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Rogers Communications Inc. (NYSE:RCI)

Q4 2008 Earnings Call

February 18, 2009 8:00 am ET

Executives

Bruce M. Mann – Investor Relations

Alan D. Horn – Chairman & Acting Chief Executive Officer

Nadir H. Mohamed – President & Chief Operating Officer of Communications Group

William W. Linton – Senior Vice President & Chief Financial Officer

Anthony P. Viner – President & Chief Executive Officer

Robert W. Bruce – President of Rogers Wireless, Inc.

Analysts

Jonathan Allen – RBC Capital Markets

Glen Campbell – Merrill Lynch & Co.

Robert Bek – CIBC World Markets

Jeffrey Fan - UBS Securities

John Henderson - Scotia Capital

Richard Prentiss – Raymond James

Dvai Ghose – Genuity Capital Markets

Scott Mallet – Goldman Sachs

Tim Casey - BMO Capital Markets

Simon Flannery – Morgan Stanley

Vince Valentini - TD Newcrest

Peter MacDonald – GMP Securities

Greg MacDonald - National Bank Financial

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Rogers Communications, Inc. 2008 Fourth Quarter and Year-End 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 Wednesday, February 18, 2009 at 8:00 am Eastern Time.

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

Bruce M. Mann

Good everyone. Thank you all for joining us for Rogers' fourth quarter '08 investment community teleconference, its Bruce Mann. Joining me here today on the call from Toronto are Alan Horn, the Chairman of Rogers' Board of Directors and also our Acting Chief Executive Officer; Bill Linton, who you all know is our Chief Financial Officer; Nadir Mohamed, who is President and Chief Operating Officer of our Communications Division.

And then we have our three divisional Presidents; Rob Bruce from Rogers Wireless; Edward Rogers from Rogers Cable; and Tony Viner from Rogers Media. And then we have Bob Berner, who is our Chief Technology Officer, joining us from Barcelona actually on dialing in.

So, as you know, Rogers released our fourth quarter results and our 2009 outlook earlier this morning. The purpose of this call this morning is to provide you with additional background and answer as many questions as you might have that time permits.

So, as these calls almost always involve estimates and other forward-looking discussion that we will either have in our remarks or that we may discuss when you have your questions. The actual results could be very different in the fullness of time. So, please review today's earnings release and our full year 2007 MD&A, the risks and uncertainties and cautions included in each, apply equally to our dialog on the call today.

So, if you don't already have a copy of the fourth quarter release or annual report, they are both available in the Investor Relations section of rogers.com or you can find them on EDGAR or SEDAR. And with that, I’m going to turn the call over to Alan Horn. And then Bill Linton, Nadir and Tony each for some very brief introductory remarks and then the management team will take your questions. Over to you Alan.

Alan D. Horn

Okay. Thanks Bruce. Good morning everyone and thank you for joining us. I will make a couple of brief remarks and then Nadir Mohamed and Bill Linton can take you through the highlights of the quarter. I’m sure all of you are aware that the company's Founder and CEO, Ted Rogers passed away in December. And it's obviously been a couple of difficult months for his family, his many friends, and colleagues including those of us in this room.

Many of you on the call shared your thoughts and condolences with the Rogers' family and company management, and for that we are very grateful. Ted was a one of a kind individual and we were all wonderfully fortunate of worked alongside him and he will be sadly missed. You've heard from Ted on several of these calls over the past few years that one of his most urgent priorities had been to ensure that Rogers Communications became what he liked to call industrial strength. He wanted to make sure that the time was taken and the investments were made to put in place the infrastructure, management processes and balance sheet to secure the company and support additional growth for many more years into the future.

He was successful in that. Today, Rogers Communications is in the strongest position it has ever had financially, organizationally, structurally, and operationally. So, we go forward very much from positions of strength with terrific assets and franchises in great businesses. Before Ted passed away, he had set out a very specific process for the Rogers Board to follow in selecting a CEO to succeed him. The process is all about ensuring that the company is led by the most qualified candidate that exists anywhere internally and externally.

A special committee of the Rogers Board was constituted and began work on this in the weeks after Ted's passing and is working thoughtfully and diligently through the process. This is the top priority of the Board, we are walking through the process in accordance with Ted's wishes and expeditiously. We are looking to conclude the process as soon as possible, but it would be inappropriate to make any further comment on this at this time. In the meantime, the day-to-day operations of the company continue to be managed by the Office of the President, myself, Nadir Mohamed and Bill Linton together with the operating company Presidents much as we did in the months before Ted's death.

I will let Nadir and Bill speak to the specific results of Q4, which for several reasons was somewhat more complicated than generally from Rogers, but I will say that overall 2008 was another year of solid growth in subscribers, revenue, operating profit, and free cash-flow. We continued with the appropriate investments to expand and reinforce our networks and made investments to grow our customer bases with high value subscribers. At the same time, we distributed a meaningful amount of our growing free cash flow to shareholders. As you can see from the guidance in our release this morning, we see a continuance of this in 2009, but with a modest slowing of growth reflecting the difficult economy and also the deepening penetration of our products.

At the same time, we're also shifting an increasing amount of management attention to controlling our OpEx and CapEx, and we believe, as I know many of you do as well that we have significant opportunities in this area. Consistent with the growth and free cash flows we are expecting in 2009 we also announced this morning that our Board of Directors has authorized a 16% increase in the dividend effective immediately and also a renewal of our 300 million share repurchase program for 2009 as well. So, overall a balanced set of results and a healthy outlook that we think is respectable especially in this current environment. Thank you again for your support and I'll now turn it over to Nadir Mohamed.

Nadir H. Mohamed

Thanks Alan. Let me quickly give you some perspective on the operations front. First on the Wireless side, three important things that I want to touch on. I will start with one of the biggest impact and that's our successful Q4 Smartphone Campaign. As you can see from the release, we activated more than 400,000 smartphones in the quarter predominantly BlackBerry and iPhone devices. That's a huge number of smartphones given our base of 6.5 million postpaid subscribers, and by the way well more than we did in Q3. 49% of our postpaid launches were on smartphones versus just 13% in Q4 of last year, that's almost four times as many.

The number of iPhones activated in Q4 was lower than Q3 when we had pent-up demand in advance of our July launch, but importantly in Q4, we activated almost twice as many BlackBerrys as we have ever done in a single quarter. 40% of the smartphone activations for subscribers that are new to Rogers and the vast majority signed up for both postpaid, voice and monthly data plans on multiyear contracts. These are high value subscribers that drive monthly ARPU of more than 150% of our blended average wireless customers. And for the 60% that were existing Rogers' subscribers, the majority were previously voice only customers, so we added incremental recurring monthly ARPU in the form of new monthly data plan. And each customer also represents contract renewal for multi-year term generally in most cases three years.

If you're going to isolate and peel away the impact of the Smartphone Campaign, here is what you would see. Adjusting for a concerned level of incremental cost from the higher device subsidy and the incremental commissions for more data plan sales, which together add up to at least $85 million, the wireless operating profit would have grown by approximately 10% versus the reported negative 3%. And wireless service margins would have been 48% versus the reported 43%.

Turning now to COA. Key factors that impacted COA with the launch of the new Fido brand and our Smartphone Campaign, which added approximately $60 to Q4 COA year-over-year. I should also point out that we also continue to have a very strong mix of postpaid activations. Secondly, on the revenue side, we had healthy double-digit top line growth, and continued success in holding down churn levels for both postpaid and prepaid. Postpaid ARPU is up 2%, reflecting the trends of our data product portfolio offset by a modest decline in the voice ARPU as we were impacted by the economic downturn. U.S., Canada roaming revenues were down year-over-year versus flat in Q3 and we also saw meaningful slowdown in user sensitive items like out-of-bucket and long-distance. As a result, our voice ARPU growth was modest and negative for the first time in quite a while.

The third item I wanted to touch on is wireless data revenue growth. I mentioned last quarter that we have simplified and added significant value to our wireless data packages early in the year to drive a much-deferred customer adoption. With this that to take advantage of the deployment of HSPA, with the fastest speed in Canada, and at the launch of the iPhone and devices like Bold and the Rocket that would drive adoption of mobile Internet. And in fact, we are moving from data at the niche, e-mail SMS type service to mass adoption of the mobile Internet. While our wireless data revenue growth is up a respectful 36% year-over-year in Q4, it's important to note that this reflects the impact of the pricing reductions that I just referred to. And then as we lack these, we should reaccelerate the wireless data growth going forward.

So, turning now to our cable division; Edward and his team delivered a healthy 9% top line growth with adjusted operating profit of 15%, a solid financial performance. On the RGU front, the results were softer than we had hoped to deliver. The economy in Ontario, where most of our cable business and most of Canada's manufacturing is centered is challenging. And consumers generally are much more cautious. People are moving residences less and those are important sales touch points for us.

In addition, the penetration level of Internet in Canada is one of the highest and our Rogers [cellphone] penetration is now at 36% of basic customers. So, with the margin, and it is more difficult to continue to deliver the same growth rates as we put earlier along the curve. We have also seen aggressive Home Phone win back offers from our competition in the last couple of quarters. But frankly I also think we need and can deliver better Home Phone numbers. These net activation numbers are [unsuccessful] to us and we clearly have some work to do to change the trajectory in the coming months in the coming quarters.

Having said that, helped by the lower RGU activity and a tight focus on products, we did see some good operating leverage, driving margin expansion up about 200 basis points year-over-year. The results also included $8 million of additional subsidy costs associated within HD digital box sale campaign within Q4 versus our normal rental model, which depressed margins by 100 basis points. So, a steady progress and a good reflection of the operating cost control as the cable team has been focused on in the last several quarters. To conclude, a busy quarter for our group positioning us well for 2009. With that let me turn it over to Bill.

William W. Linton

Thank you, Nadir. 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 9%. We recorded an adjusted operating profit of $968 million, which is relatively flat year-over-year it's up 1% or so. As Nadir mentioned, we incurred incremental costs associated with the Successful Smartphone Campaign in Q4 of at least $85 million versus what our costs would have been on the same volume and mix of devices we had in the fourth quarter of '07.

These incremental costs diluted the wireless margins by about 560 basis points and took the EBITDA growth rate down from what would have been 10% to negative 3% due to the significant amount of incremental customer acquisition and retention costs. If you normalized just for the incremental $85 million of cost, at the consolidated RCI level, adjusted operating profit would have grown by 10% versus the reported 1%. Adjusted EPS would have been $0.13 higher or $0.39 per share versus $0.26 that we reported. So, there is no question that when you look behind the immediate impact on the income statement of this successful investment initiative, which frankly is low risk, you see some very healthy results.

On the cable operation side, continued strong top-line growth, although slowed modestly given the circuit switch deemphasis and softness in RGU growth versus what we had forecasted. However, good margin expansion, which combined with the top-line growth generated 15% adjusted operating profit growth. At media, versus the reported 8% increase in revenue on an organic basis, revenues would have been flat if you adjusted for the Citytv acquisition in November 2007. And revenues from the NFL series that started in 2008.

The overall softness at media is for the most part a reflection of the weakness in advertising related revenues principally at our over-the-year television business. Publishing and radio have both essentially held flat to slightly down from last year, while strength our Sportsnet properties has been offset by weakness of The Shopping Channel reflecting the general retail sales declines. As you work your way down the income statement, there are a few cash and non-cash items, which impacted our EPS in the quarter that I should quickly highlight.

First, is the $25 million in the stock related expense and this is simply the reflection of the change in the potential liability given the increase in the RCI stock price over the course of Q4. Next is the $41 million of restructuring expenses, which primarily reflects severance costs associated with employees who left the company during this quarter and the fourth quarter as we adjusted to the declining economic conditions. Another item is the $294 million write-down of a portion of the goodwill and other intangibles associated with our over the year broadcast division.

Importantly, this does not reflect any lack of confidence in or commitment to this business going forward. In fact, we've made some very significant strides in the year since we acquired Citytv, in terms of rating, integration, cost structure, et cetera. This is strictly an accounting entry that results from the requirement that we test the value of these intangibles each year against the current business environment and in the current environment, media advertising revenues are obviously very depressed.

Tony can talk to you in more detail during the Q&A, but we're actually feeling extremely confident about how we are positioned with our media business portfolio for when the economic cycle turns back around. The next two items are somewhat related and those are the $77 million foreign exchange loss and the $43 million change in the value of derivative instruments. The two net against each other with the $34 million impact to earnings essentially relating to the large decline in the Canadian dollar against the U.S. dollar during the fourth quarter and the coincident accounting impact on the 7% of our U.S. debt, which is unhedged.

The last item is the $87 million income tax charge, the vast majority of which relates to non-cash tax accounting adjustments to the valuation allowance associated with realized and mostly unrealized capital losses. A general comment on CapEx for both cable and wireless for the quarter is that while we did come in at the top end of our annual guidance for the full year, a lot was spent in Q4, and that did significantly impact our free cash flow for the quarter versus Q4 last year.

In addition to the fact that we are going to take the overall capital intensity down for full year 2009, we are also going to be more focused on establishing better pacing around how we deploy capital and this will be part and parcel with some of the efficiency initiatives we are looking at going forward. Free cash flow for the quarter measured as adjusted operating profit less CapEx and interest expense was $28 million, compared to $195 million in Q4 '07 with essentially the entire difference being the result of the increased CapEx in Q4 '08 versus Q4 '07.

Finally, I wanted to hit quickly on pension cost for Rogers, compared to many of the large income at telcos, these costs are relatively modest at Rogers, but I know it's an item of topical interest generally given the performance of the equity markets over the past year. Implicit in our guidance for 2009 is pension expense of approximately $25 million to $30 million, which is roughly consistent with 2008-pension expense, that's the accounting side. On the cash side, our pension funding in 2008 totaled just under $40 million and we are expecting that cash funding will increase to $55 million to $65 million in 2009. So, not big numbers, but several of you had asked, so we wanted to lay it out for the broader group.

In terms of the outlook, as we said in our release this morning for 2009 we are expecting continued growth pretty much across the board in terms of revenues, operating profit which combined with an up to 10% reduction in CapEx drives double-digit increase in free cash flow in 2009. Consistent with the expected growth in free cash flow, we announced this morning that our Board has approved a 16% increase in our annual dividend to $1.16 per share and also a refresh of our $300 million share buyback program for 2009. So, very good growth in the business in free cash flow and in returns to shareholders especially in this extremely challenging economic climate.

In terms of our balance sheet, we are in a very strong position as we go into 2009, we have investment grade ratings and relatively low leverage at approximately 2 times debt-to-EBITDA. Our free cash flow is growing, we have very strong liquidity of about $1.8 billion and this is fully committed multi-year bank lines and we have no material debt maturity until mid-2011. Whether you look at leverage, liquidity or refinancing requirements, Rogers is in a very strong position in terms of its balance sheet. With that I am going to pass it over to Tony.

Anthony P. Viner

Thanks Bill, and hi everyone. Media's overall results finished the year within our revenue guidance and just shy of our revised EBITDA guidance. As I did last quarter, I will review media's operations in three sections. First, our network of regional sports stations, Sportsnet continued to do very well and continues to show growth with both subscribers and advertisers. It is also well positioned for 2009 as we finalize our contracts with the distributors.

Second would be radio, which generally tends to hold its own when the economy is tough and although it experienced a 5% decline in sales in the quarter versus prior year, it's well-positioned in the market with strong brands and market positions. Based on the latest industry report, we actually grew our share in Toronto where we were already number one.

A third layer would be our broadcast TV, and publishing businesses, where we have larger exposure to national advertising. And our Shopping Channel business where we have direct exposure to consumer discretionary spending. These are the areas where we are feeling the economic impacts the hardest. But we are positioning ourselves pretty strongly across these businesses for recovery and have made some strong improvements in our market positions in both the broadcast TV and publishing segments.

So far things aren’t getting any better in Q1 '09, and I don’t expect we will see any positive inflection until at best the latter parts of the year. Accordingly, we have been aggressively managing our expenses including a restructuring that we instituted in December. As I mentioned in previous calls, I think we are a lot better situated than some other media businesses out there as our properties are holding or growing audience share in the respective genres so they fare better when advertisers have to make choices.

And we probably have less direct exposure to advertising overall with only about 50% of our revenues coming from that channel. But we have got a solid and stable team here that's been through more of these cycles than I care to remember. And we know how these play out, and what we need to do in terms of cost structure to adapt, and that's what we are doing. I will turn it back over to Bruce.

Bruce M. Mann

Thanks Tony. Operator, before we take questions, which we will do in just a couple of seconds. We want to quickly remind people as we do on each of these calls that if those of you asking questions would be courteous to the other participants by limiting questions to just to one topic and one part, so that as many people as possible have a chance to participate.

And then to the extent we have time and I hope we do we will circle back and take additional questions where we'll get them answered for you separately after the call. So, with that why don't you just explain to the participants how you want to organize the Q&A following a process and we'll jump right in.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Jonathan Allen of RBC Capital Markets. Please proceed.

Jonathan Allen – RBC Capital Markets

Thanks very much. Alan, a question for you about the dividend and the buyback announcement this morning. It looks like as you pointed out that free cash flow, the mid point you're looking at about 16% growth, and so it looks like your free cash flow at the mid point is something around $1.7 billion, your dividends will be something around $700 million, so it looks like you're still looking at somewhere around $900 million or $1 billion of free cash flow. So, even if you use the 300 for the buyback, there is still a large amount of free cash flow that's I guess left unaccounted for. I'm curious what uses you expect for that? Are you going to pay down short-term debt, are you going to accrue a cash balance in advance of the debt maturities two years from now, and also curious if there were some sort of I guess if you are a little bit more conservative with the payout and the capital structure until a new CEO is actually announced? Thanks.

Alan D. Horn

Jonathan, I was just leaving some surplus there for the next CEO to make some further announcements, I think going back to the point I think we are being conservative as we have been, these are fairly challenging economic times like there. I think we also see that there may be some opportunities here for other things, but I think mainly it's I think continuing the approach that Rogers has had in terms of being conservative in terms of the use of cash and making sure that as Ted directed us to have a balance sheet to this industrial strength. I think looking at overall capital policy, that is something that Bill and the Board are engaged in, in terms of seeing what the appropriate capital policy would be to ensure that we have continued access to the capital markets when required, but ensuring that we were providing the appropriate returns to shareholders. And in that regard, as well, and we are rapidly moving towards a situation where cash taxes will become a bigger and bigger issue and so the tax efficiency of our balance sheet has also been factored into that analysis.

Operator

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

Glen Campbell – Merrill Lynch

Yes thanks very much. You alluded to sort of some of the drivers of the softness in wireless ARPU during the quarter on the voice side. I wonder if you give us just a little bit more color on that perhaps comment on whether the trends we saw in Q4 are going to continue or get worse into Q1? Thank you.

Robert W. Bruce

Glen, it's Rob Bruce, how are you this morning?

Glen Campbell – Merrill Lynch

Good thanks.

Robert W. Bruce

The key things that sort of underpin the softness in voice ARPU that we referenced, we're number one in roaming, which I guess frankly is not surprising, people just aren’t traveling as much and we are seeing roaming account for probably more than a third of that softness. Also as Nadir mentioned, peoples usage out-of-bucket a little bit of softening on LPE, it would just seem that people are paring back on some of those areas that are a bit more discretionary. And frankly when we look at it, we think that probably accounts for -- based on the trending, maybe as much as $30 million in the quarter.

Operator

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

Robert Bek – CIBC World Markets

Thanks good morning. Just on the cable front, I think Nadir you talked a bit about some of the issues on subscriber growth particularly the home phone and some of the maturity in the Internet. So your guidance for '09 was fairly healthy on the EBITDA revenue side as well. Can you talk a bit about what are the challenges beyond maturity, I know you did mention on the home phone side, you are not getting some buyback as well as some win-back pressures from some of your competitors, but can you talk a bit, just a few quarters now that we are seeing some weakness or can you talk a bit about some of the issues whether how much of it's economy related, how much of it is just not executing on marketing perhaps or some of the issues that are around that subscriber growth?

Nadir H. Mohamed

Hi, Bob it's Nadir. I will start and maybe I turn it over to Edward, as well to add some color. But just on your note, with vis-à-vis the guidance, we've given guidance on cable revenue and EBITDA and I think to confirm, should give you a sense of our view, which is fairly steady performance in the cable side, 6% to 8% growth on the revenue side and healthy EBITDA growth as well. So, that's the reflection of obviously the growth in terms of subscriber votings we had this year, continue the expectations of growth going forward and the pricing power we have had in the last couple of years including what we've already announced for this year. So, from a context point of view, it is a healthy business, as you know, have been adding margins to the bottom line, couple of 100 basis points this year. On the subscriber front, we've got some work to do as I alluded to and may be I will ask, Edward to talk about the drivers to what's affecting home phone and some of the other products.

Edward Rogers

I think, when you look at home phones as we do, there are different strategies that are out there, when you look at, on a penetration basis, Cablevision and Vidéotron would be one and two and they came in with a bit sharper pricing, and I think almost the rest of us. And when you look at the rest of the cable companies out there, we have been the leading company in terms of penetration and that group would have average revenues of about $5 to $12 more per sub, and you have to look at which cable company. So, I think we are trying to have a healthy mix between the quality and the penetration and trying to strive for both, which is difficult and I think when you breakdown and look at the cable company and let's say look at revenue per sub or EBITDA per sub, you will see Rogers at number one and number two in Canada and very healthy even on a North American basis. I think we've also tried to do a better job and as penetrations get higher, as Bell is fighting a bit harder, as things are a bit softer, is falling certainly to wireless and trying to go for the better quality customers too. We found we've got some traction there as well, kind of good job and aiming for higher end data customers and data net ads have been under pressure too. We've done a better job at targeting the higher tiers on the television side, good less than average revenue, a mix of rate increases and pushing people up in packages to our higher end packages at the digital VIP end and upwards. And that’s the continued challenge we have is that balance between getting that higher customer and that's why I think the math tends to look a little bit better than the subs and I think we'll continue to push ourselves on both, and I think we'll do fine in 2009.

Operator

Your next question comes from Jeff Fan with UBS. Please proceed.

Jeffrey Fan - UBS Securities

Thanks very much. My question is on wireless costs, and specifically covering both OpEx and CapEx. I guess what's interesting that I am observing is that even though it looks like the operating profit margin, you are guiding at the mid range to be flat to slightly down, it looks like the cash flow margin, if we take into account CapEx, is still certainly flat growing helpfully, very helpfully in 2009. And I guess one of the thing I want to ask you guys is whether we're seeing carriers in general and maybe you guys shifting your spending from CapEx over to OpEx, and with CapEx technology infrastructure spending coming down and obviously shifting over to more subsidies related to smartphones. And so the question on infrastructure is, given the growth in traffic that you're seeing on the data products, over the next couple of years with further additions of HSPA, do you envision a need to go to LTE and what's your general timing on that, and how that would impact your CapEx intensity on wireless, and then I guess second part to it on OpEx is in Barcelona I mean we are seeing an unprecedented number of new smartphones coming to the market through 2009, and whether you guys would be in a position to maybe take advantage on the better pricing that you could see from the handset vendors? Thanks.

Alan D. Horn

Thanks Jeff. Nadir you want to take the first part of that.

Nadir H. Mohamed

Jeff, let me start with kind of the capital and broad question and I will turn it over to Rob. We should go through the smartphones, but we believe we have had a very successful campaign that everyone talked about, but starting with the guidance on CapEx, you just see the guidance showing the CapEx intensity coming down, and I think that's the reflection of our position as you know we rolled out HSPA over the last few years, the next we will upgrade likely LTE. Frankly we feel we are in the driver seat with Bell and Telus starting on HSPA in terms of the announcement in a very early stage of the deployment. Clearly, we are going to be in the lead position in terms of determining the timing on LTE, and so we've got a chunk of that investment behind us that will play favorably when you look at our capital numbers, all this subject to obviously to the things that are success based capacity requirements as we drive data and so on. But I think you are seeing the benefit of that in '09 guidance. To your point, clearly in the quarter, in the last couple of quarters, one of the key things we have been doing is investing in our future and really driving subscribers that we feel would add value going forward in terms of revenues and margins. I think just to set the context for Rob, I want to make sure everybody understands, not every smartphone is created equal. And when we talked about our 400,000 subscribers on smartphone that we loaded that were predominately BlackBerry and iPhone. So, I think it speaks to some of things Rob is going to cover in terms of how we view that investment.

Robert W. Bruce

And along with that Jeff I think where Nadir is going is smartphones, particularly iPhones and RIMs and some of the higher end devices bring along with them a pretty satisfactory and a pretty strong ARPU lift. And I think those are different than some of the QWERTY sliders that people are actually referring to as smartphones. In our definition, we actually don't refer to the QWERTY sliders as smartphones and I think that's an important distinction. Just to come back, we are excited, I was in Barcelona on the weekend, the proliferation of smartphones out there I think will set us up for what we all think is the future and that is sort of a bifurcation in the market towards the high end and the low end in Canada. We have been fortunate enough to be dominant in that high end of the market, and we really like the economics of smartphones. We think about it at the simplest level, we are seeing a COA, an incremental COA in the range of just North of $250 and we are seeing average ARPU lifts in the range of $20 to $25, so they are on three year contracts very, very low churn. This looks like a very, very good business proposition going forward, and we are really delighted not only to have a very strong market share of 42% this year, but the predominant portion of it being in smartphones with great economics. So, the announcement is made and the devices that we saw in Barcelona just add to our enthusiasm about the potential for future growth. I did want to just pick up on the LPE, HSPA thing and say well it's interesting that Verizon made their announcement today and I think it was widely expected given that they have said similar things a year ago. HSPA, we believe has a lot of legs and the guys who are leading the world really are Telstra in Australia. They announced at their conference the day before that they are pushing not only to 2011, but now to 4022 with MIMO on HSPA, which I think gives HSPA an awful lot of long term legs and may allow us to stretch that capital investment cycle moving to LPE to longer than most people think. So, we are enthusiastic about that and we are watching some of the leaders like Telstra and hopefully that will play out.

Operator

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

John Henderson – Scotia Capital

Thank you. Just on your HSPA footprint. Could you tell us what population coverage you got now, and at what time you expect to have a full population foot print covered?

Robert W. Bruce

Yeah John, I think we may have said it before, but we are at about 75% of the pops as you all know, our focus has been on rolling out where the population is the largest, may not have said we are 7.2 everywhere where we have actually rolled out, and we will continue our rollout through the balance of this year, and generally we don’t talk about, what the target pops are until we have actually done.

Operator

Your next question comes from Rick Prentiss of Raymond James. Please proceed.

Richard Prentiss – Raymond James

Yeah. Good morning guys. I would like to ask you a question on your ’09 guidance. Can you just update us as far as what has baked into it from the standpoint of the economy in Canada, the competitive launching of possibly new services on wireless in ’09, what kind of timeframe, and also to go back to that voice ARPU, what kind of pressure you think might still be there in ’09 that’s baked into your guidance please?

William W. Linton

With respect to the economy, we are predicting relatively flat in Canada. We are predicting that there is going to be continued declines in new housing growth, which impacts our cable business. We have some improvements looking into the fourth quarter in our media business, but it's a pretty, our expectation is a flat economy in Canada. The second part was.

Robert W. Bruce

You want me to take it Bill. In terms of expectations on competitors, we think late in the year, that we will start to see possibly some of the early new entrants, entrant competitors like Quebecor in the market, but the numbers and impacts will be relatively small in '09. In terms of voice ARPU, we believe that we are going to continue to see pressure on voice ARPU and depending on how things go in the economy that that may get more intense over time.

Operator

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

Dvai Ghose – Genuity Capital Markets

Yeah, hi. Question for Rob or Nadir regarding your smartphone investment strategy. You described this as low risk, but I guess there is three risks that I potentially see and I’m interested in your opinion as to whether they're serious. The first is, with flanker brand cannibalization I’m not quite sure why you offer high end products like the iPhone and BlackBerrys in the Fido channel, but isn't there a risk that the ARPU being generated for those customers basically on the voice side with no SAF fee, 911 will come in lower, but the subsidies are in line with what we are seeing in the Rogers channel. The number two is a resubsidization risk, you talk about contracts and so on, but in some ways device churn is becoming more important than subscriber churn, are you comfortable in assuming you won't have to resubsidize the base for at least three years just because they are on a three-year contract. And number three is, especially with the iPhone you've capped ARPU somewhat because of the $40 I think for 6 Gig, and you could face some increased CapEx requirement as well as OpEx to service all of that, but with limited, with an ARPU cap, are these sort of key risks to your smartphone strategy?

Robert W. Bruce

Yeah. Dvai, it's Rob. In terms of flanker brand cannibalization, listen we've only launched one RIM device on Fido, it's the low end Pearl device, which is really a consumer device, it has very low appeal to our high ARPU RIM customers. So, we think the cannibalization is small it's also an end of life device that we got on a special deal. So, we've got a cost structure going forth and we shouldn't be confused, the data prices aren't any different. There are slight discounts in the voice prices and just to be clear SAF is included in the price, we shouldn't be confused that there is no SAF. In terms of resubsidization, lots of experience with RIM, in terms of the timing of handset upgrades, and we're happy with that. As I said, I was just in Barcelona to spend a bunch of time with some other carriers, who are a little father down the pipe than we are on iPhones, very satisfied from them that the durability of iPhones is there and that the necessity of resubsidization and that risk is low. Lastly, to your iPhone question about tapping iPhone at $40 for 6 gigs, as you know, that was a temporary promotional measure that we rolled out. And for a very short period of time and then we went through a more normal rate card that has various sizes of buckets starting at $25 for 0.5 Gig up to $80 for 8 gigs and most people are finding their way around that rate card. So, we are getting variable revenue for the amount of dollars that is there. As well, we continue to see strong growth in data roaming, SMS usage, ring tones, music and other things that we think will continue to be robust in terms of building the ARPU on these customers.

Nadir H. Mohamed

Dvai obviously those add on to the data access part of the rate card. And the other thing I just want to make sure that people understand that we are going to take, I gave on my opening remarks, we talked about the $400,000 low smartphone devices, 60% of which came from existing customers, the key thing is most of these customers went from voice-to-voice and data plan. So, we definitely get the list on data side going forward along with the re-contract.

Operator

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

Scott Mallet – Goldman Sachs

Thanks. Good morning. I want to talk about cable margins, can you take us through the opportunity in cable? As we look at 2009 and beyond, what are some of the areas you could see some of the greatest cost savings there?

Anthony P. Viner

I'll take that. I think, our focus, if you look at margins have been, to try to generate a rate of growth on cost that is at or less than revenue. And in 2008, we seem to have done a good job on that. What pushes that is obviously adding voice and data subs that have less of a cost of sale associated with it taking out, I mean lots of our operational teams, to take out voice calls a number of trucks we send out. They try to drive some of the efficiencies and then continue, we have done modest to medium rate increases and then we seem to be in an environment where we can still do that on television and somewhat on data and continuing to push usage on things line VOD and extra usage on high speed data. So, I think there is an opportunity there, but lots of work to make that. And I think when you look at our guidance, I think we are pushing ourselves to continue to expand our margins in 2009.

Operator

Your next question comes from Tim Casey of BMO Capital Markets. Please proceed.

Tim Casey – BMO Capital Markets

Thanks. Good morning. Can you talk a little bit about what your expectations are within the cable group, in terms of the risk of customers effectively trading down through as the economy tightens, are you expecting people to, trade down on, from some of your high speed products to the lower priced light products or trading down on some of the premium cable packages into more value base. So, how do you expect it to play out in this cycle, compared to previous cycles, given that you've increased the ARPU so much over the long-term? Thanks.

Robert W. Bruce

It's hard of course to get these things, but we do our best from looking at where we are and looking at the past, but obviously people tend to stay home a bit more and go out and spend less eating out and going to movies and these sorts of things. Secondly, when you look at, the hours spent tends even on televisions to be going back up it was flat to down a bit, high-speed data, they're using at much more and driving usage. So, there is definitely some customers where that will, where you will see them move down and also we've seen a hesitation in new customers where they just don't want to move and they want to wait till their household has a bit more money coming in, even if you are going save them some money. So, it’s definitely something that is out there, but again I think we are doing a rate increase this year, it's fairly common to what we've done the last few years, we continue to push usage and we continue to try to have a lot more value. So, there – what they're getting on their TV packages, it’s not just a different rate, but we are adding a lot more VOD, a lot more free as VOD and trying to increase that value for money, and then trying to increase the number of hours that they're using the product. So, it's something that's kind of built-in and we've made some assumptions and I think that they are safe enough that we can achieve them.

Operator

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

Simon Flannery – Morgan Stanley

Thanks very much. If I could keep on the smartphone topic. On the iPhone, I think there was some surprise with the drop you saw in Q4 versus Q3, you certainly talked about the pent-up demand and having the device for the first time in Q3. But there has been some countries where the iPhone has been a huge hit and other countries where it's not been as successful. Are you seeing some signs, say November, December, January that demand is remaining strong and stable or is this something where its just where people are looking at the Bold, there is other devices and maybe the iPhone is just not going to hold up as robustly as we have seen it.

Robert W. Bruce

Yes, Simon. Listen, all the looks I have had at the numbers both through Q4 and more recently suggest that there is sort of a steady demand for iPhone. It is without a doubt the best browsing device in the smartphone category, bar none, and there continues to be a segment of the market that likes that device. So, I can say without hesitation, I think it's going to continue on and it's going to be a strong device for us. In Q4, the 400,000, obviously a big number and as I said before we like the economics, we had a dual focus, we had both an iPhone focus, but a very, very strong Blackberry focus coming back after a very strong iPhone focus in Q3. So, part of what we saw and there is a little bit of trade back and forth obviously on these devices with some fantastic success on Blackberry in Q4, which I think might have slightly over shadowed what we saw in iPhone, but everything will be strong on iPhone going forward and we are very, very happy to have the Bold, which I think is the best messaging device out in the marketplace, a 3G device and have the best browsing device in the iPhone. So, very, very happy about that.

Operator

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

Vince Valentini – TD Newcrest

Yeah. Thanks very much. Hate to stay on the smartphones, but one follow-up, as you look at your 2009 guidance and as noted earlier, you are still expecting margins to be sort of flat to down at the midpoint of the range. We would have thought that with the huge smartphone ads in second half of 2008, some of the positive benefit of the higher ARPU and higher margins would have been flowing through the numbers, but that doesn’t seem to be the case yet. So, two big questions there, can you give us some sense of how many smartphone ads you are baking into your 2009 guidance, would it be even higher than the level that you sold in 2008? And secondly when we look to 2010 without giving specific guidance, should there absolutely, unequivocally be a net lift in ARPU and margins from smartphones by that time as you will have so many in the base?

Robert W. Bruce

Yeah. Obviously, we're not going to give guidance specifically on smartphones. I think what I would point to is, I think we're going to see a general slowing in terms of overall penetration in the marketplace, which will have an influence on everything. I think secondly, we've seen from the beginning of last year until Q4, a move from the smartphone loads as a percentage of the total mix in quarters going from kind of the low teens into the kind of the 50 range and you can role forward and fairly assume that we're probably going to see a little bit more of that going forward. So, you can factor that in, I think overall there are a lot of forces at play next year and probably the biggest one and the one that’s most recent is we're going to see some suppression on voice ARPU for sure and we'll see some positive offset from what we see as smartphones in the growth of SMS and our data portfolio. Again, probably one of the tougher years to call guidance, because of the volatility of the marketplace we are in, and I think that's what you're seeing in the numbers that that we put out in the release.

Operator

We currently have time for two more questions. The first one is from Peter MacDonald of GMP Securities. Please proceed.

Peter MacDonald – GMP Securities

Thank you. When you look at the state of the media business in Canada and especially the state of CanWest, do you anticipate that there is going to be some good opportunities available for you and are there any areas that, where you would not be interested in looking at expanding through acquisition?

Anthony P. Viner

Well, first off, of course, Global's over-the-air, they put some five stations over-the-air stations up for sale. We don’t comment usually on that, but we've got our hands full on City, we would be unable by regulation to acquire any of the Global-branded stations if they became available. We are opportunistic, there are some specialty services owned by Global that would be of interest to us. As you know, the former Alliance, Atlantis specialty services are tied up with Goldman Sachs. So, there is currently no indication that those might be available, but it's a very, very tough environment for television, and I think it would be tough for us to do anything, our hands are pretty full.

Operator

Your last question comes from Greg MacDonald of National Bank. Please proceed.

Greg MacDonald – National Bank Financial

Hey thanks. Good morning guys. I want to jump back onto Vince's question on wireless data. I hear your message on smartphone loads and that's a pretty bullish message. I hear your message on economics $250 COA for $20 to $25 ARPU lift, that's a pretty bullish message. But when I look at wireless data revenues, it doesn’t seem to be playing out certainly relative to what I’d have expected, and in particular I’d note 36% wireless data revenue growth is a decrease in year-over-year revenue growth relative to the third quarter, when I’d have expected what the loads that you have on smartphone to see an increase, is there a delay factor going on in some way here that I’m not picking up that could be the case. I know you are not willing to give specific guidance on this stuff, but I think when investors look on the wireless side, this is a pretty important area and it really speaks to whether the iPhone itself is actually good or as good an ROI business as we all think? Thanks.

Robert W. Bruce

Yeah great, great question. And firstly, Nadir touched on very briefly in his opening remarks. We completely revolutionized our pricing in the summer time. And you will recall, have historical perspective of we have for a very, very long time been a leader in Blackberry and the leader in smartphones in Canada. So, we had a pretty significant base of customers already on smartphone devices and when we re-launched, as we expected, there was going to be a re-acceleration as people got excited about the great new pricing on data, at the same time there was also significant re-price of that long-standing base of customers that we had. And we knew that to reaccelerate the business, we needed to simplify and make the data rate card more both understandable and more within the reach of more people. And I think that's a little bit of what you are seeing in the numbers. The other thing is if you comparing us to U.S. carriers who have been slightly higher, I would say kind of in the high-40s growth year-over-year and Bell and Telus, they have made some fairly aggressive pricing moves on SMS to going, to paying for message origination and message termination, that is something we have not done. And I think that probably accounts to a little bit of the difference as well, and I think that to touch on your supposition I think it’s a good one. There is a certain amount of delay factor involved as well as the revenues ramp up and started to offset that reprice. Okay.

Operator

I would now like to turn the conference back over to Mr. Bruce Mann for closing remarks. Mr. Mann.

Bruce M. Mann

Well, thanks operator. Thanks. But more importantly thanks everybody for participating this morning. We appreciate your interest and everybody’s support. If you have questions that weren't answered, I can't tell if anyone is left in the queue or not, but please feel free to give my colleague Dan Coombes or myself a call. Our contact info is on today's earning release. This concludes our call. Thank you again for joining.

Operator

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

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Source: Rogers Communications Inc. Q4 2008 Earnings Call Transcript
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