98, which is a 50 meg service. And it's early days for that, but we think that could a relevant product as we continue to differentiate our market.

Jeff Fan – Scotia Capital

And just a quick question on the caps. Are there customers based on – now that you've introduced a cap that actually you have average users that are above the cap?

Jay Mehr

Yes, there are some, yes, and those are customers that may impact the kind of Lite-Speed service right now that recognize that – first of all, the caps are pretty generous. So we’ve – and we've tried to introduce them in a way that they are as consumer friendly as possible and provide really opportunities, not punishment. And so there's an opportunity for a customer who – as most of us you know a year ago wouldn’t really know what we're – how much we're consuming. So we’ve really spent some considerable amount of time educating your customers in terms of just saying, this is how big your fuel tank is and this is what you can do with it. And now with the proliferation of stream video in that, they're now starting to experience that and are then subsequently making decision whether they want to buy an extra $10 worth of usage, which gives them quite an amount of headroom frankly from what they already have or if they would want to step up to the next tier.

Jeff Fan – Scotia Capital

Great. And then just one more question on wireless. When we sit back and take a look at the number of networks that are being constructed out west in some of your core markets, I'm just wondering – I mean, when you look out – do you see any opportunities to work with other wireless operators in order for you guys to be, as, Brad, you pointed out, to be more disciplined in terms of your capital spend going forward?

Brad Shaw

Well, I would think that was something you would look at depending and it's not as simple as that. It tends to be a lot of other (inaudible) doing different things. But I think if there's an opportunity to co-build and share cost, that does make sense. I know there's a lot of activity right now with some of the new entrants and incumbents on tower sharing and doing that type of thing. But we're certainly open to that.

Jeff Fan – Scotia Capital

Okay. Thank you.

Operator

Thank you. The next question comes from Phillip Huang from UBS. Please go ahead.

Phillip Huang – UBS

Hi, guys. Thanks for taking my question. I was wondering if you could elaborate on the competitive environment you are seeing for the vehicle business that you've alluded to, I guess, unusually intense competition. So just to clarify, is this more intense than what you've seen last year or just continuation of the sustained competition you've seen in the past. And my second question is just a quick follow-on of dividend increase. I was under the impression that in the last quarter you called out dividend increase decision was to be deferred until the second quarter. So the increase today is certainly a heartened surprise for me. So I just want to, I guess, clarify what's changed in the management's thinking or expectations to allow for this earlier dividend increase announcement since our last call. Thanks.

Brad Shaw

I'll take the competitive environment question. Yes, certainly on a year-over-year basis, the competitive environment has shifted. We're not necessarily seeing a huge increase in activity as you look on a month-over-month basis in terms of the competitive environment. We are five years into competing with some form of TELUS TV and we are eight years in competing with MTS. And so I think we are hitting a bit of a maturation process at the current levels. I think what you're also seeing is that it's not that hard to expand the market through promotional pricing on both sides. And so, as both sides do a little less promotion, the total size of the television market shrinks a little bit, and I think you're seeing that in our numbers as well. So I think it's a combination of, for sure, intensification year-over-year in competitive activity, if not month-over-month, and really are focused on everyday value in the customer experience.

Steve Wilson

On the dividend increase, we've talked in previous calls quite extensively about the fact that we understand the importance of maintaining dividend increases even at lower levels in times like this. Our Board considered this. And when we look at where we are at today, I mean, we've got $550 million of free cash flow from our core business. We're going report 10 months of Media at $50 million, but really for the full year, we are going to generate $100 million of free cash flow for Media. That puts us at $650 million. Even subtracting a full $200 million off of wireless, we are down to $450 million. The increase that we've implemented today takes our dividend run rate from $380 million up to $400 million. And as I said, we think that consistent dividend increases are important even on a smaller scale and support the very large income-oriented investor base that we have.

Phillip Huang – UBS

Yes, your – the channels contribution is certainly very encouraging. Thanks.

Operator

Thank you. The next question comes from Robert Goff from Northland Capital Partners. Please go ahead.

Robert Goff – Northland Capital Partners

Hey, guys. Thank you for taking my question. Could you address the SME marketplace and what sort of adoption levels you are seeing there and what sort of products are working and what products maybe in pipeline?

Brad Shaw

I'll maybe start and maybe Jay could add. I'll just at a high level – it's something that we've probably been a little bit lagging behind some of the other cable operators in North America in the opportunity. And thus we've done a little realignment in our senior management team. And under Jay's leadership of building our business plan to take a good stab at that because it's real growth opportunity for us; there's good margins, and we think it's the next focus for us from growth.

Jay Mehr

Sure. And just to amplify on Brad's remarks, we probably don't have our share of this market yet, and we're completely focused on getting this share of this market. As we've talked about on previous calls, we've really done a good job at single line voice replacement in the business space and marketing of the smallest of businesses and then Shaw Business Solution in a very price disciplined way as participated in the fiber-based market. This past quarter we brought those two organizations together into a single Shaw business organization. And I think as we move one phase of business for Shaw forward, we'll have an opportunity to take a much larger share of that marketplace. That having been said, our current approach is not to be disruptive on price. We believe that we can differentiate on service in this space as well.

Robert Goff – Northland Capital Partners

And this is PRI-based product?

Jay Mehr

We absolutely have PRI-based products in the disruptive IT technology. Our timing is perfect in that space as well. So there’s lots of opportunity, as I think is well known in the marketplace for us to become a much more major player in the business space.

Robert Goff – Northland Capital Partners

Great. Thank you, guys.

Operator

Thank you. The next question comes from Maher Yaghi from Desjardins Securities. Please go ahead.

Maher Yaghi – Desjardins Securities

Yes. Thank you for taking my questions. First question, I just wanted to ask about the cable business and the promotional activities you were talking about. When we look at your basic subscriber numbers, is it fair to assume that it seems that discounting has become necessary in order to attract customers? And looking at your assumptions, you are saying that you don’t expect discounting or – much for in the near future. So, should we assume that these subscriber numbers should continue to be – net additions to be negative going forward, or maybe even explain why net additions were negative for basic cable subs in the quarter?

Jay Mehr

I don’t think we’d agree with the statement that we should that negative basic customers is the approach that's going forward. We think that customers have historically joined the cable business on some form of a promotion as an on ramp to pricing. And certainly in the competitive world, the same has been true on the other side. And on the other side, maybe the offers have even been more aggressive over the years. I think the current flow that we see is very, very encouraging in the business, which is to have customers on ramp at a very small discount. It lowers churn; it lowers our acquisition cost and will provide a nice benefit for us. But we are happy to compete as much as we need to compete, and if the other guy goes the other way, you could see some spectacular subscriber numbers from Shaw. And if you saw those, you'll probably see a short-term bounce in financials too because that's how it works. But we are interested in the medium and long-term financial performance.

Maher Yaghi – Desjardins Securities

Okay. That’s helpful. So we should not expect any discounting in order for you to show positive net additions going forward. Is that what you are saying basically?

Jay Mehr

That's somewhat twisted from what I heard.

Brad Shaw

No, I think the discounting will be still in the business going forward. To what degree, that's –

Jay Mehr

Yes.

Maher Yaghi – Desjardins Securities

That's exactly my point. What degree should we assume, because as it stands right now, if discounting stays the same, do you still expect net additions to turn positive? Is that what you are saying?

Jay Mehr

No. We've already moved up in pricing and that's reflected in our results. I'll give you some context so we're not talking around it. So today, if you're a new Internet customer, while most of our Internet customers pay $38 a month, today you could sign up for the Internet with us and get it for $29.95 a month for six months. So there is an $8 benefit over a course of six months for you to sign up and enjoy the Internet service compared to kind of what customers traditionally fall out. And there are some ins and outs in features and you can't look at it. We've had bundling advantage. That's been one of the ways we sold our products from years gone by is that if you take three products, the cost of each individual product is discounted as a benefit to you taking those three products, and that's going to continue to be so.

Brad Shaw

Yes. And we make good money at $29.95 on that entry level – we make good money on that entry customer, $29.95. I think as you saw last spring, you saw offers certainly on both sides of the table that were significantly richer than that both in terms of timeframe and definitely in terms of offers. So I know it's hard to sort of see from the outside looking in, but that's really is a sense or a flavor of what's happening in terms of how we're on-ramping customers.

Maher Yaghi – Desjardins Securities

Okay, great. And just a question finally on Media. I'm trying to reconcile the fact that in Q1 you posted $40 million of free cash flow you had for the full year. You're forecasting free cash flows of $50 million already. It's still $75 million excluding the CRTC benefit obligations. Can you maybe tell us if the decline or the seasonality will be more impacting the revenue line or the cost line? Is there any extra cost that you expect to incur to get programming that we should be looking for maybe in Q2, Q3?

Steve Wilson

Well, let me just answer the financial question first, and maybe Paul, you could comment if you'd like to. The $40 million, yes, for the first month. For the full year, we are expecting the 10-month contribution to be $50 million. Part of that is the seasonality, as we will see a revenue drop in the second quarter, which is normal for the business, and usually the same thing in Q4, a stronger Q3. But one of the things in the first quarter that I think is important to take into account is there was very little spending on CRTC benefits, only $4 million on CRTC benefits, and a very small amount on capital. So the CRTC benefits for the year are expected to be $30 million, and they are essentially backend loaded now in that 10 months as well as the CapEx as well. So that’s part of what's driving that flatness in free cash flow for the remaining 10 months.

Maher Yaghi – Desjardins Securities

Okay. That’s very helpful. Thank you.

Operator

Thank you. The next question comes from Dvai Ghose from Canaccord Genuity. Please go ahead.

Dvai Ghose – Canaccord Genuity

Yes. Thanks very much. Steve, I just wanted to revisit the guidance question a bit. There’s also some puts and takes in Q1 '10 and Q1 '11. So if you could help me normalize, because your guidance is predicated on slightly less than 7.5% EBITDA growth for the core cable and satellite segment. You reported 4.4% today, and I understand there is $6 million extraordinary because of the ILEC charge. But there is only one month of Mountain Cablevision in fiscal Q1 '10. So, doesn’t that essentially offset – wasn’t that about four point something million? And so, how do you ramp from, let’s say, sub-5% to nearly 7%?

Steve Wilson

Sorry, what period am I ramping 5% to 7%?

Dvai Ghose – Canaccord Genuity

Well, all I’m saying is, if you offset the $6 million in this period, but also offset the fact that you only had Mountain Cablevision for one month in the year-ago Q1 period, isn’t the EBITDA growth rate pretty similar to what was recorded?

Steve Wilson

Yes, I understand what you’re saying with the $6 million in Mountain Cable. But for the balance of the year, we still expect subscriber growth. We’ve got benefits of rate increase going through for the balance of the year. And there are a number of other things. We talked about the ARPU ramp in Internet growing throughout the year. The introduction of usage-based billing. So there are other expectations that we have here for revenue. Hopefully, we’ll get some more disciplined in the markets with our competitor on promotional activity, and that will support the overall guidance for the year.

Dvai Ghose – Canaccord Genuity

Fair enough. And when it comes to the free cash flow guidance for the core, again cable and satellite, this $550 million, you only did $105 million in Q1. So it’s mainly EBITDA growth, which you think will generate the $550 million as opposed to lower CapEx. It wasn't unusually high CapEx in this quarter or was it?

Steve Wilson

No. It would have only been under $200 million for excluding wireless.

Dvai Ghose – Canaccord Genuity

Right. Fair enough. And then my question on wireless is this. I understand the prudence in terms of taking a measured approach, and you obviously want to launch a very good service and you don’t want to debase your brands. But by waiting, don’t you run a couple of risks such as increased penetration, obviously Western Canada has very high penetration relative to the rest of Canada, but also loosing mandated roaming in 2014, which doesn’t give you very much time to build a ubiquitous network in your footprint?

Brad Shaw

Well, I will start, Dvai, and maybe Michael can jump in. Our plan was always to take a disciplined approach towards launching wireless and ensuring we could learn the business and create that great experience. And we have the benefit of starting from the beginning, and I think with Shaw’s reputation, our service, our focus on the customer, the leveraging of all the services we have, we feel comfortable with these good opportunities as we see data moving and all the opportunities there. We are comfortable that we continue to grow and grow that wireless, but we are going to be disciplined in that approach and we are going to be disciplined in our costs. And everything you expect from Shaw, you’re going to continue to see.

Dvai Ghose – Canaccord Genuity

Okay. And my last question, I asked on the last call, maybe you could give us some more detail. The telcos that you compete against TELUS, MTS, et cetera, the media room platform they try to differentiate in terms of one PVR for the whole home and remote PVR. And you said on your last call, those are something you've worked on. I was wondering if you could give us some idea as to where you are in that sort of process in terms of building media gateways and how long you think it would take.

Brad Shaw

That’s an excellent question, Dvai. And I don’t know if you were at the CES recently in Las Vegas that we were certainly there and we were delighted that the development that we've been fully engaged in for the last six or seven months to develop a whole home media gateway is being – will be translated in the next couple of months into a product that frankly will leapfrog the competitors that are in our service areas. I'll give you an example of some of the benefits that we've seen and we actually saw them in CES, which are being embraced by the likes of Infinity and Time Warner et cetera. But we are looking at a centralized home gateway system that will incorporate fixed digital cable tuners as well as those fixed digital cable tuners which can all operate discreetly and independently and provide customers with access to a whole host of services. We are also – it will include numerous high-speed data interfaces, the capability to support up to six high-definition television services that can all function at the same time without interacting with each other, which is one of the limitations on the media center. The graphics-based user interface is something that we are really excited about. And I don't know if you – were you at the CES?

Dvai Ghose – Canaccord Genuity

No, I wish I was especially –

Brad Shaw

It was like candy to our eyes because there are – the user interface that we are going to be looking at will allow customers to really find movies, sports on demand, favorite programs with a guide that takes us into a realm that is – it is only years before kind of dreamed about. The PVR can utilize all six tuners. There are data interfaces. And then the great news is – some will call me a heretic for this, but the great news is that we're also then going to be moving into – very shortly after the launch of this product, into an IP-based home networking over Ethernet over Wi-Fi and over MoCA so that all of the DLNA is now a standard to see build into all television sets, which allows the home gateway network to basically pull within the home, all of the devices like hard drives where you store your movies and your pictures and your music and those kinds of things, and bring those on to the PCs, the laptops, the smartphones.

And as you know, that was one of the drivers, if you will, for Canwest, which is a multi-platform distribution of content. So this device that we are launching in the springtime will be essentially the facilitator for all of those strategies that we've talked about before will now have an ability to realize those. So we're going to be into the IP space. We're going to have a hybrid IP box, and we believe that it takes us into the lead again, if you will, in sort of home gateway architecture.

Dvai Ghose – Canaccord Genuity

That’s very exciting looking roadmap. Thank you very much. Appreciate it.

Brad Shaw

Thanks.

Operator

Thank you. The next question comes from Peter MacDonald of GMP Securities. Please go ahead.

Peter MacDonald – GMP Securities

Thanks. Peter, who was the manufacturer of that media gateway?

Peter Bissonnette

I'd love to tell you, but I'd have to be shot. We do have a confidentiality agreement with them now. But I can tell you that they are a very credible builder that has demonstrated to us by virtue of the development that they have done that they were up to the task.

Peter MacDonald – GMP Securities

Okay. Switching to Media, when you made the originally announced acquisition, you spoke about needing to normalize the EBITDA for bankruptcy. I'm wondering if these numbers need to be normalized for that as well.

Steve Wilson

You're talking about the year-over-year comparative?

Peter MacDonald – GMP Securities

Well, the numbers in this quarter. So I guess what it comes down to is the normalization requirement for bankruptcies is really programming, and then what are the implications for buying programming for the rest of the year and what that means for your margins going forward is really the implication.

Steve Wilson

No, there is no need for normalization in the quarter and the results that we are presenting to you for informational purposes. And from a programming point of view, that's pretty well done.

Paul Robertson

Going forward – it's Paul here. Going forward, there is no significant change in the comparison from a programming standpoint in PCAA analysis. It's still going (inaudible).

Peter MacDonald – GMP Securities

And on the conventional side, how is the programming purchasing done? Is it done once a year or is it done throughout the year? How is it done?

Paul Robertson

It’s Paul here again. The programming purchasing is usually done in the spring time in terms of the overall arrangements, and they usually come in the form of very (inaudible) arrangements. We have certain understanding of volumes and rates. And then those deals get played out throughout the year, and then they get renewed subsequently a year later. So, yes, it's a kind of a one-time a year overarching deal, but with lots of activity throughout the year as schedules and programs change.

Peter MacDonald – GMP Securities

And the ownership change is not only with yourself, but the other ownership changing – changes in the industry, should we be concerned about the spring purchasing of new program?

Paul Robertson

The spring programming purchases is always an important period in terms of setting the tone for the ratings expectations, but no, nothing changes. You go down and you make the best choices you can, and you be sensible about holding on to your wallet, and we're pretty comfortable that we can go through a sane [ph] period of competition there.

Peter MacDonald – GMP Securities

Great. Thank you.

Operator

Thank you. Mr. Shaw, there are no further questions at this time.

Brad Shaw

Thank you, operator. Thanks, everyone. See you next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participations. You may now disconnect your lines and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Shaw Communications CEO Discusses F1Q2011 Results – Earnings Call Transcript
This Transcript
All Transcripts