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Rogers Communications, Inc. (NYSE:RCI)

Q3 FY08 Earnings Call

October 28, 2008, 08:30 AM ET

Executives

Bruce M. Mann - IR

Edward S. Rogers - President, Rogers Cable Inc.

William W. Linton, C.A. - Sr. VP, Finance and CFO

Nadir Mohamed, CA - President and COO, Communications Group, Rogers Communications Inc.

Anthony P. Viner - President and CEO

Robert Bruce - President of Rogers Wireless, Inc.

Analysts

Greg MacDonald - National Bank Financial

Simon Flannery - Morgan Stanley

Vince Valentini - TD Newcrest

James Breen - Thomas Weisel Partners

Peter MacDonald - GMP Securities

Glen Campbell - Merrill Lynch

Dvai Ghose - Genuity Capital Markets

Jeffrey Fan - UBS Securities

Bob Bek - CIBC World Markets

Scott Mallet - Goldman Sachs

John Henderson - Scotia Capital

Rob Goff - Haywood Securities

Randal Rudniski - Credit Suisse

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Rogers Communications Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions].

I would like to remind everyone that this conference call is being recorded, today Tuesday, October 28th 2008 at 8:30 AM Eastern Time.

I will now like to turn the conference over to Mr. Bruce Mann of Rogers Communications Management Team. Mr. Mann, please go ahead.

Bruce M. Mann - Investor Relations

Thank you very much Patrick. Good morning everyone. I appreciate you joining Rogers's third quarter '08 investment community call. Its Bruce Mann here. Joining me on the call here in Toronto this morning are; Ted Rogers, our Chief Executive Officer; and Bill Linton, our Chief Financial Officer, as well as Nadir Mohamed, our President and Operating Officer of our Communications Division.

As well as our three divisional Presidents; Rob Bruce from Rogers Wireless; Edward Rogers from Rogers Cable; and Tony Viner, from Rogers Media along with a few members of their respective management teams joining us in the room.

So, as you know, we released our third quarter results earlier this morning and the purpose of this teleconference is to provide the investment community with additional background and to answer as many of your questions as time will permit.

Just quickly as these calls almost always seem to involve some degree of discussions about estimates or forward-looking types of statements from which our results at the end of the day could end up being very different. Would you please make sure to fully review today's earnings release and also importantly our 2007 Annual MD&A, our Annual Report, the risks and uncertainties and cautionary language that they include apply equally to our dialog on today's call.

You can find either, if you don't already have them either on the rogers.com website in the Investor Relations section, or they're also filed on the OSC's SEDAR system, or the SEC's EDGAR.

With that, let me turn it over to Ted Rogers and then Bill, Nadir and Tony will make a couple brief introductory remarks as well, and then the management team will take your questions.

So, over to you, Mr. Rogers.

Edward S. Rogers - President, Rogers Cable Inc.

I guess today, one of the things that are most important on calls like this, are the status of the balance sheet and liquidity, and the financial strength of the company. And we were proactive of the balance sheet as well, opportunistically executing a $1.75 billion investments grade bond offering, that's investment grade bond offering at the end of July as the market window temporarily opened.

Under Bill Linton and Lorraine Daly's excellent leadership, we were well positioned to move quickly in decisively which we did.

Compared to many companies today, we are extremely well financed to weather a storm, even the big one. Our balance sheet is rock solid, with every manageable leverage $1.8 billion in liquidity, now approaching debt maturities.

This provides a strength that allows us important flexibility in which continue to invest in growing our businesses as well as to continue to be opportunistic. Even with economic slow down impacting manufacturing and commodities in Canada, we at Rogers continue to generate significant amounts of cash flow even after substantial capital expenditures, to maintain our leadership positions.

And this also transfer... I believe is important to our shareholders and now there is a healthy dividend beyond approach for us been carried on.

A company with our gross growth profile, $1 per share, which today is a yield of more than 3%. A key factor is that we are in an ideal set of interrelated businesses, an ideal set of interrelated businesses. How many companies have that? Unique in North America, and they are experiencing healthy organic growth.

The majority of the services we provide continue to be strongly in demand. In today's age broadband, television, and wireless revenue systems are defensive ones in a down economy, as the utility of these services is extremely high and research shows our services to the consumer is less likely to terminate.

Studies have actually shown that if you can pick what you really, the last things you wanted to give up, they will say internet. But they would say their cellular phone, some would say television. Well, Rogers has all of them.

We don't have things that people wouldn't mention, that are hard to sell. We have 8 million customers. We are well diversified so, that if something goes wrong and for some customers it doesn't bring down the ship. How many companies in North America are like that with all these other benefits?

The quarter, I think we put up a respectable quarter, both, given the economic backdrop. At one of those quarterly calls nearly a year ago, I said that we needed to be cautious given the economic issues occurring south of the borders. And that Canada would not remain insulated.

We need to be prepared for restrains on the cost side. Well, we certainly forecast that right and the company has made efforts to work since then to improve its operating situation.

Are we prefect? Of course not. Particularly, in this day and age, where we have an excellent Management Team, a first class Management Team, who in my view are capable are the best ones capable for the handling of this type of situation.

Now we are in a position with our relative strength and are well positioned on many levels, financial, operating. We have the best plant in North America in terms of high speed; nobody has higher speed than we do. And all of this means continued growth.

Now I'm going to turn over the rest of this to our excellent operating management who will go through some of the results with you.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

Thanks Ed. A couple of quick comments on the financial results of the quarter. Let me begin by highlighting our continued strong revenue growth which was up 14%. Even normalizing for the Citytv acquisition last year, the top-line growth is still very solidly in the double-digits.

As we suggested last quarter, we spoke about in the release day, the iPhone launch in Canada was rapid and frankly the volumes we actually did in the quarter of more than 250,000 were quiet amazing. It did however drive significant amounts of incremental customer acquisition and customer retention costs. We conservatively estimate that the incremental hardware subsidy and data plan commission cost from the iPhone activations during the quarter, drove at least $95 million of incremental expenses.

Now this is just the incremental subsidy and data plan commission cost, versus what the same volume of devices would have been with our normal device mix.

In reality, incremental customer service and support costs were probably an additional $20 million to $30 million over and above the $95 million. If you normalize just for the incremental $95 million of iPhone subsidy and commission costs, wireless adjusted operating profit would have grown by 15% versus the reported 1%.

Network revenue margins at wireless would have been 51% versus the reported 45%.On a consolidated basis, adjusted operating profit would have grown by 14% versus the reported 4%. And adjusted earnings per share would have been $0.10 higher or $0.82 per share versus $0.72. So, there is no question that when you look behind the immediate impact on the income statement of this one investment initiative, which frankly is a low risk one with pretty certain returns, you see some very healthy results.

On the cable operation side, continued double digit top line growth, and good margin expansion. Although cable slowed modestly given the circuit-switch de-emphasis and softness in RGU growth versus what we forecasted.

You will note this quarter two significant non-cash items impacting our reported net income and earnings per share. The first is a $62 million recovery of stock based compensation expense, based on the change in Rogers's stock value in the quarter.

The second are tax adjustments to reflect the harmonization of Ontario and Federal Tax Administration and to reflect the company's view of the future tax benefit of derivates. The net result was to reduce reported income tax expense in the quarter from an effective rate of 33% to only 3%.

On the balance sheet, many of you have noted that at the end of July, shortly after the conclusion of the Spectrum auction and somewhat threading the needle through very turbulent credit markets, Roger successfully achieved $1.75 billion of 10 and 30 year notes on investment grade terms, with some of the tightest spreads seen in the entire summer.

With these proceeds and our internally generated funds we effectively paid for 20 megahertz of Nationwide AWS Spectrum we won in the auction this summer, we paid our quarterly dividend of $160 million, we bought back $100 million of Rogers' shares, settled $375 million worth of swaps which freed up capacity, and we acquired the remaining two thirds of Outdoor Life Network Canada, which Rogers did not already own, for $40 million.

As Ted pointed out, at the end of Q3 we had very strong liquidity of $1.8 billion, this is on fully committed multi-year bank lines and we have no debt maturities until 2011. So, whether you look at leverage, liquidity, or refinancing requirements, Rogers is in a very strong position in terms of its balance sheet.

In terms of the outlook, as we said in our release this morning, we're adjusting some of the full year 2008 guidance ranges which we set out in early January. The most significant adjustment is to reflect the impact of the iPhone launch and the extremely heavy sales volumes that were not assumed in our original outlook for the year.

We've also reduced the Cable RGU range to reflect the de-emphasis of the out of reach in circuit switched telephone business and the softness we've seen in sales of internet and home phone services. And then finally you'll see we've adjusted the media numbers somewhat, given the very soft advertising markets which those businesses are obviously facing in the current environment.

I will conclude by saying that despite the incredibly challenging environment around us all right now, when it comes to Rogers you should be comfortable with our strong financial position, as well as the subscription based nature of the majority of our businesses, and the strong utility of our products.

I will now turn it over to our Chief Operating Officer, Nadir Mohamed.

Nadir Mohamed, CA - President and Chief Operating Officer, Communications Group, Rogers Communications Inc.

Thanks Bill. Let me quickly give you some perspective on the operations front. First on the Wireless side, it's been a busy quarter for Rob Bruce and his team. Once again, strong double-digit top line growth with subscriber load mix with a healthy percentage of high value postpaid subs a terrific first quarter for iPhone sales. Continued success in holding down trend levels both postpaid and prepaid, with a postpaid ARPU growth of 4%, all of this despite the proliferation of discount brands and an economic environment that has limited roaming and usage.

And at the same time we've simplified and added significant value to our wireless data packages to drive much deeper customize options. We launch a host to great new 3G devices including the Blackberry Bold and continued to aggressively expand what is already a multi year lead in terms of network capabilities and our quality advantage.

A busy quarter indeed. Clearly the iPhone, just because of the sheer numbers involved defines the quarter both in terms of sales and financial impact.

As Bill mentioned, if you adjust for a conservative level of the incremental costs of this initiative, the wireless operating profit margin would have grown 15% and margins would have been maintained above 50%.

Let me take a moment to highlight the significance of our iPhone launch. First and foremost, as widely expected, customers have embraced the iPhone. The number of activations at over 250,000 is simply phenomenal. Second, as an iconic device, the iPhone association with Rogers reinforced our grand proposition around innovation. Third, this is a straightforward financial proposition. Positive lifetime value for sub given that we know the subsidy investments, we know the contract term, we know, and I have now seen the ARPU profile of more than 150% of our average wireless subscriber. And fourth, and perhaps the most importantly, it's not just about the iPhone but what it represents to our business: The first breakthrough device to put mobile Internet in the hands of our consumers and a catalyst for the biggest growth opportunity for our company: wireless data.

The iPhone symbolically represents two huge new categories for wireless: compelling consumer's smart phone devices and wireless handheld Internet access with the desktop like functionality.

These categories together are going to generate significant growth for Rogers and the industry overall. And there will be a plethora of these kinds of devices that we will carry not just from Apple and RIM, but from many others as well. We've been pushing hard for this day at Rogers and finally we have the speed, the devices, the applications and the consumer demand all opening up. So all good.

In our Cable operations division, Edward and his team delivered double-digit top line growth with adjusted operating profit up 18% of solid financial performance.

On the RGU front, while better than last quarter, still soft reflecting our decision early in the year, deemphasize our outer region circuit switch business as well as the combination of consumer caution and a largest point market in Ontario, deepening penetration of our Internet product and the intensity of the Toko win-backs.

Helped somewhat by the lower RGU activity, well with the tight focus on cost, we saw good operating leverage driving margin expansion up 275 basis points year-over-year. Even excluding the benefit from the renegotiated Yahoo! deal, cable operations delivered 15% operating profit growth and 173 basis points of margin expansion.

This steady progress and a good reflection of the operating cost control that the team is being focused on in the past several quarters.

With that I will turn it over to Tony.

Anthony P. Viner - President and Chief Executive Officer

Thanks Nadir, hello everyone.

The tough quarter for media, and quite largely inline with what we saw coming and I shared with you after Q1 and Q2. If you normalize the acquisition of Citytv which we acquired in November of last year, the organic year-over-year revenue growth would have been about 4% versus the 14% reported. And we would have been essentially flat year-over-year on operating profits versus the 7% decline, which I actually think is pretty decent performance in the current market environment for our types of businesses.

From a more granular perspective, I probably described the performance of our various divisions in three ways. First Sportsnet, our network of regional sports stations is doing very well. They're gaining share and they're driving good growth in both subscribers and advertising.

Then second would be radio which tends to least affected when the economy is tough because most of the advertising is locally focused and that's been holding through this past quarter.

The same can be said for a network of multi cultural OMNI TV stations which is a bit of a hybrid between special and over the year. They have been through enough of these cycles over the years that they are good at managing the margin.

Then a third layer would be our Publishing and over the year TV businesses where we have large exposure to national advertising and our Shopping Channel business where we have direct exposure to consumer discretionary spendings. These are the areas where we are feeling the impacts the hardest.

The bad news is that Q4 is pretty much the biggest quarter for all of our businesses. So obviously the timing of what's happening in the economy isn't exactly ideal. Pricing, we are a lot better positioned in some other media companies because of our properties have strong brands and audience shares in their respective categories. So they hold their own better one the advertisers have to make choices.

Also, we probably have less direct exposure to advertising overall, than a lot of media businesses. We have got a team here that's been through more of these cycles than I care to remember, and we know how play to it, they play out and what we need to do in terms of cost per stream to adapt, and that's what we are doing.

Lastly, I will just mention that during the quarter, we also re-branded our recently acquired Vancouver multicultural TV station to OMNI and watched our new OMNI stations in Calgary and Edmonton. So now we have a network of OMNI multicultural TV stations in Toronto, Calgary, Edmonton and Vancouver. And they are together in markets where we also have Citytv and radio stations. I think this will present significant opportunities for us as we go forward.

With that, I will pass it over to Bruce for questions.

Robert Bruce - President of Rogers Wireless, Inc.

Thanks Tony. Operator, quickly before we begin, I just want to request the participants as we do on each of these calls that that those of you asking questions be courteous to the other participants and your colleagues and limit the questions to one topic and one part each, so that as many people as possible have a chance to participate.

And then to the extent we have time, we will circle back and take more questions from you where we'll get them answered separately after the call.

With that would you please, operator, explain how you want to do the polling for questions.

Question And Answer

Operator

Certainly. Ladies and gentlemen, we will now conduct a question and answer session. [Operator Instructions]. Your first question comes from Greg MacDonald of National Bank Financial. Please proceed.

Greg MacDonald - National Bank Financial

Good morning, guys. Last time the company increased the dividend was on January 1st of this past year and that was coincident with the guidance released for the year. I am wondering a couple of things, first on timing. I am assuming that the company has a bias, when thinking about changes to the dividend but that occurred coincident with the budgeting process. If you could just confirm that?

And then, secondly, has the company given any more thoughts to establishing a formal dividend policy, i.e., targets as a percentage of the earnings, percentage of free cash flow, I think that might help us so, this company's has got a very healthy free cash profile. Ted, you mentioned that to, the rock solid balance sheet. I think a comment on the outlook when it comes to dividend, I think in the market like this might be very helpful for people? Thanks.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

Hi Greg, its Bill Linton. As you know these are unprecedented times. We are going to wait and see what happens over the next couple of months and potentially the next couple of quarters. I think you're going to find what our answers are the same as most companies answers. And that is we are very satisfied with our position today. But we are not going to do anything that would impair our position of liquidity.

So, right now I would say we are in a position where it's, wait and see how deep and long the economic problems are.

Greg MacDonald - National Bank Financial

Just as a quick follow-on to that. I mean, assuming things get back to a position where you can have some visibility, I think, that's what you're trying to say and I can appreciate that. Is the company going to at some point communicate divined targets? You're balance sheet; the profile of the company is getting to a point where I think most people are starting to consider you a more conservative profile?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

I hope so.

Greg MacDonald - National Bank Financial

Yeah. So is there point that we're going to...I mean, other companies that look like Rogers have started to give outlooks on what their dividend policy is. I wonder if you just at some point are we going to get some goal post to be able to understand where the future lays vis-à-vis the dividend?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

It's pretty easy to say that some time you will because that could be months or years. At this point, we're not in a position to say that we're going to give any guidance around a dividend policy in the near term.

Operator

Your next question comes from Simon Flannery of Morgan Stanley. Please proceed.

Simon Flannery - Morgan Stanley

Thanks a lot, good morning. I wanted to talk about the operating income guidance for Q4 for Wireless, if I am doing my math right, its looks like it's a little bit of a dip versus Q3 levels. Can you help us think about some of the drivers there, the iPhone obviously had a off to a huge start, I think AT&T's expecting somewhat less than where the iPhone sales in Q4, is that implied in your guidance?

And how much of it is relative to the economy drag you see and seasonality? Any thoughts about what's behind that would be very helpful? Thanks.

Robert Bruce - President of Rogers Wireless, Inc.

Yes Simon, it's Rob Bruce. Clearly, iPhone as Nadir said in his opening remarks, is a big part of everything. I think the other thing that is important to say is our push on smart phones isn't limited to iPhone. And in Q308, our smart phone as a percentage of our gross loads reached 40%.

We continue to drive that aggressively. That will be part of what we do in Q4. You may have also noticed our very strong push on mobile internet sticks. Again, all of these things are investments in the future which we believe is data and those will be things that color the results in Q4 and as a consequence color our guidance.

Operator

Your next question comes from Vince Valentini of TD Newcrest. Please proceed.

Vince Valentini - TD Newcrest

Yes, thanks very much. Just one clarification Nadir, you said that the ARPU on the iPhone is a 150% above your average. Would you be talking about your blended average or you're post paid when you say that?

Nadir Mohamed, CA - President and Chief Operating Officer, Communications Group, Rogers Communications Inc.

So, The reference to the 150% would be on the blended average for wireless customers.

Edward S. Rogers - President, Rogers Cable Inc.

And I think Nadir said more of that.

Operator

Your next question comes from James Breen of Thomas Weisel Partners. Please proceed.

James Breen - Thomas Weisel Partners

Thanks. Just a question on, in terms of the iPhone sales. We've seen here with AT&T where they had a big push initially sort of expectation and overtime the sales decline, would you say that you think that your more capacity can trade from the handset perspective and that you could see a longer tail in terms of the sales of the product? Thanks.

Anthony P. Viner - President and Chief Executive Officer

There were some capacity constraints or inventory constraints. As you know at the beginning of the quarter, iPhone was trying to ship basically the world out of one plant. So probably for the first month, we were constrained some what we were constrained on mix between the 8 and the 16. And we also had the brief charger issue which caused Apple to hold inventory.

So we were somewhat constrained for about the first 30 days and then things even dwelt in that...in the latter parts of the quarter.

James Breen - Thomas Weisel Partners

Great, thank you.

Operator

Your next question comes from the Peter MacDonald of GMP Securities. Please proceed.

Peter MacDonald - GMP Securities

Yes. First, I didn't catch when you talked about the iPhone. Did you give any of it for customer? AT&T said more than two times for iPhone?

Unidentified Company Representative

We have not given the...a few time in a lifetime value, no.

Peter MacDonald - GMP Securities

Okay, my question...Mr. Rogers spoke about the resilience of the Rogers businesses as a whole to recession or difficult economic times and given that Ontario has a faced some of those times already. Are there any areas where you have seen more exposure than others and are there areas where you have been surprised by the resilience?

Edward S. Rogers - President, Rogers Cable Inc.

I think as... we've drawn [ph] our notes from my numbers, you can tell that we've had a pretty good subscriber load on the wireless side. We made references to somewhat slower, RGU growth on cable. But frankly a large piece of that was our decision early in the year to curtail the investment in circuit switched home phone sales, outside of our territory.

To the extent we've seen any signs, that would really beyond usage, we made reference last quarter to roaming, not growing at the robust rates that it had been previously. That trend is continuing usage generally has been flattish. But we really haven't seen anything beyond that.

So I'd say, pretty resilient across the board and we will wait and see. We're obviously concerned about the economy. Ted made reference to restrain but at this point is more anticipation and if things get worst we're actually, getting ahead of the curve somewhat.

Operator

Your next question comes from Glen Campbell of Merrill Lynch. Please proceed.

Glen Campbell - Merrill Lynch

Yes, thanks very much. Can you talk a little bit about the ARPU of getting on your iPhone from specific customers upgrading. I know you talked a little bit about data plan take-up but could you give us an update on that and can you also talk about what you are seeing on upgrades generally? In other words, are we just seeing a self selection of better customers into the iPhone or are we seeing net benefits overall here? Thanks.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

It's sort of a complicated question because obviously there is lots of granularity in detail. Let me give you a couple of things that I think you can take away.

First and foremost, I think we are seeing strong ARPU on the iPhone, and importantly on all smart phones. Significantly, more Nadir talked about iPhones specifically being 1.5 times or better. And when you think about it Glen, at a minimum, these people are walking away with between $25 and $30 in a data bucket, on top of that possibly and depending on which trench of customers, A chunk of SMS messaging and other things.

The device clearly attracts a higher ARPU customer in general who can pay the bill in the long term. So, it drags along typically with a more LD, more roaming and more other things that characterize it very attractive customer from our perspective.

So, again we think the iPhone is a really healthy contributor to the business. We're delighted with the results we've seen. And the results we've seen overall was smart phones where a year ago 14% of our gross ads were from smart phones. Now, as I said before up to 40%, almost 17% of our base is now smart phones again pulling much higher revenue.

And so, we're we just happy with the direction that we're going.

Glen Campbell - Merrill Lynch

Okay, thanks for that.

Operator

Your next question comes from Dvai Ghose of Genuity Capital Markets. Please proceed.

Dvai Ghose - Genuity Capital Markets

Yes, thanks very much. Perhaps if I could ask Nadir, about your future wireless margins? Now, obviously in this quarter you were unusually impacted by the iPhone which is seem to be accretive in the future. But my question is really as you look out when do you think the dilution from the iPhone is going to become accretive? Clearly it's not a one quarter event. AT&T reduced all of the 2009 guidance because of the iPhone.

Also as you start going forward you get the storm and the instinct on other devices from your CDMA competitors to compete against you which could lead to higher subsidies. And of course there are events outside the PDA markets such as Kudo and Virgin now charging lower prices on Fido, which could lead to a reprise.

So, I guess my overall question is, I understand that the margin pressure in the quarter was unusual and really generated by one item, but to what extend do you think that margins can ever recover back to 50% plus in future years?

Nadir Mohamed, CA - President and Chief Operating Officer, Communications Group, Rogers Communications Inc.

Right, thanks for the question. I think there's multi-parts in there in that question but I'll try and do justice, I think without recognizing that we haven't given guidance for next year. Generally, see let me sit back and point out something that I've been saying for sometime and that is a when you look at our business as part of a communications profile, I think our view has always been that to expect 50% plus margins going forward, given some of the things you mentioned wouldn't make sense to us. And so from that perspective if you look back we've been achieving those numbers but we wouldn't see that going forward.

Clearly, the impact on the iPhone is the reason for...the primary reasons for margin compression this quarter, software device looking out ahead, the big drivers what's the volume. Because in many ways the more successful we're, the more depressed the short term EBITDA looks for the investor.

By the way, this is good news when we have the kind of success we have or had this quarter. So it's hard without really talking about the sub-expectation to be helpful. I think the best way to look at is look at profile of an individual customer and I think most people know what the cost of acquisition is and Rob made reference that average of getting $25 to $30 attached on data and hopefully higher as we go forward, when people take more than Internet access.

The variables then that are left are things like show an improvement, we know these people for the most part take three-year contract. So if you look at a profile of a customer it's very healthy and really the trick is determining what the load looks like next year. So I wouldn't want to pre-suppose what the margin is look like. Clearly within the individual customer and as you back into the end of the year, you start seeing positive slow-through on an EBITDA level for an individual customer.

So, that's kind on the iPhone side but we shouldn't look at this market as tricky and iPhone market is lots of other stuff going on. You made reference to discount brands, I think when time you look at '09, '10, the impact of the new players coming in. So we clearly see pressure on the pricing front on the ARPU front, which in turn will have pressure on margins.

Having said that, we are positioned we believe better than anybody to address that. We have been attacking our cost structure and will continue to focus on that because we recognized that as the revenue side of it starts getting a little more compressed that we got opportunities on the cost side to keep margins healthy and growing.

Dvai Ghose - Genuity Capital Markets

On the Fido, just a real quick if you don't mind, you referenced the discount brands in your prepared remarks. Do you see a need to re-price FIDO down given the fact that Kudo and Virgin don't charge SAF, don't offer contracts, etcetera?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

At this point, we are happy with where Fido is. At some point in the future we may make some fine tuning to Fido, but nothing that we're prepared to discuss today.

On that separate note and picking up on your first question with Nadir, on device pricing as a bit of an input for your model, I think what we're seeing out there is a lot of segmentation amongst the smart phone devices. We're seeing a new class of QWERTY devices coming in at the low end to facilitate SMS which is a lot cheaper.

Starting to see some of the players in the smart phone category to following those prices down to make sure they don't see some of that part of the market to these players with these simpler more segmented devices. So, I see some downward pressure there.

The one other thing that I'd love to pick up on was also I think, we've said it before and I want to say it again, that we do see in the longer term more downward pressure on voice pricing that will no doubt put some pressure on margin as we go forward. And I think it's something we've said before but as we're sort of rolling up all the inputs to that questions you asked Nadir, I think it's something that we like to just reiterate.

Operator

Your next question comes from Jeffrey Fan of UBS Securities. Please proceed.

Jeffrey Fan - UBS Securities

Thanks very much. I want to ask about, when we look at the US trends, one of the areas where they're seeing a lot of pressure from the macro standpoint is the local access line. And the area where I think wireless in Canada has not really taking advantage of this wireless substitution. Do you see that as there's an opportunity as we go through a slowdown period here?

Robert Bruce - President of Rogers Wireless, Inc.

Hi Jeff, its Rob.

Jeffrey Fan - UBS Securities

Hi Rob.

Robert Bruce - President of Rogers Wireless, Inc.

Jeff, clearly, we do see it as an opportunity. I think there's been a lot of research done recently as we lookout, a turndown in the economy and as we look at what people will shed, wireless phones towards the bottom of the list. It seems to be...have become one of those essential services. And we worked and I think you know that last quarter we launched UMA, which creates a capability to make wireless and home phone combination a very enticing substitution, a way that people can kind of cut the cord effortlessly.

We continue to believe that's going to afford more opportunities going forward. There is some technical innovations on the horizon, probably more than a year away right now that are going to make that even more enticing. But absolutely, we think it's a real big opportunity and particularly, a big opportunity outside of our cable footprint.

Jeffrey Fan - UBS Securities

You said that correctly.

Operator

Your next question comes from Bob Bek of CIBC World Markets. Please proceed.

Bob Bek - CIBC World Markets

Thanks very much. Good morning. Just on the Cable side, I know we have been talking about the economy and the potential affects on some of the parts within cable, specifically, on competitor issues.

Can you give us a bit perhaps, Edward a commentary on, what looks to be a bit more of a resilient offering, a renewed offering from Dell in some of the cable areas, in particular we are seeing some pretty aggressive pricing on there, on the DTH products. Is it just a short term leap here or do you foresee some more aggressive tactics for that? Thanks.

Edward S. Rogers - President, Rogers Cable Inc.

Thank you and thank you for asking a cable question. But no, I think when you look at Dell, they definitely have been tougher in the market than they were, let's say a year to two years ago. But if you look at where they are fighting in this more on the offer pricing and it is more around pricing keeping their own customer base. Their core pricing has been pretty steady. They continue to implement usage based on, on their side wherein rate increases on their satellite side.

Our enterprise is more on the offer pricing and they have been better in the marketplace. I think for cables and some of the things that mentioned...in the three years in the quarter be in the phone business, we have reached 34.5% of cable based kind of a home product, if you look at that way. 500,000 high definition customers.

And so obviously as you push penetration rates up, you've got to be smarter in the market to continue to get the next 10%, I'll call it, of penetration. And cable is feeling some pressure, as I mentioned, by other speakers on the economy and more of a hesitation by customers to want to buy TV sets and new laptops, and we wrap our products around. And just as Bill mentioned, for our company we just want... most people want to keep firm and let this storm weather and not move as much as they have, but...

And I think splitting out the difference has been previously mentioned on circuit. Our circuit business is important because regarding [ph] cable revenue generating units, about 164,000 for the quarter or 198,000 a year ago, so down. But when you look at combining the circuit business, you don't see the impact even though we are loosing subs on the EBITDA. And that was kind of the point of changing where we're putting our focus as we go forward.

Bob Bek - CIBC World Markets

Thank you.

Operator

Your next question comes from Scott Mallet of Goldman Sachs. Please proceed.

Scott Mallet - Goldman Sachs

Good morning, thanks. Just wanted to get a little bit back on the wireless and on the postpaid ARPU, obviously, very strong growth there. On the voice side, aside from the plan pricing which you hit on petty well, are you seeing any evidence of pressure on the roaming revenue or over head charges or any other voice extras? And then just quickly on the second, just I know I am nit-picking here but the postpaid churn did tick up a little bit. And just can you help us think through where the pressure is coming from? How much is maybe Koodo having an impact on your postpaid base and how much is macro? Thanks.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

So let me do the revenue piece first, Scott, and highlight some of the elements on the revenue front. I think the thing that you should take away as the key growth drivers. From a revenue perspective obviously first and foremost, have been data. The more discretionary ones in the deal are alluded to this. Particularly when you are looking at ARPU, so you're striking out the influence of adding the subscribers.

We're seeing a real flattening out of the airtime LD. We continue to see some growth on the essential services line and I think that's our good sales people continuing to meet our customers' needs in terms of some of these enhanced services and roaming too, is has...well overall revenue of roaming is going up with the base, the ARPU for roaming is relatively flat.

So, would you remind, I couldn't quite hear you're question on churn, do you mind repeating it?

Scott Mallet - Goldman Sachs

Yeah, just the churn, your postpaid churn and did pick up a little bit and just if you can help us, think through where some of that pressure's coming from, how much is Koodo having a impact on you're postpaid base versus maybe how much macro is playing the part?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

So, Scott, the numbers in front of me, it suggests that, churn went down actually one basis point. We would have liked to seen it go down little bit more than one, so. Churn is typically seasonally up. Were you looking at it from a sequential perspective, Scott?

Scott Mallet - Goldman Sachs

Yes, I was looking at both. It was down on a year-over-year basis more last quarter than it was this quarter; it was more even with last year as you noted. But I guess we had expected it just on the trend rate that it would be more towards 1.05. I know it's a small difference, but I wonder if you can give your thoughts.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

I wouldn't say there is anything going on there, we're making continued improvements in churn; it continues to be an area of focus of ours. We work and try to highlight the advantages of being with Rogers and that is that we have larger and better quality coverage. We continue to work on our credit adjudication processes. We sign our customers to term and we work hard to make sure that we keep them in hardware, that's working and we expect to continue to see improvements on churn overtime. And a comeback to the Kudo thing, no obvious change in trajectory that's the result of Kudo.

Scott Mallet - Goldman Sachs

Kudo more of a prepaid competitors, is what are you saying?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

No, not specifically. I guess I was responding to the question of, is Kudo on the radar screen for producing churns for Rogers? And the answer would be no.

Robert Bruce - President of Rogers Wireless, Inc.

And Scott, I assume we really meant to say that where to go Rob; maintain the churn levels as low as they are.

Just one quick thing on the roaming, it is, if you would split up roaming, it is very much the U.S.-Canada roaming as opposed to international. So I think that really points to the economy, what's going on with the markets as much as anything.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

And that applies to both inbound and outbound to the U.S. all seem to be significantly softer with inbound and outbound to international in terms of traffic, both looking fairly robust.

Scott Mallet - Goldman Sachs

Okay, thank you.

Operator

Your next question comes from John Henderson of Scotia Capital. Please proceed.

John Henderson - Scotia Capital

Yes, thank you. I am just wondering on the usage that's sort of after a quarter of iPhone and increased look at other smart phone broadband type usage activity. How do you feel about your positioning of back haul capacity and certain CapEx profile today and going forward? And then also if you had any kind of follow up comments that you wanted to share on your thoughts on Telus's HSPA?

Edward S. Rogers - President, Rogers Cable Inc.

So we feel real great... it's Ted here. I don't know if Bob Burner [ph] wants to say anything or... we worked very hard with that.

Unidentified Company Representative

Well, sure I mean you picked up... it's Bob Burner here... you picked up on a key point for the industry which is backhaul. And as we move into broadband services, the amount of capacity that everyone has to put into connect their selves by back into the core networks is going to be one of the factors that that CapEx is being spent on going forward.

Unidentified Company Representative

So just picking up on the other part of your question with respect to Bell and Telus's HSPA overlay, I guess we've said publicly before, not a huge surprise to us. It's HSPA network only so, as you know most of the roaming across on GSM. And we feel that our network reliability advantage doesn't really derive directly from the technology of GSM or HSPA. It's a direct to result of having a lot more cell side density in the areas for the country that really matter. And these are things that are hard to duplicate over time.

And we also have great respect for the challenge of changing technology. As most of you will know, we changed form TDMA to GSM and fairly recently shut down the last of our TDMA networks. And I can tell you it's a real significant challenging period to run all these networks in parallel. And I guess, our competitors are going to go through those same kinds of growing pains that we did and we look forward to the opportunities that that will present for us.

John Henderson - Scotia Capital

Thanks. Just back on the our CapEx question we just say, or do you think CapEx to revenue ratios may be trending higher in the future or flat in returning lower?

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

I think we're in the cycle and we're in the cycle of investing in HSPA. So you've seen a flavor of what it is that our CapEx levels look like and I think at this point we're not ready to give guidance for next year.

Operator

We currently have time for two more questions. The next one is from Rob Goff of Haywood Securities, please proceed.

Rob Goff - Haywood Securities

Thank you very much. On the Wireless side, we can all look to the smart phone as a driver going ahead, what would see would be your parallel on the cable side, if the increasing data speeds or increasing HD content as we look into '09? Thank you.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

I guess you're asking in terms of what our focus is? But I think, like Wireless is trying to get the better quality customer in terms of revenue, in terms of being a bundled partner, buying multiple cable products and focusing on getting a higher quality customer.

So on data as you mentioned, definitely our focus of getting people to take higher tiers of data or net ads in Q3, take the higher tier products, we're better than they were in Q3 of 2007 as the swift mix.

When you look at television and the packages that we are selling are definitely trying to focus on the higher end and continue to invest to draw customers. So on the Internet, our message just in the marketplace of the past investment in the products on television showing the most HD choice, the most televisions through VOD and trying to continue to spend money to differentiate ourselves.

So, we can take share and more importantly to your point take that higher quality of share.

Rob Goff - Haywood Securities

Good, thank you.

Operator

Your last question comes from Randal Rudniski of Credit Suisse. Please proceed.

Randal Rudniski - Credit Suisse

Thank you. Just a question on the cable, particularly cable operating expenses. Because a few times in the release, the release refers to an economic slowdown and the impact on the subscriber numbers. And really the question is in such an environment, where economic growth is a bit subdued, do you feel that you need to...or do you feel that you have the capacity to continue to hold back on selling and marketing expenses which looks like they're going to be flat this year? Or do you need to accelerate that expense line?

And then one the sort of unrelated follow on, going back to iPhone. I was just hoping that you might be able to outline what the average data you suggest for an iPhone customer? Thank you.

William W. Linton, C.A. - Senior Vice President, Finance and Chief Financial Officer

I will start with the first part of that one question. I think when you look at the economy, it's tough to exactly measure the points of data we see are some... are in some AVIs [ph] and accounts talked about in the past. So when we research our customer, some hesitation to move forward in purchases. And we look at our marketing of sales advances but you don't see some of the efficiency gains that we've brought.

And so, our purchasing on...tightening, we've got some synergies there. We've got some synergies working between wireless and cable, some synergies are on selling in a multi product way. It is generated as many sales in the early part on the industry like the new drive some efficiency on the marketing and sales trends. So, what you might see prior numbers there is more activity and more kind of total spend in that way.

And we're going to continue to push hard to drive penetrations up as we go forward.

Robert Bruce - President of Rogers Wireless, Inc.

Hey Randall, it's Rob with the iPhone data usage. Right around October 1st when we launched the revised data bundles and our new data rate card, we came out with actually a lot of facts and figures about the amount of usage we are receiving on iPhone.

So, I would actually send you back to there to look at some of that data but let me just give you a couple of sound bytes from it now.

One of the simple facts was over 92% of iPhone users use less than 300K of data. And you'll probably remember during that period of time we also had some noted journalists that we gave devices to who worked extremely hard to try to use as much data as they possibly could. And struggle to get over a 100K and a lot of that stuff was well documented during that period of time.

And we began to pick it up for you. But that again the usage was a whole lot less significant than we thought. And again, I think we should highlight that the people that we are looking at in those first couple of months were the real data sell out, the people who are coming through, they were very excited about the prospect of the iPhone. And I said K, I meant megabits.

Randal Rudniski - Credit Suisse

Great, thank you.

Robert Bruce - President of Rogers Wireless, Inc.

Okay.

Bruce M. Mann - Investor Relations

Operator, it's Bruce Mann here of the company. We wanted to take a moment to thank everybody for participating this morning. And we appreciate everyone's interest and certainly coverage. Do you have questions that weren't answered on the call, could you please give my colleagues or myself a call or contact info is on the news this morning.

Everyone have a good day, we may close our call.

Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect you lines. .

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Source: Rogers Communications Inc. Q3 2008 Earnings Conference Call Transcript
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