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Executives

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

Jay Mehr - Senior Vice President of Operations

Peter J. Bissonnette - President and Director

Steve Wilson - Chief Financial Officer and Senior Vice President

Paul W. Robertson - Group Vice President of Broadcasting and President of Shaw Media

Michael D'Avella - Senior Vice President of Planning

Analysts

Phillip Huang - UBS Investment Bank, Research Division

Vince Valentini - TD Securities Equity Research

Jeffrey Fan - Scotiabank Global Banking and Market, Research Division

Glen Campbell - BofA Merrill Lynch, Research Division

Robert Goff - Byron Capital Markets Ltd., Research Division

Colin Moore - Crédit Suisse AG, Research Division

Drew McReynolds - RBC Capital Markets, LLC, Research Division

Gregory W. MacDonald - Macquarie Research

Maher Yaghi - Desjardins Securities Inc., Research Division

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

Shaw Communications (SJR) Q2 2012 Earnings Call April 13, 2012 11:00 AM ET

Operator

Welcome to Shaw Communications' Fiscal 2012 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 will now turn the call over to you.

Bradley S. Shaw

Thank you, operator, and thanks to everyone for joining us today to discuss our second quarter results in fiscal 2012. With me today are members of the senior management team, including Peter Bissonnette, President; Steve Wilson, Chief Financial Officer; Jay Mehr, Senior Vice President of Operations; Jean Brazeau, Senior Vice President of Regulatory; Michael D'Avella, Senior Vice President of Planning; Paul Robertson, President, Shaw Media; and Jim Cummins, Group Vice President, Shaw Satellite Operations.

Earlier this morning, we released our Q2 results, and we will spend some time discussing our subscriber and financial performance this quarter. But before we begin, I wanted to provide an update on some of our strategic priorities that we have discussed in the past.

In the last 40 years, we have made significant investments to create one of the leading entertainment and communications companies in Canada, and Shaw has experienced tremendous growth and success over the history of our organization. However, as our industry matures, cable, telecom and broadcasting entities are challenged to find ways to grow and differentiate their services. We believe that our overall strategy is the correct course of action, and that we are continuing to invest capital, and focus on operational resources, in strategic initiatives that solidify Shaw's position in the competitive environment.

Our DNU activities continued throughout the quarter and the reclamation of the analog tiers will enable us to offer our customers unmatched Internet speeds and a greater selection of HD and VOD services.

Our Wi-Fi network continues to be constructed, and earlier this year, we launched our Shaw Exo WiFi finder app. We will continue to focus on scaling the network and this remains a priority for us in fiscal '12 and '13.

As a technology, Wi-Fi is gathering a lot of attention regarding its role within the broadband and wireless ecosystems. We believe it will further differentiate our broadband experience and increase the value proposition of our Internet services. I also want to reaffirm that based on the government's announcement on March 14 regarding the 700 megahertz auction, we continue to view the economics of the traditional wireless network as unattractive and have no intention of building such infrastructure.

We continue to focus on opportunities within the business market in Western Canada. During the quarter, we announced contracts with BC Biomedical Laboratories, Husky's Energy Sunrise Project and the city of Calgary.

Last week, we announced a strategic marketing agreement with Xplornet that will enable us to offer a bundle of services to our Shaw Direct customers. Over time, we believe this partnership will help grow our DTH business and improve the financial performance of our satellite assets.

Over the years, Shaw Communications has consistently delivered strong customer results and industry-leading financial metrics. We have faced competitive pressures from IPTV threats for a number of years. However, 2011 was the first year we actually lost cable subscribers.

Our major telco competitor has rolled out their IPTV product across the majority of our cable footprint in Western Canada and continues to employ an aggressive market share strategy. This strategy is predominantly focused on heavily subsidized equipment and promotional offers aimed directly at our video customer base.

On our last conference call, we discussed a change in our tactics regarding our approach to the competitive environment. Throughout the quarter, we initiated a variety of packages and offers, and the results of these subscriber acquisition strategies are evident in our Q2 results.

During the quarter, we added over 60,000 core RGUs compared to 11,000 in Q1 and 30,000 a year ago. Our basic subscriber losses moderated to less than 10,000 this quarter compared to a loss of 23,000 3 months ago.

This approach to the competitive environment, including costs associated with staffing, marketing expenditures, and the impact of our subscriber activity over the last quarter has caused financial results to come under pressure. We view the majority of these expenditures as core investments that provides long-term benefits for our company, but we do not anticipate that our cable operating cost structure to be reflective of the Q2 run rate of $450 million going forward.

The core of our strategy has always been customer service, and our operations are now fully staffed, including the 3 additional locations in Calgary, Vancouver and Edmonton in December. Call center staff have undergone additional training and have the ability to perform inbound and outbound calling, which will help us manage peak periods of call volume activity. We continue to develop more online, self-serve functionality as another avenue for our customers to reach us. We believe that the majority of our customer service issues are behind us and that reestablishing our reputation as a customer service-focused organization is of utmost importance to us.

These customer service investments were necessary, and I understand and acknowledge the importance of delivering an exceptional customer experience. I began my career at Shaw over 20 years ago in customer service, and exceeding the demands of our customers has always been and will continue to be the foundation to our future success.

The value of an effective marketing campaign, program and creating brand awareness and recognition is becoming increasingly important. We are excited about the launch of our newly-branded network, the EXO network, as we believe we have an opportunity to reconfirm our technology leadership position to the market and create additional brand awareness with the existing and new customers.

Our branding and marketing efforts will be led by our Chief Marketing Officer, Jim Little, who will be joining the Shaw team at the end of April. We look forward to his contribution as he brings a wealth of knowledge and has held senior marketing positions with several leading Canadian organizations.

We are focused on customer profitability and sustainable growth initiatives, and we are not satisfied with this quarter's financial performance. We expect Cable margins and free cash flow to improve in the second half of 2012. But considering the rapidly evolving dynamics within our business and our financial results to date, we announced today that we have revised our consolidated fiscal 2012 free cash flow guidance to $450 million.

We also announced that we anticipate a marginal decline in Cable operating income before amortization year-over-year. Modest growth in Satellite and consistent year-over-year operating income in Media.

The competitive environment that we operate in is not predictable and that means risk to this guidance.

For the remainder of 2012, we will continue to push ahead with our strategic initiatives and focus on sustainable growth. The full effects of the recent subscriber activity were not entirely reflected in our Q2 Cable revenue results, and therefore, some revenue pressure will continue. However, we do though expect that our Cable cost structure will moderate going forward. Although we anticipate continued RGU growth for the remainder of the year, we intend to be more disciplined and prudent. We remain confident about the long-term profitability and free cash flow profile of our consolidated business, and we believe we are taking the appropriate course of action to protect and grow our subscriber base. Leverage our network to accommodate new technology and provide an exceptional customer experience.

Thanks to everyone for joining us today, and we would now like to open the phones to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Phillip Huang from UBS.

Phillip Huang - UBS Investment Bank, Research Division

I wanted to ask you about your market strategy. Obviously, one of the bright spots in the quarter was the strong subscriber net adds across the board. However, I believe you've -- I think you've reduced some of the promotional activities and raised prices in March after the quarter had ended. And with fewer attractive promotions in the May quarter, I'm just wondering if -- whether you think the strong subscriber trend that we saw this quarter can be sustained and then I think correspondingly, can we expect a moderate -- a more moderate impact to your margin? I think you kind of alluded to that in your remarks saying that your Cable OpEx run rate of $450 million this quarter is not reflective of future quarters, and you expect that to improve?

Bradley S. Shaw

Phil, let me maybe answer your questions in a different way, and I want to kind of go through a little bit for those on the call and just kind of walk through some of things that we've gone through over the last quarter and touch on a couple of things. As you know, and we've -- I said in my speech, that customer service is always been our core of our business, and our key strategic advantage. In the fall, we let our customers down. We didn't deliver on our commitments, and of course, we faced some significant disruptions in our customer care centers. This happened for a variety of reasons. I think low staffing levels, we had some customer confusion regarding our DNU initiatives. We had the OTA transition. We had lengthy fulfillment times regarding our Shaw Plan Personalizer, and we had a variety of other offers we had in the market. So -- and in 2011, we began to put in the necessary operational resources and strategic investments required to fix the problem.

Jay Mehr

Phil, let's see if I can build a little bit on what Brad is saying. I think if you look to Q2, it was really about us giving ourselves some space between the lingering effects of our customer service issues that built on top of the environment we were in. And these saw us make the decisions that we made, and you know that pricing and promotions are a part of our business. It's a matter of degree. And I think if you look at the quarter in the past, we were more maybe tactical with our offers. But this time, with so much noise in the marketplace and the situation we were in, we felt we needed to be more direct in that to demonstrate to our customers that we really wanted their business. And the thinking behind that – that was the thinking behind, certainly, the launch of the Visa gift card program and simple bundles we had in January, I think you can see in the numbers looking quite literally that, that approach worked, and we were able to shift the core RGU momentum in our favor in the quarter. And that really reflects trying a bunch of things in a short period of time. But by the same token -- our financial results, that our subscriber activities generated are not acceptable to us.

Peter J. Bissonnette

And so, Philip, sorry -- it's Peter Bissonnette. So really and sort of the long-term strategy, in March, we replaced simple bundles with our new EXO offers. There was a lot of excitement around those offers. But the EXO offers really were positioned so that customers really weren't able to downgrade, if you will, and reprice themselves. And so there's good value for our customers, but they're less appealing in terms of enticing them to repackage or downgrade. We have created positive momentum, and that was one of the challenges that we were looking at was that the momentum appeared to be shifting in favor of our competitor. And we think now, with the approaches that we've taken, bolstering the call centers. So that they can take 24 hours a day, they can handle any calls. So traditionally, we'd handle up until 6:00 in the evening, it's now handled 24/7. And the wait times that we're experiencing at September had now diminished to an average of 3 minutes. We have our callback feature working absolutely pristinely so that customers don't have to wait for 3 minutes if they don't want to. That they can get a call back within that 3- to 5-minute period. So the momentum has changed. The -- you've seen the numbers with respect to our customer growth. We continue to believe that our subscriber base represents the long-term profitability of our Cable franchise, and we need to protect that. And that certainly was -- really what was driving our behavior. We need to protect that for our existing customers and compete for new subscriber opportunities. And going forward, we're really focused on customer profitability. And so, that's really, if you will, will be our mantra: customer profitability and sustainable growth. So we're confident that with the approaches that we've taken, what we put in place in terms of our company that -- this long-term profitability and free cash flow profile of our consolidated base of business will be much more in keeping with what you're used to with Shaw.

Phillip Huang - UBS Investment Bank, Research Division

Got it. That's very helpful. If I could just follow-up, the other bright spot in the quarter was obviously, I guess, Cable revenues despite all of the attractive promotions, it maintained mid-single-digit growth. Just wondering if there might be any delayed impact of revenues from the promotions and whether there was any sort of onetime benefits to revenues in the quarter like maybe business contracts that may be playing into some of the -- I guess the way the revenues have been growing, but margins have been sort of diluted.

Steve Wilson

Well, Philip, as we said, the simple bundles were very popular with our customers, and a lot of them used this as an opportunity to lower their cost. So we have seen clients in monthly revenue in Cable over the last couple of months, which have leveled out now, and we expect those to increase. But we will be below where we expected to be earlier in terms of revenue, and that's part of the difference in free cash flow here. And really if you look at it, maybe $30 million for the rest of the year lower in revenue. Just as a result of where we are today on our ongoing recurring revenue base.

Operator

The next question is from Vince Valentini from TD Securities.

Vince Valentini - TD Securities Equity Research

If I can just clarify that last question first before I ask another one. Am I reading correctly what you're saying that you fixed the call center issues and you restarted sort of the subscriber growth engine with all the marketing initiatives in the last quarter? And now going forward, now you have the momentum back, you can get by without quite as much unusual marketing expense, such as those Visa gift cards and any other unusual promotions you had. But because the call center issues are fixed and you have your momentum back, you wouldn't expect subscriber growth to fall off even if you don't spend quite as much on marketing in Q3 and Q4. Is that a fair characterization of what you're trying to say?

Steve Wilson

Yes, I think going forward, in terms of what we're talking about -- disciplined and prudent, Jay said we did a lot of things this quarter to respond to that. We're in good shape in terms of customer service today, back where we need to be. And so if there were onetime costs in this quarter, I think people need to understand that because we talk about $450 million in the cost base in Cable. But within that, there was about $5 million of overtime that we were still incurring that won't be in place going forward in the next 2 quarters. There was $12 million of additional marketing cost. That was largely surrounding the Visa gift card campaign and also the launch of the EXO network around the Super Bowl time, and $6 million of certain other costs. That's about $25 million that will come out of the next 2 quarters in the Cable cost base.

Vince Valentini - TD Securities Equity Research

Okay, that's great. You basically answered my next question on that recurring call center cost. So I'll ask a different one then. The other cost item, I guess, is programming costs. Is the ramp up you've seen and sort of the run rate we see in Q2, does that now reflect most of the renewals that have happened this year, or has that continued to ramp up in future quarters?

Steve Wilson

Vince, the ramp up that you saw in the quarter is reflective of sort of the full year activity, most of the increases take place in our case generally in January. And so they're already baked in.

Vince Valentini - TD Securities Equity Research

Okay, that's good to know. And last one for me if I can just flip that around for Shaw Media, have the rate increases that you have achieved from other distributors pretty much been reflected in the Q2 run rate, or do you get a ramp up on there?

Paul W. Robertson

Yes. It's Paul here. Only partially reflected so far in the sense that we're seeing the flow-through of a couple of the majors, but there's still probably half the distribution base that's yet to be increased. That's just based on the end of contract terms and how they're staggered. So we expect to continue to see upside momentum on subscriber revenues. A nice lift in the second quarter. And some of those are one-timers, but it's a nice backbone of growth for us over the next few years.

Peter J. Bissonnette

I just wanted to ask you a question Vince, so we're turning the tables here. But one of the things you asked me that Steve answered was on the sustainability of these RGU growth, and I don't want to leave you -- we don't want to leave you with the impression that, that the numbers that we've achieved this quarter, that those are sustainable. There's a cost base associated with that. And so it'll be somewhat less than that, but the cost that we're seeing with that kind of approach, a more modest approach, will also be reduced.

Jay Mehr

I would think, Peter, it's fair to say that probably somewhere in between Q1 and Q2 for core RGU growth, that's on average in there somewhere.

Peter J. Bissonnette

But we feel very confident in that.

Operator

The next question comes from Jeff Fan from Scotia Capital.

Jeffrey Fan - Scotiabank Global Banking and Market, Research Division

Just a couple of questions. First on your dividend with the lower free cash flow now at $450 million, the payout's a little bit higher. Just want to get some comfort on what you're thinking is on the dividend at that level, and obviously, going forward? And then the second question is specifically within the RGU adds on phone. Very strong quarter that we're seeing in phone adds. Where's that coming from? Is that residential? Is that business, and just wondering what your back base and what really drove that number for this quarter?

Steve Wilson

So first of all, Jeff, on the dividend, we made the dividend decision based on the higher forecast at the time. But this year, we'll pay about $415 million in dividends in total, of which we've got 25% of our dividend recipients on the DRIP. So our net cash cost is about $320 million for the year, even at $415 million compared with $450 million we are today, we do have some room. We realize that they're getting closer, but we expect free cash flow to potentially improve in the future years, and we also understand the importance -- we've got a very significant block of dividend investors, the importance of maintaining dividend increases at a moderate pace. And hopefully, we'll be in a position to do that going forward.

Jay Mehr

And, Jeff, on your question about phone. I mean you can clearly see that we're approaching market share as being measured in terms of what's happening in the core RGU space, not simply what's happening with video subscribers. And of course, phone is a product that we can add both profitably, and there's still quite a lot of runway for us there. In answer to your specific question, business is now becoming a significant portion of, certainly, our Internet and phone adds, but it wasn't disproportionate in terms of its net gain in Q2. The change in the phone net gain was really on the consumer side of business.

Jeffrey Fan - Scotiabank Global Banking and Market, Research Division

So when you guys talk about the RGU growth being a little bit more moderate in the next quarter or 2, is that because of Internet and TV? And how do you see phones sort of fit into that. Do you see moderating pace on phone as well, or do you see that continue to remain pretty strong?

Jay Mehr

I think that it's dangerous to look at our environment as completely baked. We clearly demonstrated, and we know we can add phone at significant numbers. And you've seen the kind of numbers that would need to add phone. I think if we need to add phone at those kinds of levels in this competitive environment, we have the ability to do that. Not sure that's really where we want end up with 55,000 phone adds. I think you'll see our current strategy would be to do somewhat less than that. But for sure, that there is -- there's an opportunity for us in the phone market in Western Canada that we can choose of course in speed.

Operator

Our next question comes from Glen Campbell from Merrill Lynch.

Glen Campbell - BofA Merrill Lynch, Research Division

First, just a couple of things I wanted to confirm. From your earlier answers, you indicated on the Cable revenue side that the revenue run rate would be around $30 million lower for the rest of the year. So if I understand, that's $30 million annualized relative to the Q2 rate, or $30 million in the balance of this year?

Steve Wilson

$30 million in the last 6 months, Glen.

Glen Campbell - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then on the cost side, you indicated that $25 million would come out of the cost on a recurring basis. Is that $25 million a quarter just adding up the previous one-timers? Is that the right way to think about that?

Steve Wilson

What I was describing there was the delta between the cost increase in Q2 versus the cost increase in Q1. So at Q1 our cost base was about $415 million in Cable. We were over $450 million this time. And you should see it around that $425 million, $420 million level going forward in the next 2 quarters. I want you to take those onetime items out.

Glen Campbell - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then the other thing I wanted to confirm -- Cogeco Cable yesterday disclosed that they had unwound these tax-driven limited partnerships which are going to create an ongoing cash tax liability. Do you have anything like that, that investors should be thinking about in their evaluation?

Steve Wilson

Yes, we do actually. We have a number of limited partnerships, and that was reflected in the guidance -- initially in the guidance -- this guidance here. And really the way we've describe that, Glen, to make it easy is, we've talked about an effective cash rate of about 28%, and that 28% includes the bringing back into income of those partnership deferrals.

Glen Campbell - BofA Merrill Lynch, Research Division

So that's a 28% effective cash tax rate, is that right?

Steve Wilson

Right. But that includes the partnership deferrals coming back in as well.

Glen Campbell - BofA Merrill Lynch, Research Division

Okay. Now in the Cogeco disclosure, they indicated that there's kind of a ramp and that this happens over 5 years. So in your case, I mean how much -- can you give us a sense of the total cash tax that's payable beyond what would normally be payable over the next...

Steve Wilson

Well, the total cash tax and that we have started with our guidance for this year over the next 5 years will be an additional $350 million.

Glen Campbell - BofA Merrill Lynch, Research Division

$350 million total, including the chunk this year?

Steve Wilson

Yes, if I remember, you're already accounting for that in the cash tax rate that we're giving to you basically.

Glen Campbell - BofA Merrill Lynch, Research Division

Okay. This is an important point, I just want to make sure I've got it, your normal rate in your jurisdiction would be around 25% right?

Steve Wilson

That's correct.

Glen Campbell - BofA Merrill Lynch, Research Division

So a 3-point delta is a pretty small number. The $350 million you're giving me, is that the delta over normal or is that...

Steve Wilson

No, the $350 million is the cumulative amount over the 5 years, but there is a step up in the -- so when we described the 28% for this year, it was including the original, the first year of step up, and there will be increasing step up in future years.

Glen Campbell - BofA Merrill Lynch, Research Division

Okay, that's helpful. Just the last one, I mean, you did try a number of things in the quarter from a marketing point of view. Obviously had a lot of success. What we're now seeing is a sort of a more normal state, I guess, if you will. Can you give us a sense of what from your point of view worked really well during the quarter in terms of attracting your customers in the Visa, the discounted hardware, the discounted Internet?

Bradley S. Shaw

Well, I think it was a combination of things, Glen. And I think if you note that there was a perception that at some time, and this is something that the perception was that somehow Optik TV was a better technology. And I think that it's an interesting contrast that many customers that actually have gone to Optik TV have in fact found not to be the case. Our launch of EXO and the EXO network and the kinds of things we're doing with additional network upgrade has really kind of shifted the game to a recognition that our network is by far much more robustness and speed. And on the broadband side, than what customers who have left have experienced when they've gone over there. And so, that I think that there's much more awareness of that particular factor. The pricing that Jay talked about in the EXO bundles is still very, very attractive. We've simplified the pricing because that was one of the things we heard in our surveys in Vancouver, and we had a large fleet of our employees go to Vancouver to talk to customers, they talk to our customers and Telus customers. And they told us that simplicity is really important and pricing, and we think that, that's reflected in the numbers as well and Jay anything else to add?

Jay Mehr

Just the -- we appreciate your characterization of our EXO bundles as -- not to put words in your mouth, but perhaps slightly more disciplined than other approaches. That having been said, taken straight off EXO bundles, particularly when combined with the Easy Own create compelling value for both existing and new customers. And we think we're right in the sweet spot there. And certainly, I'm not sure who your provider is, but we'd love to have you look for what you're paying for your suite of services, and compare it to our EXO bundles, I think you'll see we've got ourselves a spot here that is attractive to customers and really enticing to bring all of their business to Shaw.

Glen Campbell - BofA Merrill Lynch, Research Division

Totally agree, your rates are great.

Operator

The next question comes from Rob Goff of Byron Capital Markets.

Robert Goff - Byron Capital Markets Ltd., Research Division

My question would be on the business side, and there is one of, to what extent you may be pursuing larger enterprises or larger businesses. And whether or not you see partnerships as accelerating that move, drawing the analogy to what you've done with Xplornet on the direct TV?

Bradley S. Shaw

Rob, it's Brad here. I guess, a couple of things on that. One is, certainly our focus is on the small to medium size business and there's lots of markets there for us. There is actually quite a big market share in the west from the small to medium versus the enterprise side. And we believe we have a lot of good opportunities there going forward. And absolutely, we're going to look at partnerships and business where it makes sense and where we can offer similar products across the country to customers that have multiple locations. So we're doing a lot of work there, and we're actually really quite excited about the opportunity where it sits in front and some of the technology coming at us. As we know, small and medium business are looking at clouds and looking at that. When you look at that speed, they need it going up, up the road not down the road and the products we're bringing on certainly allow us from a competitive point of view to facilitate that for the small and medium business. So we're excited about the products and the evolvement of them and the opportunity.

Operator

The next question comes from Colin Moore from Crédit Suisse.

Colin Moore - Crédit Suisse AG, Research Division

My question just going back to residential video, within your comments, you mentioned you did see some packaging downgrades. I was wondering if you could flush out how much of that might have been related to some of the mass marketing you were doing and maybe how much is related to some of the increased flexibility you have in your packaging. And to the extent that EXO, I know that's tweaked the personal plan a little bit to the extent you'd see any changes from that initiative?

Jay Mehr

So with less downgrade and repricing actually -- so there were customers who were taking advantage of becoming triple play customers, but at a much more cost-effective way for themselves. And so on the downside, if you will, the costing had an impact. But those customers are very, very happy. And those are customers that will be very, very sticky.

Colin Moore - Crédit Suisse AG, Research Division

Great. So with some of the new flexibility you have, you're still seeing just some modest downgrade in total programming packages?

Jay Mehr

Yes. So if you look at the conversions that you've seen from traditional packaging into Personalizer and really EXO bundles are just simplified starting points in Personalizer, you can see a modest decline, in terms of revenue and you see a similar decline in terms of network fees as those customers convert over. So I think we accelerated the path of that in Q2, and I think we are more comfortable with the space that we're now in, in terms of the natural migration. And you need to reflect, we're entering a sort of a new phase in our competitive environment. And our customers and their customers, by the way, are shopping. And so it is important to put your best face forward in terms of our bundled packages and offer flexibility. The customer really is in the driver's seat. And we want to make sure that every customer understands that there's a spot for them at Shaw.

Colin Moore - Crédit Suisse AG, Research Division

Great. And just last question on the gateway. You've had the product out in the market now for a couple of quarters. Any update you can bring on just the functionality and your experience and how that's servicing your high-end video customers?

Jay Mehr

The gateway is -- it's been in the market for some time now, and it is a high-end product. As any new product, you're going to have -- there's going to have to be some revisions, if you will, and releases that enhance these features that are available in that. So we're at a point now where we feel operationally that the gateway is meeting most of our expectations. We're working very closely with the manufacturer on a couple of things like DLNA and some of the features that we were hoping would have been available sooner, but will be still a part of their technology roadmap. But it just fills one spot, if you will, for those customers that are looking for wholly-owned PVR, kind of features that it actually -- it'll actually address those. And we have some other products that we're working on that we'll be launching shortly that have the look and feel of the Internet, sort of HTML5-based that we think will satisfy a large group of our existing customers as they have the capability of transitioning from a older guide to a much more flexible user-friendly guide.

Operator

Our next question comes from Drew McReynolds from RBC.

Drew McReynolds - RBC Capital Markets, LLC, Research Division

Thanks very much. Just a couple of last ones here. Just wondering, Paul, if you could give us some additional color, just in the Media business with respect to the breakdown between how conventional is trending and specialty is trending? And a larger question, I guess, just in terms of recent M&A in the broadcasting space, just how that impacts, if at all, Shaw's strategy with respect to owning media assets. And just a third one here, if I can squeeze it in, just on Wi-Fi, can you update what your coverage looks like at the moment? Certainly, I understand there's a little bit of an arms race out there in terms of distributors trying to secure spots on an exclusive basis. So maybe you can help us understand where Shaw is with respect to that footprint?

Paul W. Robertson

Drew, I'll kick off with a discussion about the advertising market. This continues to be jittery as customers respond to the various economic news that's out there. In terms of our performance and it's probably pretty similar with the market. Our -- or especially Television business is growing kind of mid-single-digits. And our portfolio is extremely well-positioned in the market, and that really will lead our strength and growth as we come into a more positive economic environment. Conventional, it's clearly down from year ago. What happens on -- when the market gets soft as you'd expect it, there's a migration by the customers to -- from higher CPM businesses to lower CPM platforms. So there's a kind of natural flow that happens when markets get tight like this towards I'd say more economical offerings in specialty and digital. So again, we're dealing in a business that goes up and down with the economic climate, but I like our positioning that coming out of it, given our strength of the specialty portfolio. With respect to the recent M&A climate rather, we've seen the most recent acquisition or being applied both at CRTC between CTV, Bell and Astral, and that certainly increases the competitive stakes for us in the marketplace. But again, we feel very well-positioned to compete. Our strength in women demographics and specialty is dynamite. And we continue to be very innovative on the digital space, and our programming continues -- and our services on specialty continue to develop audiences. And if you look at our performance on specialty, all of our top networks have grown audience compared to last year. So we think we're still in a very good position to compete effectively on program buying and selling side. We seek synergies wherever we can within the broader Shaw organization, and there's a lot of them we've been able to capitalize on and continue to look to build on those.

Jay Mehr

Drew, on the Wi-Fi, we've just started that project and continue to work on it. It's early days as we continue to build on our plans. So to give you actually where we have coverage, I know there's a lot of interest, certainly at different levels of government and certainly from a small and medium business. So we're going to take those opportunities and make sure we build the best network possible. From early stages and what we've seen to what we've built, there's tremendous excitement. But for us, it's about execution, about delivering on that. So little early days to tell exactly the coverage. I think there's probably ways that you can find that out. But we're just going to be disciplined on our approach in a small and medium business and try to get in those areas where we have a lot of customers and potential value. And the big spots are certainly interested in us because we can create quite a value proposition both with the business side and Wi-Fi and bring those into new opportunities which is exciting on both sides.

Operator

The next question comes from Gregg MacDonald from Macquarie.

Gregory W. MacDonald - Macquarie Research

Question is on wireless. You made an indication that you have no intention on building networks. I don't think that's new. You've commented previously on -- thoughts for the upcoming 700 spectrum auction. I think I'm paraphrasing, but I think you've kind of indicated you haven't ruled out whether you'd be potentially bidding on that. I wonder if anything's changed with respect to the 700 auction that you communicated.

Bradley S. Shaw

No, I don't think so. I think when you look at a traditional wireless network, you look at what's available in the 700. You look at the rules, where things are at. If there's something there that was certainly more of a potential for the business to look at. But you know we've made that decision. We continue to look and see where when necessary and when the quad play does come in, what we need to do as a company, what's best for us. We know this is not a growth strategy but more defensive. So we're continuing to look at auctions and see. We know that eventually our competitor will come and will do that, and we want to be prepared. So we're hoping and looking at different options, but certainly not from a traditional wireless network and building anything.

Gregory W. MacDonald - Macquarie Research

Okay. So is it safe to say then Brad the bias is not to bid in the auction, but you haven't ruled it out? Is that kind of where you stand today?

Bradley S. Shaw

Yes.

Gregory W. MacDonald - Macquarie Research

Okay. And then just as a quick follow on that. Has anything changed on the input to what your thoughts are for wireless, whether that be -- I know it's early days, but thoughts on potential traction or business models for Wi-Fi, cost of wholesale access. Things have changed recently in that part of the business for actual mobile. Has anything changed that might change your mind on the attractiveness on an MVNO deal?

Michael D'Avella

Greg, a couple of things have changed. One of them is the Wi-Fi strategy has been widely vindicated and supported and confirmed by virtually every carrier that's in the business. Everyone's going to want to do something with respect to Wi-Fi, whether it's actually building out a network or offloading onto high-quality Wi-Fi networks, which is precisely what we're trying to build. As Brad pointed out, we're trying to keep our options open with respect to wireless. We see it largely as a defensive tool. And MVNO would not be our preference for the simple reason that MVNO is complicated, costly and doesn't really deliver anything because you don't really have control of the product. But we're going to remain relatively open in terms of other wireless-type packaging options that might come our way because we want to be mindful of the fact that competitors will be offering quad play. And we have to be in a position where we can at least offer a quad play as a defensive strategy.

Gregory W. MacDonald - Macquarie Research

And Michael, for timing on things like data offload, just the conventional wisdom out there is kind of 2014 at the earliest, maybe more like '15. Canadian carriers tend to have a lot of spectrum. So the bias might be toward just building out more on the macro networks. What do you think of that? You think that there's a good opportunity to monetize Wi-Fi from a data offload perspective before the '14 or '15 timeline.

Michael D'Avella

Well, I think you're right about the fact that they're going to build out as much network as they can with the spectrum that they got. But they're very quickly going to run out of spectrum as they start consuming -- as consumers start using a lot more spectrum for high-capacity services like video, for example. What we've discovered, and I think that you've seen this as well, that whenever you can provide high-quality Wi-Fi, that's where customers want to go, especially with things like tablets, which are not really mobile network devices. They're more nomadic devices that you use pretty much in fixed locations. So there's a role here for Wi-Fi. The monetization in the offload part of the business is yet to really be defined. But we think that if we build a high-quality network with good coverage, there's definitely an offload opportunity. It might be in that 2- to 3-year time frame, but that's probably what we're looking at in terms of construction of a good quality Wi-Fi network, in any event.

Operator

The next question comes from Maher Yaghi from Desjardins Capital Markets.

Maher Yaghi - Desjardins Securities Inc., Research Division

I just wanted to touch base on your capital spending program, specifically with your digital network upgrade. In the last 2 quarters and the last quarter of last year, we've seen pressure on cash flow coming directly from this network upgrade. And can you just maybe tell us how far are we into this upgrade cycle? And looking at your outlook for the rest of the year, it seems there's still some spending to go. But can you maybe talk a little bit further down the road, how far are we through this upgrade just to give us some metrics as to your spending plans. And my second question is relating to your strong subscriber numbers on the telephony side. Was there something particular happening there, or was there any onetime big contract wins that helped you get that number? Or this was due to specific promotional activities? Because it was a very strong number, we're trying to understand how you can replicate it.

Jay Mehr

So let's start with your capital question. So the digital network upgrade is -- they have 2 components as we've talked to you about before. There's the customer component and then there's the centralized component that exists in the hub site. The centralized component that exists in the hub site looks and feels a lot like Internet network scaling, and a good portion of that is baked into are ongoing capital numbers. The customer conversion is all front-ended. And so I think if you look at your digital customers over the course of the last 3 quarters, you can read through that in terms of the activity. And certainly, if you look at the success phases we go through, you can read through that. So we're well on our way in terms of the customer conversion, and we've invested a significant portion of our network conversion at this point. So if you look at our capital for the year in Cable, we're certainly in a situation and you can do the math where we spent more than half of our capital in the first 6 months. So you'll see capital come down in the next 6 months primarily in the 2 key categories: the success phase and upgrades and enhancements. On your question of subscriber numbers though, there was no -- on the phone there was no peak in terms of the contract -- a contract win that affected those numbers in a big way. Although we're excited that there may be a few of those that you've seen us announce, and it'll be -- it'll come forward in future quarters. The -- we have, I think you've seen a shift in focus here, which is, we have tremendous opportunity in the phone business, and I think it's fair to say that we would play defense and we played a little bit of offense this quarter and our phone product is an extraordinary product. It creates great value. You have the opportunity to move customers into a triple play. So while our revenue is increasing, their total household bill is dropping, and that's what you saw in this quarter.

Operator

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

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

Just wondering if we can get a little bit more color on the business market in particular. Where are you at in terms of ramping up your efforts here and do you have intentions to work with more partners, more channel partners to help drive your efforts there?

Peter J. Bissonnette

Blair, it's Peter Bissonnette. Clearly, business is one of those opportunities that we're now starting to take advantage of. And we have a great value in John Piercy running our business product. And we're looking at sort of 4 different levels of business starting from a what we call it a cable over coaxial customer base, small business. We have the next level, which is a little more sophisticated than that. It's sort of 20 employees and more, and then all the way up to the larger enterprises. And we're focusing right now on the bottom 2 parts of that triangle, and we've looked at the market, we've looked at what we need to do in terms of reach, and extending our facilities into those offices that exist in areas that may not be available now. And so there's a tremendous amount of focus on that business. It's a $6 billion business in the west and when we look at our current market share, you'll see us looking like the new entrants, and we'll look at ways that we can move many of those customers over to ourselves in a manageable way and a good manageable growth over the next 3 or 4 years, looks like really healthy for us in terms of the ultimate outcome.

Bradley S. Shaw

Operator, thank you.

Operator

Thank you.

Bradley S. Shaw

All right. See you, everyone, next time.

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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