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Rogers Communications (NYSE:RCI)

Q2 2009 Earnings Call

July 28, 2009 8:30 am ET

Executives

Bruce Mann - Vice President, Investor Relations

Nadir H. Mohamed - President, Chief Executive Officer, Director

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

Rob Bruce - President, Rogers Wireless

Edward Rogers - President, Rogers Cable

Robert F. Berner - Executive Vice President, Chief Technology Officer

Anthony P. Viner - Senior Vice President - Media; President of Rogers Media Inc.

Analysts

Glen Campbell - Banc of America

Bob Bek - CIBC World Markets

James Breen - Thomas Weisel Partners

Dvai Ghose - Genuity Capital Markets

Simon Flannery - Morgan Stanley

Greg MacDonald - National Bank Financial

Randal Rudniski - Credit Suisse

Jonathan Allen - RBC Capital Markets

Richard Prentiss - Raymond James

Vince Valentini - TD Newcrest

Tim Casey - BMO Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the Rogers Communications Inc. second quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Bruce Mann, Vice President Investor Relations. Please go ahead, sir.

Bruce Mann

Thanks, Operator and good morning, everyone. Thank you for joining us for Rogers' second quarter ’09 investment community teleconference. It’s Bruce Mann here. Joining me today on the call are Nadir Mohamed, our President and CEO; and Bill Linton, our Chief Financial Officer; and then also Divisional Presidents Rob Bruce from Rogers' wireless and Tony Viner from Rogers Media; Edward Rogers from Rogers Cable is joining us remotely by phone.

We released our second quarter 09 results earlier this morning and the purpose of the call today is to provide you with additional background and answer as many of your questions as time permits. We also put a couple of other releases out that hopefully you have seen subsequent to the earnings release, one with respect to our wireless network and a second with respect to a venture with Manitoba Tel.

As today’s discussion will undoubtedly touch on estimates and other forward-looking information from which our actual results could be very different, please review the cautions in the earnings release today and in our 2008 full-year MD&A. The various factors, assumptions, risks, et cetera about how our actual results could differ, all of those apply equally to our dialog on the call today.

So if you don’t have already have copies of our release or the ’08 annual report to accompany the call, they are both available on the IR page of the Rogers.com website. They are also on Edgar or CDAR.

With that, I’ll turn it over to Nadir Mohamed and then Bill Linton, both for some brief introductory remarks and then the management team will take your questions. Over to you, Nadir.

Nadir H. Mohamed

Thanks, Bruce. Good morning, everyone and thank you for joining us. On balance, the quarter reflects the strength of our franchises, the quality of our networks, and our focused execution but we are clearly moving through some challenging economic times. We continue to build on our operating and financial strength by staying focused on the basics, making the right investments to grow high value customers, and maintain our network superiority.

At the same time, we are managing our cost structure in a way that will allow us to work through the economic challenges and the maturity of our product cycles.

Before we review the operations for the quarter, I wanted to touch on a few key developments. First, I mentioned earlier this year that we would provide clarity on our plans for what is already a very healthy balance sheet. We delivered on that this quarter, opportunistically accessing the capital markets at extremely favorable costs, laying out leverage ratio targets for our capital structure, and significantly increasing our share buy-back program to tax efficiently return even more of the growing cash flow to our shareholders. This, after increasing our dividend rate by 16% earlier this year.

Bill will speak more about our balance sheet strength in a moment.

Second, during the second quarter we entered into a significant agreement to outsource a large portion of our physical IT infrastructure with IBM. This long-term agreement was the result of a very competitive process and will enable us to capture meaningful CapEx efficiencies as we begin transitioning later this year. This includes avoiding some otherwise large incremental data center related CapEx that we would have had to make in the short-term.

Third, building on our superior network position, we recently announced a new 50-megabits per second tier for our high-speed cable Internet access service on our new DOCSYS 3.0 platform that we will begin offering in the coming weeks.

I am very excited to report that earlier this morning, we announced a significant super-charging of our HSPA network from 7.2 megabits per second to 21 megabits per second, the fastest in North America, and as fast as only a small handful of other carriers in the world.

Mobile Internet is one of our biggest growth opportunities and we are now really seeing the ecosystem come alive. Devices like the Bold, iPhone, Android, netbook, Rocket Stick -- by the way, all brought to by Rogers -- along with the thousands of applications and the deployment of robust, high-bandwidth mobile networks, these are all key ingredients to really drive customer adoption of mobile Internet and we at Rogers are reinforcing our leadership position by being the first to launch HSPA at 21 megabits per second in North America. Our deployment begins in the coming weeks in the greater Toronto area.

I am very pleased that this morning we announced an agreement with MTS Allstream to together build out a high-speed wireless network in Manitoba, a cost effective way to increase our high-speed mobile coverage in the Province of Manitoba by the end of 2010.

We have established a roaming agreement with MTS for their HSPA customers to roam exclusively on Rogers across Canada.

We have also agreed to provide MTS Allstream with the opportunity to launch a wireless business offering. As you can see, not only do we have the best wireless and broadband networks in Canada but importantly, that’s not going to change as we move forward. So some good traction in terms of our balance sheet, network advantage, and strategic positioning.

Turning now to the operating side, what should be clear is that with the slowdown in our top line growth, we are successfully driving cost efficiencies to maintain margins and to continue to invest in high-value customers while at the same time growing our already strong cash flow.

On the wireless front, as you can see from the release, strong sub numbers, both growth and net, very high value with almost three-quarters of our growth adds and essentially all of our net adds being post-base subs. This includes an incremental 315,000 high value smartphone customers and also a growing number of mobile Internet access devices, such as our HSPA rocket sticks.

And you again see the result of our combined focus on network excellence, service quality, and product innovation in our churn results for the quarter, where post-paid churn is down again year over year to just 1%, an historic low level for Rogers wireless. That is the best post-paid churn performance we have ever put up.

Also, another successful quarter of smartphone penetration driven by iPhone, BlackBerry, Android, and Windows Mobile, with the up-front investment in these high life-time value subscribers clearly impacting year-over-year operating profit comparisons.

We are really starting to see the results of these smartphone devices becoming more predominant in our base with wireless data growth up 38% year over year to $313 million for the quarter and now representing over 20% of network revenue.

At the same time, our wireless business was not immune to the impact of the weak economy and we continue to see a deceleration in discretion types of usage, especially roaming, auto plan minutes, as well as slowing LD, which together were obviously a significant drag on overall voice ARPU.

Roaming in particular has continued to decline year over year, corresponding with the decline in business travel and increases in unemployment and for the quarter was down nearly 20%.

I should mention that on the voice ARPU side that as our base of rocket sticks has grown [meteorously] over the past year, it has somewhat diluted our voice ARPU metrics because the count is actually picked up in the post-paid subs denominator. We estimate that this depresses post-paid voice ARPU by approximately $0.60 in Q2 of ’09.

But because of aggressive cost management, we still delivered a very respectable 49% wireless network margin despite the higher COA and COR and the negative impacts of the recession on some of our wireless revenue elements.

Overall, a solid quarter for wireless with 6% revenue growth, excellent high value subscriber loadings, some real success on cost containment ex COA and COR, and margins up sequentially again this quarter. And coupled with CapEx down year over year, we had good growth in unlevered free cash flow.

On the cable operations side, solid top line growth at 6% with operating profit up 12% on 230 basis points of margin expansion. The good operating leverage, and again this quarter strong unlevered free cash flow up 60% year over year. The cable team has done a good job of capturing meaningful cost savings beyond just those [inaudible] growth with systemic initiatives that will stick into the future.

On the cable subscriber front, the results were clearly soft. The deep Ontario recession where 90% of our cable business is located not only persists but intensified over the quarter. In addition, Rogers' penetration levels across through our cable services are some of the highest in the cable industry but the margin clearly more difficult to continue to deliver the same growth rates as we could earlier along the curve.

As well as a function of the Ontario economy, where unemployment rates are now nearing 10%, the highest in a quarter of a century, new home construction is at a near stand-still. This in turn brings the whole residential moving cycle to a near stop, so I think we are going to see significant challenges on the cable RGU front until we see the economy start to turn.

That said, I will remind everyone that the second quarter seasonally is the slowest of the year and I don’t believe the data points you see in the quarter are wholly representative of the year.

Summing up on cable, somewhat disappointing results on the RGU side but some really good traction on cost control, which in turn drove operating leverage. With cable margins at 43% and disciplined CapEx management, we have delivered significant growth in unlevered cash flow.

On the media side, a continuation of what we’ve been experiencing for the last several quarters with significant weaknesses in advertising and consumer discretionary spending weighing across our portfolio, though admittedly some pockets a bit stronger than others, such as our Sportsnet franchise, specifically. But in terms of core radio, broadcast TV, and publishing, our experience is essentially the same as what other Canadian media companies are seeing in these segments with 15% to 20% year-over-year top line declines.

Our visibility looking ahead at the ad sales pipeline for the most part remains limited and we are not seeing much change. Fortunately, not getting worse but frankly not much is -- it’s not getting much better either. The media team has been very aggressively implementing cost reduction initiatives across all of its divisions for multiple quarters now, while at the same time selectively investing and laying the groundwork to grow share when the economic cycle returns.

As you will recall, the ad market here in Canada really started falling off in the early third quarter timeframe last year, so at least as we look at the second half of the year, the costs aren’t as severe and we’ll be operating from a base that will have considerable leverage when the markets again should turn back up.

While the economy is a significant challenge across all three of our business units, and we are not yet seeing signs of a turnaround, we are certainly encouraged by recent Bank of Canada comments predicting the economy might begin to show signs of growth later this year or early in 2010.

So to wrap up, we are continuing to perform well in terms of market share, delivering solid churn results margin, and cash flow. We are building on our operating and financial strength by staying focused on execution, investing in high value customers, and our network advantage, and managing our cost structure in a way that will allow us to manage around the economic challenges and slowing growth.

As a result, I think we are better positioned for when the economy recovers and in the interim, we have the financial strength, the franchises, and the team to continue to deliver real values to our customers and shareholders.

Let me now turn it over to Bill Linton, and then we’ll take your questions.

William W. Linton

Thank you, Nadir. A few quick comments on the financial results for the quarter -- let me begin by highlighting our consolidated revenue growth of 3% in this very challenging economic environment in during what is generally a seasonally slow quarter for us as well.

Importantly, our core wireless and core cable businesses both grew by 6% year over year. We recorded an adjusted operating profit of $1.08 billion, which is down a very modest 1% year over year, and which reflects the continued softness we are seeing in advertising sales at media, combined with the investments we made in the successful smartphone campaign at wireless we carried into Q2, as well as the significant slowing of certain discretionary wireless services, such as roaming, which Nadir mentioned a moment ago.

Of note, we are lapping an unusually high margin quarter, during which wireless network margins were at a record 53% in Q208, which as we said at the time was not sustainable. You’ll recall that in Q208, we added fewer subscribers than the second quarter of this year, as there were many purchase delays in advance of the July ’08 iPhone launch.

It is important to point out that we have made substantial progress with our cost control initiatives across all three of our operating companies. It’s quite evident in the cable operation’s results, where we expanded margins 230 basis points. But perhaps not as evident on the surface in wireless, where smartphone COA and COR blurs our progress on cost reductions there.

Take into account that we not only have higher wireless subscriber additions in the quarter versus last year but at the same time had a much higher proportion of those ads, as well as upgrades, coming on smartphones. The cost we took out to deliver a 49% margin are obviously very meaningful. In fact, if we take the year-over-year increase in COA and COR out of the picture for a moment to remove the impact of higher sub adds and a higher proportion of smartphones, we would have seen operating profit up almost 8%, with margins of 54%, and OpEx per sub in wireless excluding equipment margin would be down approximately 3%.

In terms of items below the adjusted operating profit line, while depreciation and interest were both up modestly year over year, I’ll point out that there was an $80 million foreign exchange gain which was only partially offset by the change in the value of derivative instruments. The net of these two currency related shifts contributed just over $60 million to the year-over-year net income growth. We also had an income tax valuation allowance adjustment during the period which favorably benefited earnings by about $30 million, in which you see in the lower effective tax rate for the quarter versus last year and versus the last quarter. So together with the lower share count, reflective of our share buy-back program, adjusted EPS was $0.65, which was up 14% from the first quarter.

An additional item I’ll point out is the $37 million of integration and restructuring expenses we recorded in the quarter. This item reflects restructuring and cost reduction initiatives we undertook, much of which is related to work force reduction costs and just over half of which this quarter was in media.

In terms of CapEx, we see double-digit declines at all three business units on very good cost controls. The increase you see on the corporate line for the most part reflects work on our consolidated billing system project. This IT spending was included in our 2009 guidance and you will see it continue at the corporate level as the year goes on, although the amount may fluctuate somewhat from quarter to quarter.

So operating free cash flow for the second quarter, measured as adjusted operating profit less CapEx and interest expense, was $493 million, up 4% year over year.

On the balance sheet, during the quarter we opportunistically raised $1 billion of seven-year senior notes in the Canadian market at 5.8%, which is about 140 basis points lower cost than the average cost of our existing fixed rate notes. We were told this was the largest non-financial single tranche debt issue in Canada since 2002.

With the proceeds, we repaid the outstanding amount on our bank credit facility, bought back shares, and ended the quarter carrying a cash balance as well.

As part of our forward-looking balance sheet management, we work with the board to do a couple of things during the quarter. First, we established a target leverage range of net debt to adjusted operating profit of 2 to 2.5 times. This is something Rogers hadn’t established publicly before. We also significantly increased our class B non-voting share buy-back program by a factor of 5 times, from $300 million to $1.5 billion, which would represent approximately 10% of the Class B share public float.

As of the end of the quarter, we had repurchased 16.5 million shares for just over $500 million under this program, so an increasing return of cash to shareholders with both the 16% dividend increase earlier in the year and now the largest ever share buy-back the company has ever done.

Overall, we continue to be in a very strong financial position. We have investment grade ratings and relatively low leverage at approximately two times debt-to-EBITDA. We have a full $2.4 billion of liquidity under our fully-committed multi-year bank facility and we have no material debt maturities until out into mid 2011.

So whether you look at leverage, liquidity, or financing requirements, we are in a solid position from a balance sheet and financial flexibility perspective.

Finally, you’ll note in the release that we have made some updates to the full-year 2009 guidance. The revenue ranges for media and consolidated revenue and also the media operating profit guidance range have each been updated to reflect a deeper and more sustained recessionary climate than we had originally forecast. The reduction in the consolidated revenue growth range also reflects a revision from our initially forecast wireless equipment revenues.

I will point out that equipment revenue carried little or no margin and are not a component of wireless network revenue, so there’s no change to the wireless network revenue range.

I will also point out that we are going to be absorbing much of the cost of the wireless network up-speeding to 21-megabits per second, from within our existing budget for the year, even though we are pulling the timing of much of the upgrade forward into 2009. We are able to do this by offsetting the cost with CapEx efficiency measures we have instituted in the first half of the year, so no change to CapEx or free cash flow guidance [inaudible], but also less likely we will hit the very high-end of the free cash flow guidance range as we are going to be reinvesting a good portion of the capital efficiencies in the early deployment of HSPA plus.

We have also noted that there is a large degree of uncertainty around our recent launch of Apple’s new iPhone 3GS and the impact that may or may not have on the second half of 2009. We hadn’t assumed this device, or the timing in our 2009 forecast and to the extent that sale volumes materially exceed our initial iPhone forecast for the year, COA and COR could exceed our forecast as well, which could pressure wireless adjusted operating profit in the short-term.

But as we said in the release, while these sales with higher than average subsidies, depressed operating profit in the period of the sale, our experience has been these devices in turn generate higher-than-average ARPU and lower-than-average churn in the periods following initial sale, thus positively impacting margins in future periods. So selling a lot of these would be a good thing, from our perspective but again, we really cannot accurately predict what volume it will be at this point.

With that, I will pass it back to Bruce and the Operator so we can take any questions you have.

Bruce Mann

Thank you very much, Bill. Operator, we’ll be ready to take questions from the participants in just a couple of seconds. Quickly before we begin, we’ll request as we do each quarter on these calls that the participants asking questions be courteous to the other participants and limit the questions 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, we’ll have circle back and take additional questions, or Dan or I will get them answered for you separately after the call.

So with that, Operator, if you would please quickly explain how you would like to organize the Q&A polling for the participants, we’d be ready to proceed.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glen Campbell of Banc of America.

Glen Campbell - Banc of America

Thanks very much. In the past, you’ve given us a bit of a breakdown on wireless ARPU and you gave some detail on roaming this time around. I wonder if you could give us a bit of color there as to sort of how much is now coming from long distance and overage and what the trends there have been, and if you could do the same as well on the data ARPU, you know, sort of how much you were getting now from browsing, from SMS, and so on. Thanks.

Rob Bruce

From an LD perspective, interestingly enough of the voice ARPU lines, it’s one of the lines that hasn’t been as profoundly impacted by the recessionary pressure as before. I think we’ve said that it represents in the high single digits in terms of percent of our revenue.

Moving to data, the big elements of data ARPU, as I think you know are SMS and smartphone. They are by far and away the biggest chunks of the equation.

Glen Campbell - Banc of America

Okay, thanks, and could you talk a little bit about how the -- about any trends within voice ARPU that are beyond roaming? I mean, overage, for example -- is that up, down year over year?

Rob Bruce

Yeah, you know, Nadir touched on these in his opening remarks. The softening in the voice ARPU, he touched on the fact that sticks is affecting the denominator of the calculation. Roaming, obviously the strongest and most significant down draft in the voice ARPU, representing roughly $2 of the $5.43. MSF being the second most at I think $1.50, in that range, and air time around $0.80 in terms of that’s out-of-bucket air time. LD being much smaller in the kind of $0.40 range in terms of decline.

All of this, of course, offset by, as Bill made reference to, strong results in data, significant growth on the smartphone line and 38% growth year over year, so --

Nadir H. Mohamed

Just building on what Rob said, just to give you a framework, the biggest factor in terms of the voice ARPU decline clearly was roaming and roaming I think we mentioned before, represents above 11%, give or take, of our revenues, so that’s -- when you see an impact in that category, it affects the voice ARPU.

On the data side, frankly very strong growth on the traditional categories -- BlackBerry email, iPhones for sure. One of the things that affects the data side that you should be aware of, and it sort of goes along the theme of the economy, and that is things like ringtones and gaming, so these would be applications, they are obviously being impacted with the times that we are in. The good news on that side is frankly in terms of margins, that’s probably the lowest of the margin categories within data. So the data growth would have been even more robust collectively.

Rob Bruce

I guess the last thing on data, Glen, in terms of -- is talking about the data re-price, and you’ll recall we made those changes last fall and we still haven’t fully lapped those changes, so they will still hang over our data numbers slightly.

Glen Campbell - Banc of America

Okay, very helpful. Thank you.

Operator

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

Bob Bek - CIBC World Markets

Just on the cable side, I guess, Nadir, you mentioned obviously the effect of the economy and the moving cycle. I guess for Edward, can you give us a bit more color on how much of this is related to the economy and how much could be related to BC's new effort -- I guess they are doing couch promotions, obviously were in place during the quarter and how much competitive pressure is embedded in here. And specifically, can you speak to the Internet as well? I think that the 4,000 loss in the quarter I think is a bit of a surprise, given the strength of that product in the bundle. Can you talk at all to trend in that product specifically? Thanks.

Nadir H. Mohamed

Edward, over to you.

Bruce Mann

Operator, have you muted Mr. Rogers’ line?

Operator

His line is open.

Edward Rogers

Hello? Can you hear me?

Nadir H. Mohamed

Yes, Edward. Carry on.

Edward Rogers

Okay. In the quarter, the numbers weren’t where we planned them to be or where we wanted them to be. We had seen that there was going to be a slow-down of sales in the year and we had taken action on two fronts to first concentrate on a better quality of customer, which we have seen some good things from, and concentrate on our costs. And kind of all three did more than we had thought, including the sales slowing down faster than we had thought.

There’s a number of things that I have touched on; first as mentioned, second quarter is always our slowest quarter at cable with the schools leaving. Definitely this year is a tougher year with where the unemployment rate has gone up about 2.9% since June of 2008. Housing starts are down by about half from June 2008. And when you ask what contributes in terms of which part would weigh more, it is difficult to assess that. Bell is definitely fighting harder and the couch thing obviously gets a lot of the press and a lot of the air time but they have been a more effective company, fighting harder for quite some time now and I think it’s -- I would say it’s more of their efforts as a total versus their fun advertising using the couches.

But I would say they are more effective and I would actually say that the couches, while not helpful, it’s more showing how they’ve been in the marketplace.

You know, wireless is also something that we’ve looked at. We’ve seen wireless changing over some home phone customers for us and Bell over time and probably on data, it’s starting to touch that. I think Rogers obviously having the best wireless data product has a better chance of keeping those customers and we are going to do a better job at trying to not only keep them but upselling them to multiple data products.

We also find in our markets, and I don’t know how much this affects more nationally, but the rate of theft continues to be an issue. We are part of a group called [CAS] that looks at theft that the BDUs and the media companies are a part of and they had done a report that showed about $1.2 billion hit, and that is something that I think is especially acute in our markets. We do have more focus on that as a business.

And lastly, I think in the second half is generally where we tend to do better and we still anticipate ourselves, we have taken action on the home phone side to have more effective pricing in the marketplace and we are launching DOCSYS 3.0, which should serve as a catalyst, and obviously the second half is usually a stronger half.

Bob Bek - CIBC World Markets

That’s great. Thanks very much.

Nadir H. Mohamed

Bob, it’s Nadir. I’m just going to add one or two comments to what Edward said, just to be helpful again and provide context. In the quarter, as you know, we did change our marketing approach on Rogers home phone. I just want to make sure people on the call know that that was launched in June, so we didn’t have the benefit of that being in the quarter for the whole quarter.

And the other thing, Bob, I think when you look at sub numbers, it is important to look at the other side of the equation and that’s ARPU and what’s happening with ARPU. And it’s important to note that across all of our products, ARPU is actually going up in the case of Internet, close to 10%, so I hope that provides some color.

Bob Bek - CIBC World Markets

Yeah, that’s helpful. Thanks, Nadir.

Operator

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

James Breen - Thomas Weisel Partners

Thanks for taking the question. Just two quick questions, one on the wireless side -- you know, you’ve talked a lot about the increased ARPU from some of the smartphone customers, yet obviously we’ve seen ARPU coming down for economic reasons and so forth. When do you think you start to see a turn where the base is large enough on the smartphone side to offset some of the roaming impacts?

And then secondly on cable, the EBITDA margins there, the highest they’ve been in several quarters. Do you have an internal goal in terms of where you think cable margins can go as you look at your plan over time? Thanks.

Nadir H. Mohamed

Why don’t I get Rob to start with the wireless and then Edward, I’ll pass it on to you for the EBITDA question on cable.

Rob Bruce

James, the smartphone base now is in the range of 25% of our base. I think the things that are holding us back in terms of blowing the top off the data revenue, as it was, as it were, you know again, we’re plus 38 year over year, is in fact a couple of things that we’ve touched on already. Firstly, the re-price that we took last year, we are still, we still haven’t lapped that significant re-price in data. And as Nadir said, if there was one small black cloud, we can see the economic impacts today and particularly in this quarter as people take discretionary data usage, things like downloading, ringtones, and screensavers and lots of stuff they did, quite routinely but we can actually see that as impacted by the recession in this quarter. So I think the combination of -- I think the base is clearly big enough. We now it’s, as Bill said, the churn is low, the ARPU of these customers is very high, 150% of the average ARPU of our regular customers, so we’re very, very happy about the overall economics. A little black cloud from the current economic situation that we are seeing, and secondly, waiting to lap that re-price and I think when all those things are in place, we’ll continue to see some stronger upward momentum in the data growth.

Edward Rogers

Okay, and I’d just add on the cable side, it’s difficult to give you a number. We budget for a three-year period and we update our planning process as you learn more through the years but I’ll just give you a little color in terms of what I think should be helping us, and there are a few things we keep our eye on which could hurt us.

The circuit business is one that has been a lower margin business for us and as you know, we’ve been not focusing on that business and shedding customers and we’ll be looking at some point how to exit that in an orderly fashion, or continue to move that base down and so that thinner margin business won't be as big on the cable P&L in the future.

Secondly, when you look at home phone and in turn at its cost of sales is generally smaller than the traditional television, so if you are adding more of those than television over time, that will help your margin level.

And we’ve seen some good news on the cost side, really focused on the percentage of base calling for call center types, really focused on the first 60 days when we hook up the customer. A lot of the activity stems around that process, around the customer making sure that they are right-sized around when the offer comes off. We’ve done a much better job there, and so I think we’ve got some traction there to continue to drive some recurring costs out of the P&L.

When we look at the cost of sales on the television side, we try to keep that rising at or less than the rate of revenue growth for the television business. Most years we are able to do that. This year we aren’t doing that and when you look at various fees that the government is looking to levy on us there, that’s always a question mark. But it still maintains our plan to have our cost of sale growing at or less than revenue growth, so we should be able to continue to focus and take margins up but I guess you’ll next see that in our guidance when we give it out for 2010.

James Breen - Thomas Weisel Partners

Great, thank you.

Operator

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

Dvai Ghose - Genuity Capital Markets

Thanks very much. Good morning. While I understand that ARPU may be under pressure in the short-term because of economic factors, some may argue that ARPU will be under pressure for some time because of new entrant competition. And while I think you’ve done a pretty good job on focusing on how to try and maintain ARPU through data, I’m wondering if you could give us some idea as to how you are trying to reduce costs in the wireless business to protect margins; in particular, in three areas -- headcount, handset subsidies, which are obviously significant at the moment, and CapEx. Would you entertain network sharing now that you are all going to be on HSPA, not just with a small provider like Manitoba Tel but with Bell and Telus, who are obviously much larger and have much more to offer you.

Rob Bruce

Thanks, I appreciate the question. Bill touched on this but let me amplify it -- we have been very focused on cutting costs at wireless. In fact, if you take away the equipment factor, our operating expenses grew 3.8% year over year on subscriber growth of almost 9.5%. We’ve been really, really focused on managing down the costs.

In terms of CapEx and managing down CapEx, our announcement this morning with MTS is exactly that -- a focus on managing down by working together with others our costs to build networks. We foresee that the MTS deal will bring us both lower CapEx and lower OpEx, will afford us greater market share in the Manitoba market, will provide us with a source of roaming revenue and in the longer term, probably some MV&O revenue as well, but back to the core of your question -- in terms of handsets, we continue to try to manage the mix against very, very strong demand for smartphones. We’ve used QWERTY sliders quite effectively for customers that look like they are way more focused on SMS than on more robust forms of data and QWERTY smartphones, very low subsidy, making up a much higher percentage of our mix as we are going forward. But at the same time, a lot of that is offset by the very, very strong demand that we’ve seen for both iPhone, BlackBerry, and the Android device.

So across all fronts, whether we are talking about CapEx, OpEx and how much it’s grown against our sub growth or our handset efforts, we’ve been cutting in all areas, so -- and the last thing on CapEx is that we have really tightened our belt on CapEx and it’s afforded us the ability to be able to bring forward our 21-1 launch which was scheduled for next year and be able to actually accomplish it this year, still well within our guidance envelope for CapEx.

Operator

Your next question comes from Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. I wonder if I could follow-up on the 21-1 launch. Can you just give us a sense of what your timeline is for coverage, if you are reaching the 80% you have today with 7.2? And what could you expect in terms of real world download speeds with sticks and compare that also to what you are sort of getting with the 7.2 today? Thank you.

Rob Bruce

Why don’t I turn the last part over to Bob Berner, the Chief Technology Officer, to talk about the speed and the time.

Robert F. Berner

Sure. As it said in our announcement, [we are progressively] rolling out the 21 megabit coverage starting this August. We expect to see a completion of that in the months to come across our current HSPA footprint and of course our footprint will expand appropriately over the coming months.

In terms of actual throughputs, what we’ve seen in terms of the work we’ve done so far is peak data rates and average data rates that are three times the current speeds that customers are already experiencing, which are by far the fastest in North America.

Rob Bruce

So coming back and just talking about the timing, as Bob said, and I think Nadir touched on in his remarks, is we are doing work starting in August and in fact, we’ve made some of the moves to set us up already and we’ll be rolling out progressively across the country. As most of you know, we don’t disclose the precise timing or the locations that we do rollout for competitive reasons but needless to say, we want to deliver the fastest possible network to customers as quickly as we can. So why don’t I leave it at that for today.

Simon Flannery - Morgan Stanley

Okay, and the 7.2 rates, just for comparison, what the real world average throughput is today?

Rob Bruce

We’re seeing peak data rates on 7.2 on the order of 4 megabit, 5 megabit averages while mobile in the 2-plus megabit range and stationary is higher than that.

Simon Flannery - Morgan Stanley

Thank you.

Operator

Your next question comes from Greg MacDonald of National Bank Financial.

Greg MacDonald - National Bank Financial

The question goes to Rob Bruce -- hoping to get a little more detail on data ARPU. Just the question really is one of modeling and how do we do that going forward -- I’m suspecting lumpiness is now a part of data revenue growth. We saw a big increase, plus 49%, in data revenue in the first quarter after the big 4Q sub load. I’m suspecting that the 38% result that we got this quarter is probably going to be higher next quarter after this big sub load. I wonder if you might confirm that.

And then secondly, just in terms of the profile of customers that you are adding right now, I can appreciate smartphone customers spend 150% of what the average post paid customer spends but that average post paid customer’s ARPU is declining. I wonder if you might talk about the trends for smartphone ARPU, particularly given the fact that it’s probably that you are adding more consumer smartphone users than you are business on an ongoing basis, i.e. as time goes --

Rob Bruce

In terms of ARPU, we’ve been watching the smartphone ARPU, both the BlackBerry and the iPhone ARPUs and like you, looking for any signs of deterioration over time to ensure that we were getting the value that we were spending in our COA and at this point, we’ve seen no material deterioration -- again, 150% of what we are seeing from a regular customer, so happy there.

In terms of the lumpiness, frankly it’s a little tougher to call. I think probably if you roll back a quarter or two, we weren’t seeing any kind of softness from the economy in terms of people restraining themselves on data. And this quarter, clearly it’s come shining through so to call how next quarter is going to turn out, I think some of -- you know, I’d love to help with the model but I don’t think I can give you much that’s helpful.

I think that the last thing is I think in Q2 we will still see some of that lapping of the re-price that we took last year and I am guessing that we should start to see more goodness shining through in Q3, to the extent that that’s helpful. And again, strong loadings this quarter but frankly we had pretty strong loading last quarter in terms of smartphone too, so I don’t think the delta loading quarter to quarter is going to bring any significant shift in what’s going on.

The one other thing in terms of just pure loads, sticks are now making up about 15% of our gross. Sticks do have obviously a slightly lower ARPU, so that may be another factor to consider in the modeling exercises, Greg.

Operator

Your next question comes from Randal Rudniski of Credit Suisse.

Randal Rudniski - Credit Suisse

Thanks. I’ve got a question on cable margins and sort of the forward direction margins -- in that division, and really the question is do you think you have an opportunity to really materially reduce costs in the cable division to improve margins? And the context is really that Rogers' business solutions has extremely high costs relative to its revenues. Your subscriber growth is becoming more nominal as the business has matured. You are going to incur higher regulatory costs related to the conventional television situation. And your G&A expense in cable at 50% of revenues is the same as what you have in wireless while wireless revenues are double cable revenues. So again, the question is do you think you have an opportunity to materially reduce cable costs?

Edward Rogers

I can answer that. I think what we’ve tried to do is to limit the growth in costs to be less than the revenue growth, even as the revenue growth is coming down. I think for the quarter, you see I think it’s 0.4 of 1% spending growth, which is pretty good. We have a reduction of total costs, I think you will see an increase in margin if we can keep our cost structure down.

And what that is is there are some units on the P&L growing faster, obviously and then we take out things which are mainly customer focus things that are causing people to call us many times and many truck rolls and these sorts of things.

So I think we are on the right path and we are focused on keeping that strategy going and lifting margins as we go forward.

William W. Linton

One of the things we announced today was this outsourcing arrangement with IBM. You know, you can assume that that’s in part driven as a major cost reduction initiative that goes across all of the operating companies, so I think that’s another good example of which we are finding ways to permanently change the cost structure going forward.

Randal Rudniski - Credit Suisse

Okay, thanks. That’s helpful. Thank you.

Operator

Your next question comes from Jonathan Allen of RBC Capital Markets.

Jonathan Allen - RBC Capital Markets

Thanks very much. I’m just trying to understand the MTS wireless deal. Rob, you had mentioned that you saved some CapEx in the province of Manitoba but I’m just wondering, I mean, you are basically helping a new national entrant into the business market where Rogers already has pretty high enterprise BlackBerry share. Are you basically letting a wolf in the henhouse here? And did you have to do this because of the spectrum rules?

Rob Bruce

No, we didn’t. Firstly, we are excited about the --

[Multiple Speakers]

Rob Bruce

We looked and we think it’s a great deal for obvious reasons -- the share network in a territory where we haven’t been able to have the best network and you know our deep commitment to being the best network, both the fastest and most reliable network and that’s been very successful for us. To be able to extent that into Manitoba is very exciting for us. The lower CapEx, the lower OpEx, we think that that means a greater market share in Manitoba. I mentioned the roaming revenue benefit that we talked about and lastly, the MV&O. The MV&O, as you know, compared to both Bell and Telus, we’re under-developed in the business market. Yes, we do well in BlackBerry but across the board, we have a significantly smaller share than either Bell or Telus. This gives us yet another way to reach into that market and realize revenue dollars that we might not otherwise get, and we worked very hard to structure the deal in a way that makes this a reality for us.

So obviously these things, Jonathan, have MVAs wrapped around them and I want to be careful that I am not too specific about the content of the deal but trust me -- we’re not about to make a bad deal in the long run. We’ve had good luck over time with MV&O as a source of revenue and we think this will be no exception.

Jonathan Allen - RBC Capital Markets

Well, just given your excitement about those roaming rates on it, and I note that you signed one with Videotron just a couple of weeks ago, are you happy with the rates that you are getting with this? And do you think those kind of rates, would you be happy about the ones that could be applied to the new entrants coming in?

Rob Bruce

I think the deal with MTS is quite different than a typical new entrant deal and I think looking at the Videotron deal, you know, we are pleased we worked through the Videotron deal. It wasn’t a deal that went to arbitration. I think we got an outcome that worked for Videotron and an outcome that worked for us, so I think we are all good. Is there anything to add?

Nadir H. Mohamed

The only thing I would add, Jonathan, is obviously it is confidential. The one thing we can tell you is it is multi-year and it is exclusive and we are obviously pleased with that.

Jonathan Allen - RBC Capital Markets

Okay. Can I just ask one quick clarification question? Rob, you mentioned about -- that sticks were about 15% of gross adds. What percentage of the basis is the mix right now?

Rob Bruce

That’s just not information we’re releasing right now, Jonathan.

Jonathan Allen - RBC Capital Markets

Okay. Thanks, Rob.

Nadir H. Mohamed

Very small.

Rob Bruce

Yes, it’s early days.

Operator

Your next question comes from Richard Prentiss of Raymond James.

Richard Prentiss - Raymond James

The question I’ve got for you is on the ’09 guidance. On the consolidated line, you reduced the midpoint of the revenue guidance by what looks to be about $450 million, advertising revenue reduction looks to be about $90 million, so should we imply then that the difference there, the other thing you point out, the lower equipment revenue and if so, given the high margin that -- or the lack of margin, if you will, in the equipment revenue, why would there not have been an associated reduction [if you adjusted] operating profit on the wireless side?

William W. Linton

First of all, you are roughly correct with your numbers. It’s a combination of media and equipment revenue. The second thing that you should know is we are seeing quite a different mix in the equipment that we are selling and how we are selling it this year, so that there is a reduction in equipment revenue but there’s very little impact on the margin compared to our guidance and that’s why we didn’t have to change anything else in the guidance numbers.

Nadir H. Mohamed

Rick, it might be helpful to think of it as a change in mix without a change in the subsidy level.

Richard Prentiss - Raymond James

Right, so CPGA instead of collecting a higher revenue and having to do the higher cost side, you’re just not charging it on the revenue side?

Nadir H. Mohamed

I’m not sure I’ve told you about that but think of it as the delta is negligible, given the subsidy is about the same across the different mix.

Richard Prentiss - Raymond James

Right, right. And then as far as the pricing for the smartphones, how is that marketplace proceeding? It sounds like then you are trying to keep the equipment revenues down to attract attention. Is that being quite successful then?

Rob Bruce

Pricing for smartphones in the market, I think there has been some concern expressed but we haven’t seen it and that is that there’s downward pressure on smartphones, in terms of price. I think what we’ve seen is also some downward pressure in terms of cost, I think driven by the QWERTY sliders. I think across the board, we haven’t seen -- I think there was some fear that the $99 iPhone price might be catalytic in terms of driving down smartphone prices across the board. I would say that at this point, I think that that’s not been the case.

Operator

Ladies and gentlemen, we have time left for two more questions. Your next question comes from Vince Valentini of TD Newcrest.

Vince Valentini - TD Newcrest

Yeah, thanks. I’ll stick with the iPhone for a sec -- first off, can you give us any color on how many customers who bought the iPhone last year are coming back and getting a re-subsidy on the 3GS? And secondly, Bill, you mentioned in the guidance you didn’t factor in the 3GS iPhone but just to clarify, you did assume you would sell iPhones throughout the year; the fact that in the second half you will be selling 3GS instead of the 3G, does it really change anything? It’s really just a function of how many iPhones you sell, the fact that they are 3GS versus 3G shouldn’t really matter. Is that correct?

Rob Bruce

Why don’t I take the first part of the question first, and it really essentially you said, you were asking iPhone [hubs], why did you have the -- why did you re-subsidize some of the customers. Firstly, it was a limited time offer. It expires very shortly. It was available only to people who bought in the first few months of 2008. They all signed three-year contracts and we’ll get mandatory data attach on all of them. And we suspect a very, very high percentage of the old iPhones will be reactivated on our network, so we’ll get some benefit there.

And for the record, in quarter roughly 4,000, so totally non-material.

Vince Valentini - TD Newcrest

Great.

William W. Linton

And Vince, the biggest impact is going to be the volume. This does come with a lot of hype and a lot of new features and if the volume increases substantially in gross adds or [hops] with different devices, it’s going to have an impact. And that’s all we said in our guidance, is that people should recognize the fact that we’ve got a new very hot product and there’s a probability, if history repeats itself, that it’s going to be very successful.

Nadir H. Mohamed

And Vince, I wouldn’t [inaudible] -- there is a $99 price point attached with at least one of the SKUs going into Q4 and that makes it very difficult to actually predict.

Vince Valentini - TD Newcrest

Okay, great.

Rob Bruce

I would just add that as well, the CFO at Apple highlighted the fact that there has been some challenge providing supply, so I think the numbers we’ve seen on iPhones so far have probably been under-stated, vis-à-vis what they could have been had we been flush with inventory.

Operator

Your next question comes from Tim Casey with BMO Capital Markets.

Tim Casey - BMO Capital Markets

Thanks. Can you update us on your commitment to the Blue Jays? I know it’s a small piece but this is a business that’s never been profitable, you’re being outspent in that business by your competitors by about $100 million, and so what is your commitment there? And are you seeing any evidence that some consumer un-satisfaction in that business is impacting any of your traditional consumer businesses?

Nadir H. Mohamed

Let me start with we remain obviously committed to the Blue Jays and I’ll get Tony to give more color.

Anthony P. Viner

Tim, listen, we believe that the financial performance of the Blue Jays actually can improve. In fact, it’s the one division of the media company this year that the year-over-year performance is better than it was.

We think that we can bring costs reasonably under control and more in line with revenues. But -- and our revenues are actually increasing in certain parts of the business.

And as you know, the Jays form an important part of our programming schedule on Rogers Sportsnet, which is another division of the company that has done increasingly well and especially well during the recession.

Operator

Mr. Mann, there are no further questions at this time. Please continue.

Bruce Mann

Thanks, Operator. I thank everybody on the call for participating this morning. We appreciate your interest and support very much. If you have questions that weren’t answered on the call or if there was anybody left in the queue that didn’t get a chance to ask, please give my colleague Dan [Kunes] or myself a call. Both of our contact info is at the end of today’s earnings release. Thank you again and this concludes today’s call. Bye.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect your lines.

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Source: Rogers Communications Q2 2009 Earnings Call Transcript
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