Transcript Q1 08 results FINAL

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Transcript Q1 08 results FINAL Powered By Docstoc
MAY 9, 2008, 8:30 A.M. EDT

       IAN CHADSEY, Vice-President of Investor Relations, Manitoba Telecom
Services Inc.:
Good morning, everyone, and welcome to the call. Earlier today we issued our
news release with our first quarter results for 2008. The news release along with our
MD&A and other supplemental information are now available on our website at

I should mention that today, along with the release of our results, our Board of Directors
approved the second quarter dividend, which has been set at $0.65 per share.

Today's comments may contain forward-looking information relating to the finances,
operations and strategies of the company, including comments on revenue, EBITDA,
earnings, cash flow, capital expenditures and sales and marketing activities. These
statements are based on assumptions made by the company and run the risks that our
actual results or actions may differ from those anticipated. The statements made today
reflect the assumptions made by MTS as of May 8, and accordingly are subject to
change after that date. MTS disclaims any intention or obligation to update or revise the
statements, whether as a result of changing circumstances, changing events or
otherwise. These cautionary statements are made on behalf of each speaker for those,
of their remarks containing forward-looking information.

On today's call we have Pierre Blouin, Chief Executive Officer; Wayne Demkey,
Chief Financial Officer; John MacDonald, President of the Enterprise Solutions division;
and Kelvin Shepherd, President of the Consumers Markets division. With that, I'll turn
the call over to Pierre.


      PIERRE BLOUIN, Chief Executive Officer, MTS Allstream Inc.:
Thank you, Ian. Good afternoon everyone. Thank you for joining our first quarter
conference call.

This morning, I will quickly review the highlights for the quarter and then, I will spend
more time on the solid performance of our Enterprise Solutions division and the
continued success of our Consumer Markets division. I realize that we're getting close
to the wireless spectrum option and that there's a lot of interest in this initiative. I will
provide a brief update, but I would like to focus my remarks today on the performance in
our core business.

To summarize our results for the first quarter, revenue, EPS and EBITDA from
continuing operations, all increased significantly over last year. Revenue from
growth services was up close to 18% year-over-year and growth services now represent
43% of our total revenues. Our cost reduction initiatives continued to deliver strong

results which are in line with our guidance. Also, we're on track to deliver on our
guidance for 2008 with overall revenue growth of 1% to 3% for the year. Taken as a
whole, these results speak to the significant and sustained performance gains realized
over the past two years. I will take a closer look from a divisional perspective, beginning
with the Enterprise Solutions division.

The fourth quarter of 2007 marked a return to growth for the Enterprise Solutions
division, and this positive momentum is continuing into 2008. Total revenues in the
Enterprise Solutions division for the first quarter were up by 2.6%, while EBITDA was up
by 0.6%, and we're delivering growth in both revenue and EBITDA, in line with our
2008 guidance. There are a number of drivers for this improved performance. In 2007,
we launched the mid-market initiative called “rainmaker”, and started targeting the
mid-market business segment in specific urban markets. This initiative picked up
considerable momentum in 2007 that continued through the first quarter of 2008. For
the quarter, it resulted in 133 new contract wins. This includes a new $2.4 million
contract to provide security and case management services to Passport Canada. The
value of total new contract wins for the Enterprise Solutions division in the first quarter
was $76 million. Growth in this division is also supported by the strong performance of
our growth services. Notably, unified communications and converged IP services,
which grew by 27% in the first quarter. These performance gains are the product of the
strategy we adopted in December 2006. At that time, we committed to transform our
enterprise business by playing to the strength of our national IP network, our growing
suite of innovative products, the deep relationships we enjoy with our customers and by
being very focused on profitable revenues. We also said that we expected revenues
from our Enterprise Solutions division to grow on a year-over-year basis in 2008. We
achieved what we set out to do with that plan. We're excited about the future and about
how the Enterprise Solutions division, or what is known as Allstream, is performing.

I'll now turn to our Consumer Markets division, which continued to perform well in the
first quarter. In wireless, we achieved strong overall results with revenues increasing by
11% and customers by 10.8% in the quarter. Our first quarter wireless average revenue
per user decreased by approximately 1%.             This reflects the success of our
fourth quarter wireless plans and fending off aggressive pricing by our competitors. The
large number of new customers joining MTS impacted our average revenue per user.
However, these plans generated stronger revenue growth without impacting our
profitability. We have since removed these plans from our line-up. Also, delivering
strong performance in the first quarter, our consumer-high speed Internet customer
base increased by approximately 10%, contributing to a year-over-year revenue
increase of 21%. At quarter end, we had over 169,000 high-speed Internet customers,
maintaining our market share in Manitoba. We also delivered steady television growth,
increasing our customer base by 13% and revenues by 23% from a year ago. At the
end of March 2008, we had over 78,000 digital television customers in Winnipeg, which
is a 32% market share. This is the highest television market share achieved by a
Canadian telecom company against a cable competitor. We also continued to solidly
perform in the residential telephony marketplace. Residential access lines, again,

remained stable for the quarter. This extends our trend of fewer line losses over the last
six quarters.

Our winback strategy continues to be effective. We are in the unique position to be able
to offer our customers a “quadruple play” bundle of broadband, home security,
digital television and wireless services in addition to traditional voice services. It's
something our competitors in the Manitoba market cannot match and it provides us with
a strong competitive advantage. In all, total average revenue per user from bundled
customers was up by 5% in the first quarter. Overall, we believe that these results
continue to represent the best performance by an incumbent facing a cable competitor
in North America. As for our Enterprise Solutions division, the gains we're making are
the result of the steady execution of our strategy and the delivery by our people of a
strong value proposition.

Now, I'd like to turn to our potential wireless initiative. We're continuing to work with our
consortium partners, Canada Pension Plan Investment Board and The Blackstone
Group L.P., to finalize plans and definitive agreements between the parties. As you
know, Industry Canada has placed strict rules on what we can say about our strategy
going into the auction, so we want to be careful not to compromise our competitive
position or our bidding strategy. I will simply say that we remain committed to being
disciplined at the auction. While we see this as a potentially significant growth
opportunity, it is by no means our only opportunity for growth. I'm confident that with the
momentum we have developed in our enterprise business and in the continued strong
performance of our consumer business in Manitoba, we can continue to grow this
company with or without a new wireless initiative. That said, we're moving towards the
auction in May with world-class partners, a clear and disciplined strategy consistent with
our previously stated goal of maintaining our current dividend policy, and all of the
advantages that flow from MTS Allstream's position as a leading Canadian
telecommunications service provider with significant wireless assets and expertise.

In summary, MTS has achieved solid and improving financial and operating
performance, over the past nine quarters. We're on track to deliver our guidance in
2008 and we're well positioned for further growth in 2009 and beyond. I'll now turn the
call over to Wayne.

        WAYNE DEMKEY, Chief Financial Officer, MTS Allstream Inc.:
Thank you Pierre and good morning everyone. We're pleased to report another quarter
of solid financial results, building on two years of steady progress. First, I'll highlight our
consolidated results from continuing operations, and then look more closely at the
growth services and legacy services businesses of our Enterprise Solutions division and
our Consumer Markets Division. Those who have been on these calls before know that
we discuss results from continuing operations because we believe they assist investors
in assessing the performance of our company. Our reported results include a number
of items which are not from continuing operations, such as the cost of our restructuring
over the last two years. These items are outlined in our first quarter results, news
release and MD&A.

EBITDA from continuing operations in the first quarter of 2008 was $168.7 million, 2.2%
higher than the first quarter of 2007. Revenue from continuing operations for the
first quarter was $478.8 million, up by 2.4%.             These results were driven by
strong increases in our growth services revenues, which were up by 17.8% in the
first quarter. Revenues were ahead for the second consecutive quarter confirming that
we are on track to achieve 1% to 3% overall growth in revenues this year. Additionally,
earnings per share from continuing operations was $0.84 which is up by $0.10 or 13.5%
from the same period in 2007, driven by growth in EBITDA and the results of our share
buyback program last year. We are pleased with the steady improvement of our
Enterprise Solutions division, with revenues up by 2.6% in the first quarter; the second
consecutive quarter of year-over-year growth, while at the same time, in the first quarter
this year, also achieving growth in EBITDA. This solid performance demonstrates the
growing demand for this division's products and services and starts us off in a good
position to achieve our full-year objective of overall revenue and EBITDA growth.

Next generation data services revenues, which include converged IP and
unified communications services achieved strong year-over-year growth in the
first quarter at 27%. Breaking it down further, in this quarter, converged IP services
revenue was up by 15.1% and unified communications services revenue increased by

The Enterprise Solutions division generated over $20 million of incremental revenue
from its growth services products of which organic growth represented 85%. The other
15% of the growth came from our recent acquisition of ICU Technologies Inc. and
MCS-Multinet     Communications        Services      Inc.,   which   will  increase our
unified communications revenues by approximately $3 million per quarter this year.
This growth is partially offset by $14 million of legacy revenue decreases.

In our Consumer Markets division, wireless revenues for the quarter grew by 11.1% on
the strength of a 10.8% increase in new cellular customers since the first quarter of
2007. This increase in subscribers helped to offset a 1.1% decrease in average
revenue per user. This decrease resulted from our response to competitive price points
that were in the market in the fourth quarter of last year, as well as a decrease in
wholesale revenues over last year.

Our high-speed Internet revenues also showed significant growth with
consumer internet revenues up by 21.3% year-over-year. This increase in revenue was
driven by an increase in new subscribers of 9.7% since the first quarter 2007, and an
increase in the average revenue per subscriber.

Our digital television services continued their strong growth with revenues, up by 23.2%
in the first quarter driven by a healthy 12.9% increase in our customer base and a
$4.05 increase in average revenue per subscriber. We now have over 78,000
digital television customers in Winnipeg which equates to a market share of 32%.

Net additions were a little slower in the first quarter, partly due to the first quarter being
a seasonally low period for television additions and partly as a result of our continuing
focus on profitability. Importantly, average revenue per subscriber is higher due to
changes in pricing along with an increase in revenues from video-on-demand and
pay-per-view, while churn was also better planned in the quarter. Looking forward, April
was a strong month for net subscriber additions at almost 1,200 for the month.

Legacy declines in the first quarter are flattening out with only a 1% decline in
local services, and a 7% decline in long distance. We've made significant progress
stabilizing our legacy business in both our divisions.

Overall, our proportion of total revenues attributable to growth services hit 43% in the
first quarter and this number is expected to increase to 45% for 2008. As our
percentage of revenues from our growth services continues to grow, the impact from the
decrease in legacy services revenues will continue to diminish. Today, MTS is
operating with a positive revenue growth outlook and positive momentum in both
divisions. EBITDA is also growing, demonstrating that we are disciplined on our cost
structures as well.

We are continuing to work diligently on aligning our cost structures to the realities of our
market, identifying and executing on potential inefficiencies throughout both our
divisions. Our target for the year in cost savings is $20 million to $30 million. In the
first quarter of 2008, we achieved over 50% to 60% of our goal by generating
$16 million in annualized cost savings, demonstrating our ability to manage costs. We
expect to continue to achieve these savings by gaining new efficiencies organizationally
and decreasing our usage of competitors' networks.

Capital expenditures totaled $55 million for the quarter, which is higher than the same
quarter in 2007, due to differences in timing. We are targeting 2008 capital
expenditures to be in line with 2007 expenditures, representing capital intensity of
14% to 15% for the year. This is below the levels that you're seeing at other telecom
services providers, as we continue to benefit from the significant investments that we
have made in recent years within both divisions in state-of-the-art networks.

Free cash flow from continuing operations for the first quarter was $78.7 million
compared to $94.5 million in first quarter of 2007. Cash flow for the first quarter was
down as a result of the timing of certain capital expenditures and pension funding
payments. These items are unique to this quarter and are not expected to impact our
guidance for free cash flow for the year. For 2008, we are expecting free cash flow of
between $250 and $280 million, showing growth over last year. This more than covers
all cash requirements including non-reoccurring items, such as restructuring costs and
pension solvency payments.

Additionally, we have unused and available tax deductions that will shelter us from
paying cash taxes until 2014, and which will have a continuing positive impact on cash

As Pierre mentioned, we are continuing to work with our consortium partners to finalize
definitive agreements. We remain committed to a clear and disciplined strategy
pursuing this initiative in such a way as to preserve MTS's current financial profile and
protect our current dividend policy.

Before I continue, I'd like to offer a point of clarification on the total cost of building a
network, buying spectrum and start-up losses for a new entrant in general. As Pierre
mentioned, we're constrained in terms of what we can say on this subject, but I will say
this, we've seen a wide range of analyst estimates that have suggested that the total
cost to build a new entrant national network would be at the high end of the $1 billion to
$2.2 billion range. Based on our internal analysis, and the considerable due diligence
performed by Blackstone, CPPIB and André Tremblay's team, as well as their
consultants and advisors, we believe that the total investment cost for a new entrant of
that scale would be much closer to the low end of the range and would be
correspondingly lower for regional scenarios. We also believe there are synergies with
our existing network infrastructure that have not been properly factored into many of the
current estimates.

Finally, I want to conclude with a comment on segmented reporting. In our
supplemental information, we have included our results segmented by customer,
consumer versus enterprise, and by geographic, national versus Manitoba. We plan to
discontinue the reporting we make on a geographic basis by the end of 2008. It simply
no longer accurately reflects how we operate our business. We now segment by
customer regardless of geography, assigning consumers and small business customers
to the Consumer Markets division and the larger business customers to the
Enterprise Solutions division.      In 2009, our disclosures will include only that
segmentation. For those of you who are using the geographic segmentation numbers, I
can tell you that we have achieved growth in both revenue and EBITDA in the
first quarter of 2008. The revenue growth is not as high as the Enterprise Solutions
division due to the inclusion in national of our small business customers where we have
been grooming our revenue base to shed unprofitable revenues. Additionally, we have
seen an increase in unified communications revenue for our enterprise customers in
Manitoba, which are included in the Enterprise Solutions division and not in national.

With our continuing strong results and positive outlook, the Board of Directors has
declared a second quarter 2008 cash dividend of $0.65 which is payable on
July 15, 2008 to shareholders of record on June 16, 2008. On an annualized basis, our
dividend ranks as one of the highest yielding stocks on the Toronto Stock Exchange.

Thank you. We'll be pleased to answer any questions you may have.


GLEN CAMPBELL, Merrill Lynch:
Wayne, you made an interesting comment about the projected cost of a national
wireless build-out. Could you give us a clarification on the billion dollars? Does that

include capital expenditures only? Does it include the initial operating losses? Does it
include financing or not? Does it include spectrum costs? And, is that coverage in the
60% to 70% range or higher than that?

        WAYNE DEMKEY, MTS Allstream:
Yes, it includes everything, all of the items that you're talking about.

GLEN CAMPBELL, Merrill Lynch:
On coverage, are we in the 60% to 70% range on those assumptions?

       WAYNE DEMKEY, MTS Allstream:
In terms of population?

GLEN CAMPBELL, Merrill Lynch:
That's right.

       WAYNE DEMKEY, MTS Allstream:
Yes, that's a reasonable estimate.

JEFFREY FAN, UBS Securities:
About your Bell Mobility agreement, in March you provided them with notice of
termination. Can you give us some colour on what disputes Bell is making with respect
to that, when you think this would be resolved and how this could impact your
wireless business?

        KELVIN SHEPHERD, President Consumer Markets division, MTS Allstream Inc.:
I don't want to comment a lot on the details on the dispute. But we have entered into a
transition agreement with Bell and in terms of operational considerations that are
cardinal issues, those are resolved and we continue to go forward. In terms of the
dispute or disagreement over the actual notice and those issues, I can't get into those

JEFFREY FAN, UBS Securities:
Perhaps, we can step back and review what the original agreement allowed you to do,
and what it allowed Bell to do, so that we can have a better understanding of the

       KELVIN SHEPHERD, MTS Allstream:
At a high level, it was an agreement where we worked together to serve national
customers and obviously, as part of that agreement we also pre-procured certain
services from Bell. We've indicated we'll be making arrangements to procure those
services equivalent or similar services from alternate sources and those arrangements
are well underway.

JEFFREY FAN, UBS Securities:
This was a notification that was initiated by you?

       KELVIN SHEPHERD, MTS Allstream:

GREG MACDONALD, National Bank Financial:
Manitoba Telecom is somewhat unique in Canada with respect to the size of its
enterprise business as a percentage of its total business. If you were to guess as a
percentage of average revenue per user, and what data may represent in three to
five years, would it be closer to 20% to 30% or could it possibly be as high as 50% to
60%? What are your estimates or how encouraged are you on the potential for data
growth in wireless? Secondly, LTE versus WiMax, we saw a big deal this week with
Sprint and Clear Wire. Many are criticizing it but I would point out is that the structure of
this deal looks quite familiar to Manitoba Telecom vis-à-vis the one that you'd just
struck. Does WiMax represent a threat in your view to the existing wireless players
given the potential for wireless data in particular wireless broadband to have a higher
demand going forward?

       PIERRE BLOUIN, MTS Allstream:
On LTE and WiMax, it's too early to call right now. We don't see it as a threat,
particularly in our situation. Having national footprint and depending on what happens
through the spectrum auction, it could be an opportunity for us. We have to see it
evolve further. It's going to be interesting to follow Sprint and see how customers
behave in the economics of that business. On the potential data side, if we were to be
successful to access wireless on a footprint that would match our current footprint on
the wireline side through Allstream, that could bring an interesting upside. I’m unsure
with percentage, but it is potentially because of the way the company is set up, as
you're noting we're approximately 50/50 or 55/45. In fact, in favour of enterprise
customers that's something that could bring an interesting upside for us and probably
more in percentage than the larger incumbent in the market.

GREG MACDONALD, National Bank Financial:
When one asks AT&T about this, they will say, “Yes, wireless is a focus for us because
our enterprise customers are demanding more wireless products.” For example,
productivity for employees, etc. Are you hearing the same things from enterprise
customers in Canada?

       PIERRE BLOUIN, MTS Allstream:
Yes, we're hearing the same thing. Data is really picking up and it's on the mind. --
wireless data is on the mind of a whole lot of people as well and it bodes well for us not
only as we're currently looking at a potential wireless initiative, but also because of who
we are. Some of the work we're doing with customers is to develop applications and
services that would integrate wireless and wireline regardless of a wireless offering at
the end of the day. It's what's behind that's also interesting and we're not concerned
with generating re-price because it's a greenfield for us.

I find it a bit ironic that you're going to stop the national reporting or the old Allstream
reporting, given you're finally showing some good results there. With that being said,
can you clarify what the real underlying growth rate was for the national segment this
quarter? If you back out the $9.3 million of AT&T and Rogers revenue, and the
$3 million of acquisition revenue, I get about 4.5% underlying revenue growth, does that
make sense?

       WAYNE DEMKEY, MTS Allstream:
That's about right.

There’s a tremendous improvement from what we've seen in the past couple of years.
Are there any one-time items of any kind? Sometimes the construction revenue and
wholesale revenue pop into the numbers, is there anything like that this quarter? Also,
looking forward does this business have any sort of economic sensitivity if there is more
of a slow down in the general economy? Is that something that would concern you
specifically on the enterprise and Allstream fronts?

       WAYNE DEMKEY, MTS Allstream:
There are no one-time items in our revenue base that you're talking about. We do have
sales that are similar to equipment as part of our unified communications portfolio and
our security and professional services portfolio. Those revenues will fluctuate from
quarter to quarter, but there's nothing that's individually significant as a one-time item.

        JOHN MACDONALD, President Enterprise Solutions division, MTS Allstream Inc.:
On your second point in terms of whether the enterprise segment is immune from
prevailing economic conditions, there is a relationship there. We're not finding much in
the way of any impact when we look at the nature of deal flow in the
enterprise segment. As a matter of fact, you could find that customers' willingness to
invest in converged IP products and services is actually driven by a desire to improve
their individual economic position in terms of cost reduction, better performance and
enabling new applications, etc. We've been watching quite carefully, and we have not
seen any change in terms of what the funnel looks like at this point.

ROB GOFF, Haywood Securities:
In your release, you noted that you are continuing to work with your consortium partners
to finalize definitive agreements, can you provide more description? Are the talks or
agreements with respect to the partners themselves or the vendors?

       PIERRE BLOUIN, MTS Allstream:
The negotiations are to build the consortium. We're negotiating the shareholder
agreement and finalizing the business plan and bidding strategy. There are many types
of agreements.

ROB GOFF, Haywood Securities:
Does that mean that there is a potential for additional partners? Could you discuss
whether or not there are put/call provisions within the agreement?

        PIERRE BLOUIN, MTS Allstream:
I can't discuss the agreements until they are final. Potential for other partners? We're
getting very close to the auction so I think it would be a very low probability.

DVAI GHOSE, Genuity Capital:
Before you announced your partners, you had alluded to the potential for a foreign
strategic partner and one hasn't developed. You're suggesting now that one won't
develop and I'm wondering why. You obviously tried. On a related point, with the
appointment of André Tremblay as the leader of your joint venture, I'm wondering what
that means, vis-à-vis your view for unlimited price plans like City Fido? Obviously
Pierre, you were the adversary to City Fido when you were at Bell, are you now
embracing that sort of strategy?

        PIERRE BLOUIN, MTS Allstream:
We're too early to talk about strategy. I'll come back to my comments of discipline
because I think you know our company and we have tried to be a very disciplined player
in the market over the past few years. It's with that type of mindset that we're finalizing
our arrangements with our partners into the auction. In terms of André, it puts much
strength and expertise on our side if we're considering a wireless venture.
André Tremblay and his team are bringing the experience of a new entrant in Canada
and knowledge gained from past experience. I see this as a benefit and strength on our
side. As for a foreign strategic partner, we did indeed have discussions with a number
of international wireless providers and the result is where we are right now. However, it
doesn't foreclose in any way the possibility that after the auction, we can pursue those
discussions. So I'm not focused that much on it. We have an arrangement that we
think is good for the company and we're going to move forward with that.

DVAI GHOSE, Genuity Capital:
You have one third currently as your structure stands, you have one third of the upside
from national wireless expansion, only one third, and yet potentially you have 100% of
the downside associated with the retaliation in Manitoba. We haven't even entered the
auctions yet and as you correctly point out, TELUS and Rogers have pursued some
very aggressive pricing. It could get worse because Bell can come into your market and
indeed, Shaw may as well. Isn't there a risk by taking one third of the upside and 100%
of the downside that you're a net loser from this equation?

       PIERRE BLOUIN, MTS Allstream:
I'm not sure what the 100% of the downside you are referring to because you're seeing
our performance facing those tough conditions. I can't stop anybody from coming into
Manitoba regardless. I think we've said in previous calls that our guidance for 2008
assumes entry of other competitors in our market on the wireless side, so we're
prepared for it. I think that's going to be the world regardless. In terms of the

                                           - 10 -
partnership, it is a way for us to have access to wireless, and obtain quite a bit of the
upside as well when you think about what it could do to the balance of our business.
However, it also ensures that we are disciplined financially and it is structured to not
impact our financial profile, as well as our dividend policy. It balances out and if we're
successful - we're still pre-auction – it could be meaningful for the company.

DVAI GHOSE, Genuity Capital:
I appreciate that. As a final observation, the billion dollar number you threw out on
national wireless is interesting, but not that useful until you give us your assumptions.
As you know, in the past, new entrants including in Canada have underestimated the
amount of capital required. If you could give us any clarification on a going forward
basis it would be of great value.

       PIERRE BLOUIN, MTS Allstream:
That's a good point. The only thing we can say at this time, is that there has been a
large amount of due diligence and analysis by very experienced people. While you
don't have the detailed assumptions, you could assume that all of these people have
past experiences in Canada and all over the world. They would have introduced these
issues in their calculations.

DVAI GHOSE, Genuity Capital:
That's fair enough. My only point is that they also underestimated the amount of capital
that's required in the past.

       PIERRE BLOUIN, MTS Allstream:
That's right. Once we have finalized our agreement, we will disclose what are required
to, which will hopefully give you more confidence.

JONATHAN ALLEN, RBC Capital Markets:
As far as the wireless partnership, you mentioned the $1.2 billion as being the low end
cost. Is Manitoba Telecom going to be contributing cash to this venture, such as
$400 million of cash in capital? Or is there the potential to provide services in kind, for
example, in the Allstream and Inukshuk partnership, they were initially just providing
services rather than capital. My second question is for John: looking at the Allstream
and legacy business, the decline that we've seen sequentially in the last three quarters
in the legacy business seems to be improving slightly, though in the MD&A, we're still
talking about some re-pricing, discounts and what's happening in the market, can you
give us a sense of where things are improving in the legacy market, and where the
biggest re-pricing or competitiveness is in that area of the market?

      PIERRE BLOUIN, MTS Allstream:
To confirm I understood your first question, did you talk about a $2 billion number in
your question?

                                           - 11 -
JONATHAN ALLEN, RBC Capital Markets:
No, I said you had put out a range of $1 billion to $2 billion or a $1.2 billion to
$2.2 billion, so if we use $1 billion and then Manitoba Telecom is responsible for one
third of that, would you be providing say $300 million or $400 million of cash for the
venture or would you be providing a higher mix of services, such as
backhaul termination and transportation.

       PIERRE BLOUIN, MTS Allstream:
Unfortunately, we're going to have to wait until we finalize and announce the conditions
of our agreement to provide you with those details. Once we're done, we will indeed
give you those details.

JONATHAN ALLEN, RBC Capital Markets:
But it's still a possibility though?

      PIERRE BLOUIN, MTS Allstream:
We are unable to talk about these details until the agreement is finalized

JONATHAN ALLEN, RBC Capital Markets:
Okay, that's fair enough.

        JOHN MACDONALD, MTS Allstream:
In terms of the legacy business, we are seeing improvements in the overall
characteristics of that market and we're quite happy to have customers continue with
legacy contracts, if they should desire to. But when we're talking about access line
growth, PRI growth for example, we've seen significant improvements year-over-year.
We're seeing some slowdown, although I hesitate to say that it's going to continue
relative to cross-border traffic and our relationships with AT&T, in terms of erosion and
migration to next generation services. With the lower price points in services such as
long distance, there is less room to go. It's broadly-based and as I said earlier we're
quite happy to have that business, but once again recognizing that ultimately customers
are going to be migrating from those services over to next generation services.

JONATHAN ALLEN, RBC Capital Markets:
Is there a possibility that the legacy services decline will actually pick up over the next
while since Allstream is so focused now on the mid-markets? Is there a possibility that
you're going to start losing more and more of your large enterprise contracts?

       JOHN MACDONALD, MTS Allstream:
No, I don't think so. Our focus on mid-markets does not in any way shape or form
indicate any or presumption that we're not focusing on the large customers that we
value as well. We're looking at acquisition and cross-sell opportunities in the
mid-markets primarily but we're not turning our back on large enterprise at all.

                                           - 12 -
PETER RHAMEY, BMO Nesbitt Burns:
I wanted to talk about the competitive environment. On the consumer side, one other
analyst was asking with regards to competition on wireless and some of the targeted
promotions by your competitors, perhaps resulting as punishment for getting a
national wireless business or preparing to break with the others? My second question is
on MTS TV, you noted that you had lower churn, you had increased rates and you're a
little bit disappointed on the growth. What's happening here? Do you see a line being
drawn by standby companies like Shaw with regards to if you start to promote growth, it
comes to the detriment of other services or do you see this as transitioning your
business to focusing on profitability versus growth? Could you indicate whether in that
business, it's possible to say that it's EBITDA positive?

        KELVIN SHEPHERD, MTS Allstream:
Around the TV piece, I'm quite pleased with the way MTS TV is performing with
approximately 30% market share. Truly there's some transition to where we are more
balanced and not focused solely on growth of subscribers. That continues to be part of
our focus and we continue to be reasonably successful in doing so. Although the
first quarter was a little softer on that side, there's some good reasons including the fact
that we did not have heavy advertising or promotional campaigns in the market. With
so much wireless activity in our channels, it didn't make a lot of sense to us to drive
digital television customers to the channel when we were really focused on other parts
of the business. Going forward, we've had a balance. We've increased prices in our
digital television business on a reasonably regular basis as we saw the value of the
service continue to grow and with the growth we've been doing that over the last two
and three years, I think it's in pretty good shape for the rest of the year. Going forward,
we'll see some continued growth in subscribers but I think we'll also see maintaining
some focus on average revenue per subscriber. It is EBITDA positive, so it is making a
positive contribution to the business financially as well as of course, the other benefits in
terms of our bundling strategy.

PETER RHAMEY, BMO Nesbitt Burns:
How do those margins compare to your core business?

        KELVIN SHEPHERD, MTS Allstream:
It's tough getting into the details but obviously they're going to be lower. The very
nature of television, where a sizable percentage of your revenue is more or less the
cost of goods sold because you have the cost of the content, which is fairly substantial.
It means that television is not going to have the same margins as a business such as
wireless or voice. It's not going to have 60% EBITDA margin but it's still a strong
contributor to the business.

PETER RHAMEY, BMO Nesbitt Burns:
Sounds promising. Could I ask you about the change in platform that I think you're
considering? You have a Motorola-based system that's no longer supported, could you
enlighten us on what the transition would look like?

                                            - 13 -
       KELVIN SHEPHERD, MTS Allstream:
We're continuing to grow on the existing Motorola platform. It's continuing to be
supported certainly in terms of being able to add customers and to do what's needed to
sustain it over a fairly long period of time, so we don't see changing that platform out
per se, what we're doing though is investing in additional broadband capability. We
have announced that we're working with the Microsoft IPTV platform and we do plan
very late in the year to launch an initial location with initial deployment of IPTV platform
and we do see it being a platform for future expansion and addition of services, such as
high definition and personal video recorder, with these capabilities down the road.

PETER RHAMEY, BMO Nesbitt Burns:
So it gets overlaid and then new customers would come on to that platform as

       KELVIN SHEPHERD, MTS Allstream:
Yes, that's a fair statement and we certainly see the existing Motorola platform being in
place for many, many years, but we don't see extending it t new cities and as we deploy
substantially more advanced services, they would be on the new platform.

JOHN HENDERSON, Scotia Capital:
You pulled your aggressive wireless price promotion in the quarter, how have your
competitors reacted?

       KELVIN SHEPHERD, MTS Allstream:
Competitors still have their lower price plans in the market. We're not overly concerned
about it. You can see from our results in the quarter and also, from results we’ve seen
in April look strong in terms of our wireless growth. We're not seeing any real impact
from not having that lower price point in the market. I believe that competitors pulled
back a bit on their promotion of those plans. They're still out there; they're still visible;
they're advertised occasionally. But, we're doing well against them and don't believe
that that would change in at least the near term.

On the Allstream division, I thought the margin improvement was pretty good. Could
you talk about the drivers and how much of the cost savings that you talked about
earlier in the call were directly related to the national business?

       WAYNE DEMKEY, MTS Allstream:
The cost savings are a big part of that and I would say that the majority of the
cost savings would have been in the Enterprise Solutions division.               We have
opportunities - one is the direct cost and the other being operating efficiencies where we
have opportunities in both divisions. Clearly the direct cost opportunity is where we
achieve gains because we're turning out suppliers which quite often are competitors.
Additionally, we have been focused over the last couple of years on working on
higher margin customers and opportunities. We're focused more on on-net customers
and we effectively are not pursuing revenue growth for the sake of just growth in

                                            - 14 -
revenues; it's always with a focus towards profitability. Over time that is having an
impact. Currently, there is impact that goes the other way. We are losing some legacy
revenues and those are higher margin services, so there's a balance here. As we
mentioned earlier, as you have a higher and higher percentage of your revenues
coming from growth services, you're going to see a lesser and lesser impact on your
margins from the loss in legacy revenues.

       JOHN MACDONALD, MTS Allstream:
The other thing is that some of the higher margin or parts of the growth portfolio such as
converged IP; we believe we have a superior offering in the marketplace, when you look
at our MPLS offer relative to what the competition has. For example, we launched
added functionality to that portfolio with SecureConnect in which we embed security
within the core platform. We're increasing the dimensions of the offer as well by our
partnership with SecureWorks over at the United States, so we do win more than our
fair share relative to the converged IP and MPLS marketplace and that certainly helps
our profitability as well.

With respect to Rogers and AT&T, how much business is left and how much of that risk
for the rest of this year?

       WAYNE DEMKEY, MTS Allstream:
This is based largely on estimates than we've been given from them, rather than
something that we control, but we expect to lose approximately $40 million in revenue
this year. This was factored into our outlook. It includes that we expect, in spite of the
decreases in those revenues, to have overall growth this year. Where we saw
decreases in the first quarter, is in line with that estimate.

The $40 million includes the nine in this quarter?

       WAYNE DEMKEY, MTS Allstream:

On the Bell Mobility termination agreement, why is it necessary that it was terminated?

       KELVIN SHEPHERD, MTS Allstream:
The simplest way to describe it is to look at the rules established by Industry Canada.
We clearly can't be partner of Bell going forward and compete with them or bid in the

Was it necessary pre-bid or would that have been necessary just pre-offer?

                                           - 15 -
       PIERRE BLOUIN, MTS Allstream:
The rules are very pretty. If you go on the Industry Canada website, you'll see the rules
are clear on associations and how the rules to allow bidding. This applies to everyone.

DAVID LAMBERT, Canaccord Adams:
Aside from the wireless auctions, some of your customers suggest that CIBC is
running out of data centre capacity and they understand you have a small data centre
business inside of Allstream. If your customers looked at you to award contracts in the
data centre space, would you consider investing in that area?

       JOHN MACDONALD, MTS Allstream:
When looking at the data centre business, we characterize it as the “power business”.
In many cases, the issue is that people are not running out of physical space in
real estate but they're running out of ability to cool and get the power, associated with
powering those centres.

We've looked at our hosting business and decided that the best way is to partner with
another vendor, a marquis vendor, and when our customers need a hosting solution, we
provide their facilities. For us to go into that particular business, it's very difficult as
quite frankly, it attracts a large amount of capital relative to the revenues that can be
earned. Where there are opportunities to bring network along, then we're quite happy
with that. As a matter of fact, we see some of the data centre constraints that are
existing with our customers and there's an opportunity to sell more higher bandwidth
services, such wavelength services to those secondary centres.

DAVID LAMBERT, Canaccord Adams:
So you don't see a shift from them using the primary providers like IBM and HP?

        JOHN MACDONALD, MTS Allstream:
Not to us, I don't think. We see it as a continuing significance but a dimension to our
offer in the marketplace. We’re not going to go full force into the hosting and data
centre business. It's a brutal business in terms of things such as power consumption.

GLEN CAMPBELL, Merrill Lynch:
When you look at your business, and leave aside the Rogers and AT&T legacy
revenue, do you think the revenue gains are a function of market share gains overall or
are you seeing customers spending more? I'm not thinking just on the growth areas but
overall across the whole portfolio of revenue and legacy. Also, we've seen margins
expand pretty nicely, and I'm wondering as you look out a few years, do you think
margins have the potential to continue to go up or should we view this 90% margin
quarter as being a peak and above the long term norm?

       JOHN MACDONALD, MTS Allstream:
I do believe, on your second point that there are continuous opportunities for us to
manage our cost performance as opposed to how we deliver our services. We can do
things in terms of our direct top line as well as operating expenses to ensure that we

                                            - 16 -
continue to improve our margin performance as time goes on. It’s not a short-term
aberration. We'll always have ups and downs as we go forward, but overall the trend is
to increase both the top line as well as ensure that we have the profitability to go along
with it through the disciplined actions that Wayne had alluded to.

GLEN CAMPBELL, Merrill Lynch:
Are you gaining share within your customers overall or do you think they're spending
more or both?

         JOHN MACDONALD, MTS Allstream:
It's a bit of both. In some of the key portfolios such as converged IP, we are growing a
little faster than the market. In unified communications, I would say the same thing, so I
believe that we are gaining share. Also, our focus on how we address the market, not
only looking at new customers through our acquisition program, “rainmaker”, but also
looking at cross-sell opportunities similar to Kelvin's playbook in terms of looking at
ways to offer more services to customers. We have a number of customers that are a
single-product customer and when we have that established relationship, being able to
up-sell and provide additional opportunities for those opportunities at every opportunity
will also help.


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