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Shaw Communications (NYSE:SJR)

Q2 2011 Earnings Call

April 13, 2011 3:30 pm ET

Executives

Paul Robertson - President, Television

Peter Bissonnette - President and Director

Michael D'Avella - Senior Vice President of Planning

Jay Mehr - Group Cable VP Operations

Steve Wilson - Chief Financial Officer and Senior Vice President

Bradley Shaw - Chief Executive Officer, Director and Member of Executive Committee

Analysts

Robert Goff - NCP Northland Capital Partners Inc.

Dvaipayan Ghose - Canaccord Genuity

Maher Yaghi - Desjardins Securities Inc.

Peter MacDonald - GMP Securities L.P.

Robert Bek - CIBC World Markets Inc.

Jonathan Allen - RBC Capital Markets, LLC

Glen Campbell - BofA Merrill Lynch

Jeffrey Fan - Scotia Capital Inc.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Tim Casey - BMO Capital Markets Canada

Vince Valentini - TD Newcrest Capital Inc.

Operator

Welcome to Shaw Communications Fiscal 2011 Second Quarter Conference Call. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [Operator Instructions] 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 that actual results could differ materially. Please refer to the company's publicly filed documents for more details on assumptions and risks. Mr. Shaw, I would now like to turn the call over to you.

Bradley Shaw

Thank you, Operator, and thanks to everyone for joining us today to discuss our results for the second 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; Ken Stein, Senior Vice President of Regulatory; Jean Brazeau, Senior Vice President, Regulatory; Paul Robertson, President of Shaw Media; and Jim Cummins, Group Vice President, Shaw Satellite Operations.

Before we take your questions on the quarter, I wanted to make a few brief remarks on some of the recent developments at Shaw. Over the last several years, we have grown substantially. We have added up to 1.2 million residential phone customers. Our Internet penetration is now at 80%, and our digital TV customer base has experienced significant growth since the beginning of fiscal 2009. We are now approaching our goal of 80% digital penetration by the end of this year.

During this time of growth, our industry has experienced dramatic change. Technology and consumer preferences are evolving, and the competitive environment has converged and intensified. Our organization has adapted and prospered during recent years. We continue to believe that following the acquisition of Shaw Media, there remain substantial opportunities to combine distribution and content for the benefit of our customers and our shareholders. We believe that our portfolio of asset cements our status as one of the leading entertainment and communications companies in Canada and that we are well positioned in a highly competitive environment.

We have recently taken steps to realign our business to take into account the competitive realities of our industry. Our recently announced restructuring of approximately 550 employees was a difficult decision, but we feel it's necessary to streamline our organization and continue our track record of superior operational focus and execution. These initiatives, which are mainly focused on management efficiencies, will result in over $50 million of annual savings and will not impact our focus on an exceptional customer experience.

Our subscribers' results to date this year reflect the maturity of our products and the impact of the competitive environment. However, we remain confident that we can achieve our financial targets previously disclosed, including the $600 million of free cash flow in fiscal 2011. Recently, we rolled out new packaging options for our customers, which provide choice and flexibility. The Shaw Plan Personalizer enables our customers to customize their home entertainment services by choosing features they value and want. It uses our Internet Extreme product as the anchor of the residential bundler, and the Plan Personalizer is the tool that we will use to create everyday value for our customers.

We have also launched an attractive option for our customers to secure hardware, including HD PVRs, through our Shaw Easy Own plan. This enables our customers to amortize their cost of equipment over 36 months' time frame and protects our capital investment through an implied contract. Our role of innovative products and services will continue in the upcoming quarter. The Shaw Gateway box will be launched in May and represents a premium entertainment experience that enables IP-based content, whole-home PVR solution and an advanced user interface.

The dynamics within the wireless industry continue to evolve at a rapid pace, and we believe all options need to be carefully considered in advance of the launch of a wireless service. We announced today that we are adjusting our wireless build activities as we evaluate technology, including LTE options, and strategic alternatives with respect to our wireless initiatives.

Our strategy has always been focused on providing a wireless service that creates compelling value for both our customers and our shareholders. And therefore we believe we should allow some of the uncertainties, including technology developments within the industry, to become clear before we move forward and articulate our wireless plans. While we continue our wireless strategic review, we will continue to focus on the strength of our core business, and we tend to make important investments in new technology platforms, digital reclamation and broadband capacity initiatives.

These expenditures will ensure that our services remain best in class. We believe we have an opportunity to expand, evolve and position our broadband service as the product that is truly differentiated and to create an Internet experience for our customers that is difficult for our competitors to replicate.

Over the last quarter, we continued our focus on the business market across Western Canada. We have the ability to deliver a new experience for our business customers through innovative solutions. This includes IP-based voice and data services through our substantial fiber and coax infrastructure that already exists. Additional investments will remain to grow and capitalize on these opportunities, including new service developments, strategic fiber builds and increased capacity.

Over the next month, we will be launching a hosted PBX solution in Calgary and Ethernet over DOCSIS in all major markets. The benefits are about previously investments, and DOCSIS 3.0 will enable us to aggressively market our Warp and Nitro products to our business customers. Expanding our business initiatives represents attractive incremental margin opportunities for our organization.

Shaw has a proven track record of prudently managing capital and managing financially sound investments for all of our stakeholders. Our industry is evolving at a rapid pace and competition has intensified. We are confident we are making the right operational, strategic and capital decisions that continue to position our company as a leading entertainment and communications company in Canada.

We all recognize the challenges that we face with respect to the competitive environment, evolving consumer preferences and the technology development. But we are also excited about the possibilities that truly exist for Shaw.

Thanks to everyone for joining us today, and we'd now like to open the phones to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Vince Valentini from TD Securities.

Vince Valentini - TD Newcrest Capital Inc.

Two questions. First, particularly on the small-medium business market you talked about, Brad, can you guys give us a sense of how you see profits and revenue evolving in that area? Is this a business where you already have the infrastructure? So as soon as you start ramping up customers, they are immediately accretive to your EBITDA and your margins? Or is there somewhat of a long investment cycle here we have to spend up front, and you could lose a little money in the next couple of quarters as you ramp up before you reach pay dirt? I will let you answer that first and then come back with my second one.

Bradley Shaw

I'll just say maybe something, Vince, on that. We -- Just to let you know, we went through a full strategic session with our Board yesterday, which for myself became very prevalent that we're certainly on the right track with where we are. The Board is very pleased. We're excited with how we are as a company and the position we're in. Part of that was looking at the business and the opportunity there. And I can tell you for a fact that when we look at the businesses in our fiber, our plant and we overlaid it, a good majority of the business is within 200 feet of the plant we have. And so we're comfortable we can have it. There's a good potential market share for us there, a good opportunity for us. And as you know, with high margins and little competition, the door is open for us.

Vince Valentini - TD Newcrest Capital Inc.

Okay, fair enough. The second question is on the cable side. Obviously, you've had an increasing amount of pressure on your ARPU and margins with each of the past couple of quarters. I'm wondering if we can ask about the promotions last year. You started those early last year, and I'm talking about the $10 promotion, obviously, and then you stopped it around August. Do you guys have a good sense of how much uptick there was from customers as the year went on? I'm wondering if maybe as you went from Q2 to Q3 to Q4 last year, did you see an escalating amount of people take those promotions as word-of-mouth spread and awareness spread so that the magnitude of impact in your numbers is growing with each passing quarter, but all of a sudden it will come to a stop once those promotions roll off?

Jay Mehr

Hey, Vince, it's Jay. The -- yes, we have extreme visibility into our promotional activity and obviously manage on a daily basis. I think there's really two primary buckets. It's been an awful lot of talk about the acquisition, just sounds in the various things that our competitor and us did when we were being very aggressive through the spring last year. Those we started stepping up in acquisition offers in June, and as I'm sure you can appreciate, you can't just turn the cap off. So we really stepped up through September moving from 12 months to six, moving from 10 to 20, to 30 and so forth. So the acquisition offers really stopped in any major way in October. What's maybe not fully appreciated is, of course, the results of save offers in the marketplaces as all parts of the competitive environment do, and the save offers were probably a slightly larger number. And those really keeled off after the acquisition offers. So they -- we started to step up over the summer and kind of pulled them from the marketplace in October. So the good news for us as we look at the next couple of months is certainly every day, our net promotional discounts is dropping with every day of business today. And as we look throughout the spring and even throughout the summer, there's a real positive trend there.

Operator

The next question comes from Jeff Fan from Scotia Capital.

Jeffrey Fan - Scotia Capital Inc.

I want to go back and talk a little bit about the competitive environment through the quarter. You guys have put through some price increases, I believe, in the fall. However, Telus hadn't done anything until, really, earlier this year. So can you guys talk a little bit about how that perhaps impacted your subscriber adds this particular quarter? And then I guess a little bit more comment on, since Q2, both yourselves and Telus have put through those price increases, now effective April. I'm just wondering whether you're seeing the competitive environment actually improve and whether that's translating into your numbers as well.

Jay Mehr

Thanks, Jeff, it's Jay again. Yes, so for context, we did a rate increase in September. And I think with the cumulative nature of the promotional discounts that we were facing at that time, nobody was coming off promotions, customers continue to go on and of course you have the multi-month impact of six- and 12-month offers. So the rate increase in September really immediately got into knock [ph] in terms of revenue balance. Both us and Telus have done rate increases for April 1. We were two and two, $2 on basic, $2 on TV. They were $3 and $2. And because we're in a much better position serving our company promotionally, we'll be seeing that rate increase flow directly through our financials going forward.

Bradley Shaw

I think, Jeff, it's fair to say we've been disciplined in our promos and we'll continue that. I think when you look at the second quarter, we've still seen aggressive promotions from the competitor. I can tell you recently, we have seen that come up in maybe the term of the offer and also a little bit on the pricing, but it's still very intense, but we're starting to see a little bit of change.

Jeffrey Fan - Scotia Capital Inc.

Okay, and just one quick follow-up on the wireless. You didn't mention in your release regarding the $150 million to $200 million CapEx spending for wireless for this year. Can you, perhaps, update us on that?

Bradley Shaw

Well, I think as we indicated, Jeff, in the release, we're looking at technology and other options. And once we get through that review, we'll be looking at what our build activity is for the year. Looking at LTE, naturally, with the ecosystem there, development, when you push back, if that is your choice, your build. And so we don't have anything specific right now in terms of giving you a new number, but we'll come back on that.

Operator

The next question comes from Glen Campbell from Merrill Lynch.

Glen Campbell - BofA Merrill Lynch

First on the cable operating trends. You gave us a bit of color on the way the promotional discounts are rolling over. Could you talk a little bit about how your new rate plan structure is affecting the level of acquisition and save discounting that you're experiencing and when we might see any benefits coming from that?

Jay Mehr

Sure, absolutely, Glen. We're not doing any save discounting, so that's straightforward one of the great things about Shaw Plan Personalizer is it's transparent, it's simple, it's flexible and it's for everybody. And so that's for the benefit of our long-term customers, which we certainly heard loud and clear. And so if a customer's concerned about their pricing and packaging at Shaw, we have a whole new choice for them and an opportunity for them to reprice at full price and adjust their level of service.

Bradley Shaw

Yes. And I guess on that, Glen, is that it really allows the customer coming out of promotion on the Personalizer to be able to find what products and services at what level they want. So it's really flexible in that regard, and we're comfortable that's a nice transition as we come out of promotion.

Glen Campbell - BofA Merrill Lynch

Okay. And on the subscriber trends, can you give us a sense what they were like in the quarter and maybe post-quarter? Have you seen them steady, improving, deteriorating through the quarter?

Bradley Shaw

In this current quarter, you mean?

Glen Campbell - BofA Merrill Lynch

Yes, Q2 and then into Q3.

Bradley Shaw

Well, it's we're -- I think we're still seeing -- we have -- growth is certainly seeing that. I think there's -- we're still seeing some fall-over from the second quarter in that regard. But the promotional pricing is coming up. We're comfortable we have some nice growth opportunities in the quarter. And the key for us is -- as you go along here, there comes an inflection point where you're going to be pushed into the corner. And our focus and our commitment is to not do that. But over time, if promotion is the game, you're going to have to play it. But we're focused on adding value in other ways, and the Personalizer gives you everyday value. And we really believe this is the way going forward for Shaw and our customer base and how it gets them in there. But it's a balanced approach as we go forward to ensure that we can continue to grow and plan that balance.

Glen Campbell - BofA Merrill Lynch

Okay, thanks. Just a last one on wireless. I know you got a lot of options on the table, but let's say in the situation where you decided to really pull back, would there not be a launch based on the current build? Would you sort of mothball what you have and wait for next-generation technology? Could we see a sort of dramatic cutback in spending?

Michael D'Avella

Glen, that's certainly a possibility, but I think we don't want to prejudge it. We need to go through the process of evaluating the current state of LTE. I think you've probably heard that LTE is evolving at a fairly good clip. But it's not a simple decision. I mean, if we do make the decision to go with LTE, it will likely use up the 20-megahertz spectrum that we have. So you kind of major that in terms of how you want to deploy it. And in order for us to do that, we would have to be fairly comfortable if there's a good fallback option to either other frequency bands that are using LTE or other technology that's probably going to be HSPA. And so we need to kind of go through the exercise of deciding whether or not this is the right technology path for us, bearing in mind that whatever we do in the space is going to be focused, really, on providing high-end data services and data-centric type services that extend our broadband advantage. We're not trying to compete here at the low end of the voice scale with all the other new entrants.

Operator

The next question comes from Jonathan Allen from RBC Capital Markets.

Jonathan Allen - RBC Capital Markets, LLC

First question on wireless, and from all of the discussion it seems to be really just a question of whether you do HSPA or LTE. Is that the limit to your strategic review that you're doing for it? When I say strategic review, I think of other things as well, partnerships, maybe acquisitions. Are all of those also on the table?

Bradley Shaw

I think, Jonathan, it's -- we're looking at all options. And it's a little -- we just come out of the strategy session yesterday with the Board. So it's a little early to be defining on what that is. But certainly, there's some options out there for us that we're going to discuss and see where we go.

Jonathan Allen - RBC Capital Markets, LLC

Okay. I Just want to follow up on your discussion about cable and balancing, not wanting to be pushed into a corner. It seems to me, though, that subscriber growth has slowed quite significantly in the last couple of quarters. And I'm starting to wonder if you are starting to feel a little backed into a corner. And if so, you mentioned the Gateway, the Gateway device being launched in May. And from the sound of it, a better user interface, whole-home PVR capability, I think you also mentioned IT streaming in there as well, too, I mean, to me, that sounds like a pretty good competitive advantage or something that you could fight back with Telus. Will you be aggressively pushing that? And is this a way that we should look at subscriber trends picking up again in the next few quarters?

Peter Bissonnette

Hi, Jon, it's Peter Bissonnette, the Gateway guy. And we've just finished a demonstration as a part of our strategic overview for our Board. And as you know, the composition of our Board is made up of Canadians and Americans, and they've seen -- many of them have seen the CES shows, et cetera. And I think they were very, very delighted when they saw the performance of the Gateway that we demonstrated to them. The look, the feel, the user interface, the capability for six televisions being controlled independently from room to room, which, as we mentioned in the past, Leapfrog was available in our competitors' homes are very, very exciting. We still have positioned this as a more of a, I'll call it a higher-end lease service. But we're making the Gateway available through our Easy Own process that we have in place for our HD PVRs and our lower-cost -- and our HD boxes. So we think that when customers see this available for them on the first week of May that they're going to be really delighted with it. Now the last time we talked about the Gateway, we couldn't tell you who's made it. But today we're delighted to let you know that this is a manufacturer that has made for us many, many hundreds and hundreds of thousands of modems for our telephone product, Arris. And of course, the Moxi box is a very, very high-end box. And so the look and the feel, the Internet guide, the IT interfaces, the DLNA, which will become available in, I think it's in July, as a part of the versions that we'll be ultimately moving to will make this a very, very compelling box. And so it's just one of the things that we're looking at in terms of adjusting, if you will, the competitive advantages. And we're -- I think we're trying to maintain a disciplined approach to pricing and a value-add. And this is a great part of that value-add proposition.

Jonathan Allen - RBC Capital Markets, LLC

I know I've taken up a lot of time. If I can just ask a summary question of that. So with the subscriber trends that we saw this quarter coming down significantly year over year, is this basically now a new normal for you? Or with all of the competitive changes and things that you talked about earlier, should we start to see some recovery?

Peter Bissonnette

Well, our -- obviously, our objective there is to turn this around in terms of trending, et cetera. And the Gateway box is just one of the tools that we have. We have a very compelling Internet product. I think, as Jay had said, in our Personalizer plan that the foundation Internet product is a very, very robust one. We believe that it's -- the Internet services that we have will start to become the driving force in our product mix, and we haven't even turned up a dial, not yet.

Bradley Shaw

Yes I think If you got some media [ph] and Internet and phone, we got pricing price power when you look at east to west and opportunities there. But it's not growth at any cost. And it's good growth. It's growth that contributes. And it's not a race to the bottom.

Steve Wilson

And Jon, and let me just add on that from a financial point of view. If you look at total cable ARPU for the first two quarters of this year, we're running at around $106 versus $102 average last year. On Internet, we're over $42 compared to under $41 last year. And that's before the rate increase that we've just put through now and so with the cable one as well. And digital is maintaining relatively flat. So ARPU is still growing because there still is pricing power in the products, and we have an enormous base that, that takes into account. One of the things that I think out there the people are concerned about is the guidance for the year. We said there'd be a moderate for a core of cable of satellite, that there'd be growth, but that was moderately less than 7.5%. And what I can say is that in order to achieve that, we have the rate increase now which we put in place in April, and Jay talked about that. Even allowing for some promotional activity there, that's going to add $35 million of EBITDA in the second half of the year. And then secondly, of course, we've had the restructuring initiatives, which are somewhat phased, but they will add $20 million in the second half of the year. So there's $55 million of EBITDA growth coming just from those two things. So when you look at this, not just from subscriber point of view, you have to look at EBITDA, you have to look at the cost initiatives that we've undertaken, the pricing power that's still in the product. And what I can say is that of 12 analysts here, when you look at their core cable and satellite estimate for growth for the year, there are five -- the group of you are at 5.5%, which is in line with what we said, which was moderately less than the 7.5%. And when Greg asked the question, we said that will be one or two points less. So I think where you're thinking in terms of the second half of the year from a financial point of view, once you take all those things into account, is pretty well on track.

Operator

The next question comes from Bob Bek from CIBC.

Robert Bek - CIBC World Markets Inc.

I got a couple of media questions, I guess, for Paul. Obviously, strong ad growth in the quarter. Can you give us any color at all on the conventional specialty split? And I know visibility is always hard in this space, but any of your thoughts on the market and the continuing improvement or recovery on the conventional side? I got a couple of follow-ups as well.

Paul Robertson

Sure, Bob, it's Paul here. Yes, we're pleased that the growth was supported by both conventional and specialty, and both are growing really well. So that's -- in terms of the market overall, clearly, we're still in total green light mode and so the recovery is totally intact. All the key categories that we consider kind of bread-and-butter, the big ones like food, automobile and retail, are all showing good core strength. So we see no signs of the ad market easing up. And we're really well positioned within that because of our programming strength and our renewed vigor.

Robert Bek - CIBC World Markets Inc.

Can you talk a bit about the programming strength or at least the requirements for investment? On the conventional side, at least CCTV has got a bit of a lock on the ratings. You inherited that. Should we expect to see a fairly material effort to try to kind of break into that ratings pack a bit? Or is it something we'd see take place over a longer period?

Paul Robertson

Well, we really have to look at the ratings on a by-market basis in terms of kind of how you're doing in terms of top-20 programming. And we've, again, with the improved debt position a lot over the last two, three years on that basis. So we now get five to eight of the top 20 in those key markets. So we are really quite well positioned compared to historic. And so everyone is always looking for an opportunity to improve their position. That's what it's all about. As I heard Brad say earlier, not at any cost, right? So we're going to be prudent.

Robert Bek - CIBC World Markets Inc.

That's good, thank you. And perhaps for Steve, just with the CapEx, I know it's not a very capital-intensive business, but just to get a better sense on the media cash flow, free cash flow, what kind of CapEx outlook do we see for this? Or I know you don't break out individually, but just any ballpark you could give would be great.

Steve Wilson

No, Bob, that's a good question, because we're running at $64 million of free cash flow as reported. Actually, better than that with the two losses [ph] of the equity pick-up. In the last two quarters, we will see, and the first two quarters were fairly light in terms of both CapEx and benefit obligation spending. So in the last two quarters, we'll see that pick up, and we expect capital to be about in the $20 million range in the last two quarters, and the benefit spend's about $20 million as well. So that's a substantial pickup from the first half of the year.

Operator

The next question comes from Tim Casey from BMO Capital Markets.

Tim Casey - BMO Capital Markets Canada

Brad, can -- when you were going through your strategic review, should we assume that you're -- on wireless, should we assume that you're still committed to a facilities-based offer? Because in the past, you talked about how wholesale agreements just aren't economic to you and you prefer to control all aspects of your operations. So are you still committed to facilities-based offer?

Bradley Shaw

Yes.

Tim Casey - BMO Capital Markets Canada

Has anything changed with respect to your thoughts on any wholesale agreements as an interim phase or anything like that?

Bradley Shaw

Just coming out of the session yesterday, I think we're a little early. We have a little bit of follow-up the management team has to do here for the Board. I tell you, we've talked about a variety of things. And we'll be able to give you more color on that in a couple of weeks here. So it's -- we're open.

Tim Casey - BMO Capital Markets Canada

Right. Is there any other assets that you're reviewing? Any of the media assets you own that you're going to look at whether or not you want to hold on to them longer term? I mean, there are some smaller ones in there that would seem to be maybe of interest to others and not strategic to you.

Bradley Shaw

Well, we're pretty comfortable where we are right now. We have BBC Kids, and One - Mind, Body is no longer even part of the portfolio. But we're comfortable we can renegotiate any of the deals we need to do to give us better economics in some of the lower-end channels. We like the mix we have now. Paul has some plans to do a few other things. But no, we're comfortable where we are now. And there's really nothing in the offer to look at any kind of...

Tim Casey - BMO Capital Markets Canada

Right. And lastly, it seems like an obvious one. But given the way you talk about wireless, we should also assume that you are still committed to participating in the 700 wireless spectrum auction?

Michael D'Avella

Tim, I think we're going to wait and see what the auction framework looks like before we make that call.

Bradley Shaw

Yes, we have to really see what is the framework, what does the government have in there, and we're just not totally sure what's going to come out of that, and then we'll base it on that.

Operator

The next question comes from Rob Goff from Northland Capital Partners.

Robert Goff - NCP Northland Capital Partners Inc.

Peter, you've used the expression before "throttling up" or "throttling down", and not to put words in your mouth, but would it be fair to say that you throttled down on the digital boxes ahead of the new box launch?

Peter Bissonnette

Are you referring to Internet speed, or...

Robert Goff - NCP Northland Capital Partners Inc.

No, no, no, in terms of how hard you pushed on the product. Did you pull back on the digital boxes in anticipation of the launch?

Peter Bissonnette

No, I would say that when we were throttling up, throttling down, we were saying at that time, but if we wanted to be reported the other time and in penetration and then some are saying the industry is significantly higher. And we said, yes, but the industry have been basically subsidizing that growth. We said we don't need to do that. It's not as critical. What became critical, though, was some of the threshold. The 80% threshold became critical for us in terms of our ability then to have more flexibility in the way that we program and the way that we package our services. And so to the extent that we introduced a, I think, the rental model, which was very, very attractive, and we took advantage of the buoy that existed in our penetration, we've done very, very well. But that still won't really tinkered with that as we go into the, I'll call it the realm of the Gateway. We think that the Gateway will appeal to a higher-end customer. But when they get that Gateway and the various slave units, they're going to be the most satisfied customer, because it is, frankly, the most rewarding experience that we've had in the cable industry in all the times I've been around. It is a very, very compelling experience. So we think it will develop its own kind of ramp in terms of growth, and it will be based solely on the desire for the highest quality.

Jay Mehr

And Rob, building on what Peter said, sort of the inference behind your question appeared to be our digital growth numbers. And I think our plan is well on track towards our 80% digital penetration by the end of the fiscal year. And what you're more seeing is the natural evolution of our programs as we continue to move -- we've hit sort of the level that that program was designed to take us to. And I think you'll see the next level of digital growth come with the migration of services from analog to digital, and that will evolve and take it to the next spot as for the digital plans. So there isn't really a shift in approach. It's just more of a natural inflection point as we hit our 80% number.

Robert Goff - NCP Northland Capital Partners Inc.

And if I may, on the prospective impact of the rollover of the promotional packages, if you were to do a mark-to-market on the cable rates, would that be like a $1-million-per-month impact or a $2-million-per-month impact? Just sort of a guidance on what that might be, if you could.

Steve Wilson

Rob, there's certainly moving pieces there. It'd be dangerous to do that. So I know you're trying to model it out, but I'm not sure that we can really help you with that one.

Operator

The next question comes from Peter MacDonald from GMP Securities.

Peter MacDonald - GMP Securities L.P.

I got a couple of maintenance questions and a couple of follow-ups. So first, the CanWest on your balance sheet. Do you still intend to refinance that?

Steve Wilson

The 13.5% PIK notes?

Peter MacDonald - GMP Securities L.P.

Yes.

Steve Wilson

Yes.

Peter MacDonald - GMP Securities L.P.

And we should expect that by the end of the year type of thing?

Steve Wilson

The call date is in August. It's a one-to-one call in August.

Peter MacDonald - GMP Securities L.P.

Okay, and the depreciation expense in the quarter, is that a good run rate to use?

Steve Wilson

Yes, I believe so.

Peter MacDonald - GMP Securities L.P.

Okay, then on the follow-ups. On wireless, I'm just trying to get an understanding of what the tipping point was that led to delay. Was it -- is it cost? Is it how you intend to use the spectrum? I'm not really getting an understanding of that.

Steve Wilson

In regards to the delay?

Peter MacDonald - GMP Securities L.P.

Yes.

Steve Wilson

Well I think -- Michael, why don't you start and I'll finish?

Michael D'Avella

Well, I mean, look, the evolution of LTE is happening a lot faster than anybody anticipated. And when we see Verizon, probably the most aggressive in terms of deployments, and the kind of cover pops that they're talking about in the U.S. and the devices that they're actually causing to be built. Look, I just -- it caused us to simply step back and say do you really want to be the chipset [ph] HSPA network in the market that is heading in the wrong direction from a technology point of view? So we're making a prudent call here, and prudent call is step back, watch LTE evolve. It's going to evolve over the next 24 months. And you're probably going to see some pretty clear ecosystems evolving around whether you're in the AT&T camp or the Verizon camp. So that drives a lot of decision here. And we've only got especially negative spectrum, and you can only use it for one or the other. It would be foolish to split it up into HSPA and LTE. And if you're the new guy in the market with a strategy to focus on data and bundling that product with all the wonderful broadband things that we do, and, in fact, our video services are going to be part of the mix as well, you got to make the right technology call.

Peter MacDonald - GMP Securities L.P.

And then the CapEx that you spent to date. There's not -- there's no waste in that CapEx? You will be able to utilize everything you spent on?

Michael D'Avella

Well, some of it's going to be redeployable if we head down that path. Yes, absolutely. When we made the vendor choice, we clearly had an LTE path in mind. We didn't pin the time, but we're now in a position we can make some of those calls.

Steve Wilson

And Peter, no doubt a factor of when you look at retention spending, what's going on currently right now, $15 a month, those types of things are to us seem like a little bit of a chase to the bottom, as I've mentioned earlier. So those are a factor also.

Bradley Shaw

Yes, and just to add to that, in terms of people that talk about wireless, still, I mean, these are very important decisions from a technology point of view and also making sure that we look at whatever alternatives there are out there. Let's remember that in the early days, the early years of wireless, it's not going to be a significant EBITDA contributor. So if you're a little bit off and you hit your timing right with the right technology or you have some other way of approaching the market, that is, it would seem at this point, a very prudent program to press that look at the state of the market today. I mean, nothing wrong with letting things settle down here and seeing where they come out. And then we'll be ready to get into the market in a way that's appropriate for us.

Peter MacDonald - GMP Securities L.P.

The other question I have is on the basic subscriber losses. When you look at the experiences that you had in Manitoba, when you compare to where Telus' rollout is today, where are we in that erosion? Are we early on? Should we expect the subscriber losses, pending whether or not the Gateway is a big impact or not, should we expect the subscriber losses to accelerate, stay where they are for a couple of years? Just trying to get a feeling about where we are in that.

Jay Mehr

Yes, I mean, we're in our sixth year of competition with Telus TV. They've changed platforms and certainly have gone very aggressively at their most recent platform. So they would have probably 300, and I guess they wouldn't have released their quarter yet, mid-300s customers at this point. So I think we're in a point where both sides are maturing, and presumably, Telus would be doing the natural thing with three-hundred-some-odd-thousand customers in trying to figure out where to make money off that base at this point. And so I think that's what we experienced in the other marketplace is when you're a brand-new entrant, you don't necessarily need to get a return on your investment. So we're seeing some positive signs in that regard. And we've got lots of levers in the competitive environment here. The Gateway is certainly one, but probably even more significantly is broadband leadership and the opportunity for us to really drive our Internet business. And certainly, the business market is material for us. And in that case, the telcos are really in a near-monopoly position with 90% kind of shares involved. So there's good opportunities on that side of the business. So we think we're in a very balanced competitive environment.

Steve Wilson

Yes, just to add to that that, as Jay said, there are still great growth opportunities. We talked about pricing power and what we've done in the business. But this is not to say that we don't take subscriber losses seriously or that we're complacent about it by any means. But I think everybody has to keep in perspective here that we lost 20,000 basic subs this year on a total base of 2.2 million customers. So we're balancing all of those things, and we're also focusing on the core business to make sure that we've got the weapons to be able to provide our customers with what they need and what we need to be able to grow value in the future.

Jay Mehr

And the IPTV footprint is significant for Telus. So it's covering a majority of the market.

Operator

The next question comes from Maher Yaghi from Desjardins Securities.

Maher Yaghi - Desjardins Securities Inc.

I just wanted to talk a little bit about your new box strategy. Talking to maybe about the costs associated with upgrading your customer base with these new boxes, when I look at Telus, they have a happy partner in Microsoft willing to subsidize the Xboxes for free, basically offering them to customers. When you look at your subscriber base and what it takes for you to offer these Moxi boxes, you -- can you maybe talk to us about how you can -- what is your contemplated costs associated with upgrading your subscriber base with these new boxes so that you can continue to be competitive in a market where more and more customers are looking for multi-HD receivers in every room?

Bradley Shaw

The multi-HD receiver, if that's the quest, then they will go to the best. I hate to say that in a cocky way, but when you have six rooms within a home and all have HD -- different sources of HD and they can control all of the HD, the quality of the HD will be as high as it's available anywhere in the industry, then they will look at this. So we believe that the quality-hunters will come to our Gateway. It's that significantly better than what's out there right now. And then in terms of the deployment, Jay can talk about that. But it's not something that's going to be broadly deployed initially. It's going to grow as our HD boxes, our HD PVRs grew. And it was in a very low subsidized kind of approach. Customers will see the value in it, and they have options to buy it or rent it.

Jay Mehr

Yes, absolutely, this is a high-end solution. I think if you're trying to sort of evaluate sides in terms of the battle for the big screen, which is really what we're talking about here, for sure, we spent the last of couple of years investing very heavily in our HD pictures. And there is no question that we're in a leadership position in terms of picture quality that is offered on the big screen, absolutely no question. We've invested heavily in transforming our on-demand product. And those were the two major plays that we've made over the course of the past couple of years. And I don't think they were wrong. At the same time, the IPTV players in all of our markets with Microsoft Mediaroom, which gives them a more Internet-feeling guide and a whole home PVR solution. And I don't think they were wrong either. And by the way, if you look at the technologies that were available to each of us as we are making those decisions a couple of years ago, we probably both made the rational decisions which are available to us. If you fast-forward to today, our new Gateway solution provides a very compelling Internet-feeling guide, and it's a step forward in terms of the guide and a very, very compelling six-theater home PVR solution. But remember that all of our platforms have a roadmap. So our true two-way guide is available for VOD applications today and will be fully available in the fall for our existing boxes, and actually I think our true two-way guide's even a step forward from what we have on the Arris box today and certainly a step forward in terms of Microsoft Mediaroom and, of course, is backward-compatible to much of our base. And there's whole-home PVR solutions coming for the base as well as we evolve in platforms. So we've got a roadmap for all of our pieces, and so there certainly isn't a need to do a major conversion here. And there is no question, if you look at the biggest screen in Western Canada, we're in a leadership position even today without those things. We'll absolutely be in a leadership position as we move forward.

Maher Yaghi - Desjardins Securities Inc.

So basically, you think your customers value -- would value your product for $400, $500 more than what they're getting with the competitive product? They're willing to pay that price to get that quality. That's basically your bet right now.

Jay Mehr

Well, they have been all along with HD PVR. They'd be paying for those HD PVRs, in spite of the fact that they could have got something -- an alternative service, the quality of the pictures is what was driving that desire. And there is clearly a difference in the quality of the pictures.

Operator

The next question comes from Dvai Ghose from Canaccord Genuity.

Dvaipayan Ghose - Canaccord Genuity

If I can go back to the HSPA versus LTE question. If you decide to go all-LTE, and I completely accept the fact that it's going to have tremendous carrier support and global economies of scale over time, but at the moment, there's very limited device availability. As you know, Verizon and AT&T have clearly only put data on their LTE channels at the moment. They're underlying voice network is still HSPA or CDMA. And at least one of the incumbents disputes the fact that if you go LTE-only that they have to provide you with HSPA roaming as part of the mandated roaming rules. So given all those complications, when do you think you could actually build out a ubiquitous LTE offering?

Bradley Shaw

You've just described why we're doing what we're doing.

Dvaipayan Ghose - Canaccord Genuity

Fair enough. So if you delay, and let's say you especially delay beyond 2012, which may be the case, I guess your comments are that there's no major urgency. What I would contend is, obviously, penetration rises every day. Increasingly data-centric customers want iPads and other wireless devices to complement their desktop broadband experiences. You run out of mandated roaming as part of the mandate from the AWS auction in 2014, which is not that far away now. And in the interim, you talk about Telus' aggression, they're gushing cash flow from the wireless business, which they're clearly using against you in the broadband business and TV business without your ability to impact them on the wireless business. Are these important factors in terms of accelerating your rollout?

Jay Mehr

I could certainly speak to the impact on the corporate business if you'd like to, but I think it's -- let's be absolutely clear. We've made some dramatic moves in terms of creating a rational pricing in the marketplace. And we continue to remain hopeful that our competitor will follow us. And I think that's what you're seeing in terms of what's happening in terms of our subscriber numbers. In terms of the competitive balance, the concept that we would be able to launch a wireless network that could fundamentally shift bundling as the sixth player in the marketplace and change the core economics is one that's a little hard for us to see. We're going to win the battle for our core business within our core business. We're going to win it through a broadband leadership strategy and being the leading Internet provider in our market. And certainly, we just recently went through some usage-based billing consultations throughout our country in 34 different markets, sitting and meeting with our customers. And while they weren't all delighted with some of the things that we've done around the Internet, I can tell you that there wasn't any of them that were willing to consider leaving us in terms of going to a telco competitor for the Internet. That's absolutely our core competitive advantage. We're going to make it stronger, and that will be what tips the scales badly throughout [ph].

Bradley Shaw

And if I could just, again, not to drive this down to wireless, but to keep looking at the bigger picture here, we've just had a very energizing discussion with our Board on an overall strategy is very much in alignment on where we're going here. And it's a big-picture view of all of the businesses that we have and how we create shareholder value from it. And we've got tremendous opportunities in the core, technological opportunities to be able to compete very effectively and to develop and further that competition. We've talked about wireless. We talked about the fact that we're looking at the technology, and that, that will change the time frame if we do. And we're also looking at other options as well. Wireless is not necessarily a nirvana business, certainly not in the short term. And so even if we're a little bit late here, we see a focus on the core as being important. And then the last thing, the media, and you'll disagree with me on this, but the media investment has turned out to be great for us. There is tremendous synergy that we're just starting to begin to realize. So we're very much in alignment, and we're very confident about the strategy that we have going forward.

Jay Mehr

And Dvai, I really think that over the next few years, the fight is still for the home. And that's where you're going to see our focus along with other things.

Dvaipayan Ghose - Canaccord Genuity

That makes sense. If I can just ask one more question on a different topic, which is a threat from over-the-top video. I guess in Canada, the arguments against the threat for over-the-top video have traditionally been, number one, we charge usage-based billing for Internet services, which is not generally the case in the United States, for example. And number two, Digital Rights Management, where we have a lot of Canadian companies which own a lot of rights to content. But I guess both those issues have seemed to be somewhat challenged this year. On the usage-based billing, of course, there's been a huge political furor over the wholesale issue, which seems to have seeped onto the retail side as well. And when it comes to content, obviously, you're aware of the Netflix-Paramount deal recently. To what extent is this a growing threat in your mind, given these factors?

Michael D'Avella

Well, let me deal with the content issue. You might want to comment on the usage-based billings, Peter. So on the content side, I mean, what they're -- they are obviously being more aggressive in terms of acquiring programming. They've done the Paramount deal, which is essential the pay-TV window for that particular content. That content is available to us, not necessarily in that window, but it's available in the earlier windows. So with whatever movies they have, we'll get through VOD. And even an extension of VOD, we can actually get the broadband rights. So they don't really have any sort of a content advantage from the perspective of being able to get that particular content. The high-quality content, which is called the premium content, that's sort of available from pay-TV offerings that either Movie Central or the movie networks provide, and typically that's HBO and Showtime and a few others, that's not available to them. And that's essentially part of that particular pay-TV bundle and pay-TV window. So we still have access to the premium content, the premium content to us is available on a variety of platforms, whether it's on demand or broadband and eventually on a mobile platform, if we want it. So they're not going to get that. And the Canadian market in my view, in our view, is a relatively better-organized market in terms of actually acquiring these rights. And Paul can certainly comment on what we do on the TV side of the business. But we have a pretty good pipeline of content acquisition in both the television side of the business as well as the specialty side of the business. And remember, those services provide a tremendous amount of content, obviously, in a scheduled and linear format. But we do have the ability to take as much of that as possible where we have the right and provide it on-demand, provide it on broadband, provide it on any devices. So our customers have access to whatever they want from the perspective of either movie contents or other types of content that we license either directly or through a variety of programming services.

Paul Robertson

And Dvai, we are of the mind that we still have a tremendous upside in terms of pricing power on our Internet services. And through the course of our consultations with our customers, I think what we've seen from them is a recognition that the principle of if you use more, you should pay more holds true. But we believe that as we work our way through some of the feedback that we receive from them, that there really is a win-win for our shareholders as well as our customers in the way that we offer our tiers of Internet services. Remember, in Western part of Canada, both the telephone competitor and ourselves, we do not -- we haven't charged a customer yet for usage-based, whereas in the East, both the telephone and the cable operators have been doing that for some time. And their pricing is higher than ours, and we believe that we still have that pricing power. And that we've been very creative in the way that we offer our services. What Jay said was that not one of the customers that came from those consultations was saying to us that if you do something, we're going to leave to go to a lesser-performing Internet service. There all acknowledged that our Internet service provides them with the kind of experience that they want, and this was really just a value and a price situation for them with respect to a threshold or an offering a threshold and the desire to know what they're paying on a monthly basis. And we think that we can address that through the manner in which we offer our tiers of Internet services.

Operator

The next question comes from Blair Abernethy from Stifel, Nicolaus.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

I just wanted to follow up a little bit more on the Internet, if I could. The usage-based billing testing you've been doing, you haven't really given us a sense of when do you think you might actually begin to shift the pricing over to usage-based billing, first off. And secondly, given the tiers you have now and the product at high end up 100 MIPS, do you see those -- has your feedback kind of given you a sense that maybe there's more tiers required? And I guess also with the Gateway product coming, does that maybe push the higher -- push it to move the higher-end up?

Bradley Shaw

Yes, that was one of the -- one of the conclusions we came to was that the thresholds -- because we don't use that other word anymore, the thresholds that were in place were probably more generous and -- which is part of a win-win kind of solution, our customers question the thresholds and the levels based on the kind of usage that they're experiencing. And interesting enough, the Netflix usage actually on our network has gone down since they introduced that, I'll call it the low-grade movie viewing experience, which intended to maybe not have customers hitting those thresholds as quickly as they would on a higher-grade kind of viewing experience. And so there are some impacts that have already been felt as the result of this. And I think one of them is we have a much, much better extent of what's important to our customers. And our customers said, "We are prepared to pay more for a higher value of service."

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Okay. Great. And again, any sense of -- is this going to happen this year, do you think? Or is it next year?

Bradley Shaw

We're certainly going to verify our pricing and packaging plans, probably the late spring, probably May, early June. The process, of course, is we did 34 sessions across the country in community halls, in libraries, and those concluded on the 1st of April. We got some further follow-up that we committed to do with the customers who came out to our sessions, who really came out and spent a couple of hours with us for a sandwich and a Diet Coke and have really helped us build our Internet product of the future. And absolutely, people have said to us, "Let's not divide the Internet product today. Let's figure out how to create a world-class Internet experience. And then we can figure out how to do pricing and packaging from there." So I think it'd be reasonable to get further clarity as we're going to go back and talk to some more customers about it. You'll probably read about it on social media like you seem to be reading about all this stuff, which is great. And we'll probably have a more formal announcement kind of end of May, early June.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Okay. That's good. It's very helpful. Thanks. And just one quick one for Steve. Steve, the tax rate this quarter is just below 25%. What's your expectation for the year on the tax rate?

Steve Wilson

So for the year, the tax rate will be between 28% and 30%.

Operator

And that question comes from Tim Casey, a follow-up question. [BMO Capital Markets]

Tim Casey - BMO Capital Markets Canada

Can you provide any goal posts or metrics for us on your expectations for the snee [ph] business? Can you -- any sign -- any clarity you can provide on how many dedicated salespeople you have there now? Anything you could put around that?

Bradley Shaw

As a part of our reorg, Tim, we actually were able to move the sales forces out to all of our regions. And we've also empowered those sales forces to be selling the full range of the products that they describe, which is the Ethernet over DOCSIS and PRIs, some other hosted products. And so we will have in each of our regions salesmen in those markets who will be making those sales promotional activities for us. So we're actually quite excited, because what we see is actually a material increase over the next three years in the kind of sales that will come from that segment.

Jay Mehr

But Brad has been very clear in terms of the expectations. So this business today is a couple of hundred million dollars a year for us in terms of revenue. Our business model was exponential growth over the three years, so you can do the math on 2x or 3x that and a margin significantly north of 50%. So it's not our whole growth story, but it's a big part of our growth story.

Tim Casey - BMO Capital Markets Canada

And would you -- would there be a specific dedicated CapEx associated with reaching those goals? Or is that -- once again, is that something that you think you can do with what you have now?

Bradley Shaw

I don't think you'll see a material change in our core CapEx run. If you sort of model it in and around 20%, maybe lower than that in year three, year four capital intensity, you get a sense of what's there. But remember, we're spending some capital in that business today. And because we haven't broken it out, you don't necessarily see any run rate. So I don't think you're going to see any major shift. A lot of our fiber segmentation, those segmentation, many of these products can actually be delivered over a traditional hybrid fiber coax which actually exists. So we're leveraging our core assets to make these products available now.

Tim Casey - BMO Capital Markets Canada

Very helpful. Thank you.

Bradley Shaw

Thank you, Operator. Thanks, everyone.

Operator

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

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Source: Shaw Communications' CEO Discusses Q2 2011 Results - Earnings Call Transcript
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