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Rogers Communications, Inc. (NYSE:RCI)

Q3 2009 Earnings Call

October 27, 2009 8:30 am ET

Executives

Bruce Mann – Vice President, Investor Relations

Nadir Mohamed – Chairman, Chief Executive Officer

William Linton – Chief Financial Officer

Robert Berner – Executive Vice President, Chief Technology Officer

Analysts

James Breen – Thomas Weisel Partners

Jonathan Allen – RBC Capital Markets

Jeff Fan – Scotia Capital

Simon Flannery – Morgan Stanley

[Vince Tarantini – TD Newcrest]

Randal Rudniski – Credit Suisse

Greg MacDonald – National Bank Financial

Dvai Ghose – Genuity Capital Markets

Glen Campbell – Banc of America/Merrill Lynch

Bob Bek – CIBC Capital Markets

[Rob Gough- Haywood Securities]

Tim Casey – BMO Capital Markets

Operator

Welcome to the Rogers Communications third quarter 2009 earnings conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Tuesday, October 27, 2009 at 8:30 am ET and I would now like to turn the conference over to Mr. Bruce Mann of the Rogers Management team.

Bruce Mann

Good morning everyone. Thank you for joining for Rogers’s third quarter ’09 investment community teleconference. It’s Bruce Mann here. Joining me in Toronto today on the call are Nadir Mohamed, Rogers President and Chief Executive Officer, Bill Linton, our Chief Financial Officer, Rob Bruce, President of our Communications Division, Edward Rogers who is our Deputy Chairman and Executive Vice President, Tony Viner of Rogers Media and Bob Berner, our Chief Technology Officer.

We released our third quarter results earlier this morning. The purpose of the call is to provide you with some additional background and answer as many of your questions as the time permits. Today’s discussion will no doubt touch on estimates and other forward-looking types of information. Our actual results could be very different than what we talk about, and as such would you please review the cautions in today’s earnings release and also in our 2009 full year NB&A.

There are various factors, assumptions and risks with respect to these kinds of statements and how our results could be different and those cautions apply equally to the dialogue we’ll have over the next little while on this call this morning. So if you don’t already have a copy of the earnings release or our annual report, they’re both available on the IR site of rogers.com.

So with that, let me turn it over to Nadir Mohamed and then Bill Linton for some brief introductory remarks and then the management team will take your questions.

Nadir Mohamed

Good morning everyone and thank you for joining us. As you can see from this morning’s release, our third quarter results represent a healthy balance of growth, cost control and margin expansion with double digit increases in both cash flow generation and cash returns to shareholders.

Let me highlight a few of the key items in the quarter; first, solid revenue growth in both wireless and cable operations of 7% over Q3 of last year. The most significant driver of the acceleration in top line growth was the record high growth from our wireless data revenues which in the third quarter alone were $372 million, up 46% from Q3 ’08 and today represent about 23% of wireless network revenue.

That’s an increase of $116 million year over year and up almost $60 million sequentially from Q2. We’re on track to well exceed $1 billion for the year. This reflects the strong success of the smart phone investments we’ve made over the past several quarters and the fact that we’ve now lapped some of the data price changes we made in 2008.

Our accelerated upfront investments over the past several quarters and getting an increasing portion of our base onto the higher ARPU, higher value smart phone devices and plans are proving successful and today, approximately 28% of our full space are on higher end smart phones, almost double the 15% level we were at last year. And in this quarter we had to add an additional 370,000 smart phone devices predominantly Blackberry I-phone and Android.

Secondly, our heightened focus on cost both operating costs and capital stands out in the quarter. What should be clear is that with the slowdown in our top line growth, we have been successfully driving cost efficiencies to maintain margins as we continue to invest in high value customers and grow earnings and cash flow.

This, combined with our continued healthy top line growth despite the recessionary environment enable us to deliver excellent margin expansion resulting in 15% consolidated adjusted profit growth.

I had at the beginning of the year highlighted our focus on free cash flow growth and in the quarter with our double digit increases in free cash flow and cash return to shareholders which Bill in a couple of minutes will address further.

The third item I’ll touch on is the internal reorganization we announced on September 16 regarding the further integration of our wireless and cable business. This builds on a journey we began several years ago and one which we’ve already had benefits from in many ways. These changes are designed to drive further enhancements to the customer experience, to improve our time to market and to make us a more effective and efficient business so that we can continue to compete, win and to lever sector leading growth as we go forward.

By further integrating our marketing, sales and service network organization, we will be much better positioned to move quickly and seamlessly to address change in customer needs. These changes are first and foremost about becoming more effective and more nimble as an organization.

My first priority is that we get the structure right, the team right to make it easier for our customers who engage with us and our employees to more efficiently work together. It isn’t in and of itself about cost reduction which is clearly separate and ongoing priority and in which we’re making meaningful progress.

Having said that, as we are rolling out our organization, we are taking the opportunity to streamline management and streamline our operations. As a result of the integration and flattening of the organization we are reducing the number of management layers and eliminating duplication; much of it at the more senior levels, and we have eliminated approximately 20% of positions at the Vice-President level and above across the combined wireless and cable organizations.

While this is still work in progress, we expect that reductions below the senior management level will represent a very small percentage of our work force in the low single digits.

Last item before touching on the operations, is that I believe we’re successful during the quarter, solidifying our network leadership positions for both wireless and cable. At wireless we launched our innovative HSB8 Plus 21 megabits per second wireless data network. By the way, the first and the fastest in North America and one of the most advanced in the world.

And at cable we turned on our new DOCSYS 3.0 platform with the launch of a 50 megabits per second high speed cable internet access service. We are the fastest and most reliable wireless and broadband network period, and that is not going to change.

Turning now to more of an operational view, on the wireless front as you can see from the release strong numbers both gross and net and high value with 70% of our gross sales and 80% of our net has been posted. And you again this quarter see the result of a combined focus on network excellence, service quality and product innovation in our churn results where churn is down again year over year to just 1.46%.

At the same time, due in large part to the weak economy we continue to see a deceleration in discretion type of uses, especially roaming and auto bucket minutes as well as slowing LV which together were a significant drag on overall voice ARPU.

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

With aggressive cost management and fewer existing subs updating this quarter than third quarter last year when the devices first launched, we delivered a very solid 51% wireless network margin. So overall, a strong quarter for wireless, highlighted by strong wireless data growth and cost management resulting in year over year adjusted operating profit growth of 22%.

On the cable operation side, solid top line growth of 7% with adjusted operating profit of 8% on 30 basis points of margin expansion; so further operating leverage and again this quarter strong unlevered free cash flow growth of 26% year over year. The cable team continue to do a good job of capturing meaningful cost savings which has enabled the continued growth and profitability despite the top line slowdown.

On the cable subscriber front, the results improved from second quarter but still down significantly from Q3 of 2008. The relatively deep Ontario recession where 90% of our cable business is located is obviously not helping, but the reality is also that Rogers’ penetration levels across all of our cable services are some of the highest in the cable industry, so the margin is clearly more difficult to continue to deliver the same growth rates that we had earlier along the curve.

I do believe by the way that we have an opportunity to gain some subscribers when they come in from the cable side in the small business segment as we go forward.

On the media side, for the most part a continuation of what we’ve been experiencing since mid 2008 with declines in advertising and consumer discretionary spending weighing across our portfolio. However, for the first time in more than a year late in the quarter we saw somewhat letting of the ad market slowdown and sales of the Shopping Channel beginning to show some signs of life, trends that have continued so far into Q4. So for the first time in more than a year, we have a bit of optimism brewing around our broadcast and televised shopping business.

It’s too early to call a turn in the ad market, but clearly there are encouraging signs. That’s definitely being helped by some very strong ratings from radio that’s been generating very positive results, exceptionally strong prime time audience on the broadcast side and continued strong results from our Sportsnet franchise.

The media team has also aggressively worked on cost reductions 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 turns and I am confident that we’ll be working from a base that will have considerable operating leverage when the market begins to turn back up.

I’ll just conclude by saying that overall, we’re well positioned and the strength of our franchise is reflected in our performance; strong market share, solid margins and cash flow growth. We’re building on our operating and financial strength by staying focused on execution, investing in the high value customers and our network advantage, and managing our cost structure in a way that allows us to deliver our cash flow growth in the context of a challenging economy and slowing growth.

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

William Linton

A few quick comments on the financial results for the quarter; let me begin by highlighting our core wireless and cable businesses which both grew by 7% year over year. That’s up sequentially from the 6% growth in these two units in Q2 ’09.

This solid growth was offset by lower negative margin wireless equipment revenue versus last year which was the result of fewer hardware upgrades by existing Rogers’s customers to I-phones in the current quarter, and also some year over year revenue declines in RBS and at Media and the continuing challenges in the economic environment. So overall consolidated revenue growth was 2% as a result.

We recorded an adjusted operating profit of $1.18 billion on a consolidated basis which is up 15% year over year and represented 450 basis points of operating profit margin expansion. In terms of comps, we’ve now lapsed Q3 ’08 when we first introduced the I-phone and when the economy began cycling down at an accelerated rate.

These very healthy results also reflect not just acceleration in wireless data revenues which Nadir spoke to a moment ago, but also and importantly, very significant progress around cost controls in all three of our businesses.

At wireless, good cost containment across both sales and marketing and general and administration costs, despite increased investments in customer care and obviously cost of equipment sales being down meaningfully, together enabled us to grow wireless adjusted operating profit 22% and expand the wireless service a full 630 basis points to 51%.

At cable operations we grew adjusted operating profit by 8% and expanded margins by a further 30 basis points to 42%. This represents the ninth straight quarter of year over year margin expansion for cable operations.

At media, also significant continued cost reductions which have been ongoing now since late 2008, and the business is poised to show some very meaningful operating leverage as advertising revenues begin to bounce back with the economy.

We also had good cost controls in terms of CapEx with year to date declines at all three business units which is what enabled us to pull forward the CapEx to accelerate our HSPA at 21 megabits per second launch within our current year’s budget and our current year’s guidance.

So year over year, unlevered free cash flow of 28% and 26% respectively at wireless and cable operations.

The increase you see in corporate CapEx 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 for the remainder of this year and next although the level may fluctuate somewhat from quarter to quarter.

Net net operating free cash flow on a consolidated basis for the third quarter which is adjusted operating profit less CapEx and interest expense was $524 million which is up a very solid 19% year over year.

In terms of the main items below the adjusted operating profit line on the income statement that impacted the year over year growth in net income and earnings per share, I’ll point out that there was a $72 million foreign exchange gain which was partially offset by the change in the value of related derivative instruments.

The net of these two currency related shifts resulting from increased strength in the Canadian dollar in the quarter contributed about $40 million to the year over year increase in adjusted net income.

We also recorded a year over year increase in income tax expense primarily related to items recorded in the third quarter of last year including the impact of the Federal and Ontario income tax harmonization and certain income tax valuation allowance adjustments.

You can see this from the lower effective tax rate in Q3 of last year of only 2.8% versus 21% in the current quarter. These items together with the growth in operating profit and the lower number of shares outstanding as a result of our share buyback program resulted in adjusted earnings per share of $0.82 which is up 12% from Q3 of ’08.

On an unadjusted basis, a couple of other items I’d point out, would be the $68 million swing in stock based compensation moving from a large recovery position in Q3 ’08 to a modest non cash expense position this quarter.

Additionally, we recorded $11 million of integration and restructuring expenses in the quarter. This item primarily reflects severances that occurred during the later part of the quarter associated with reorganization of our communications group, and also, certain transition costs associated with our IT infrastructure outsourcing agreement with IBM.

I’ll mentioned that we expect to record additional below the line integration and restructuring expenses in the fourth quarter of this year as we work towards completing the reorganization of the communications group but I can’t yet quantify for you the amount.

Also in the quarter we recorded a $12 million termination fee related to a Blue Jays player contract.

In terms of the Part Two regulatory fees, as you know the CRTC is expected to amend its regulation of these fees and we estimate that on a going forward basis they will be roughly one-third less than the current rates. We’ve been accruing these fees for the last three broadcast years which end in August at an annual rate of about $27 million including both cable and media.

In Q4 we expect to reverse accrued amounts for ’07, ’08 and ’09 broadcast years totaling about $80 million. Most of the amount, portions related to ’07 and ’08 will be below the adjusted operating profit line and the current year portion will be reversed above the line and the Q4 and go forward accrual rates will be reduced by approximately one-third as I referred to a moment ago.

On the balance sheet you’ll see $430 million now classified as current portion of long term debt. This relates to the fact that we intend to redeem our U.S. $400 million 8% note at a premium of 102 during the fourth quarter.

In terms of cash returns to shareholders, during the third quarter we bought back 13.9 million RCI shares for a total of $408 million under our share buy back program. Year to date, as of the end of September we have repurchased just over 30 million shares for $917 million and paid out dividends during the period of another $527 million.

So cash returned to shareholders so far this year of more than $1.4 billion reflecting the 16% dividend increase earlier this year and execution to date of the largest share buy back the company has ever done.

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

So whether you look at leverage, liquidity or refinancing requirements, we continue to be in a very solid position from balance sheet and financial flexibility perspective.

With that I’ll pass it back to Bruce and the operator so we can take your questions.

Bruce Mann

We’ll be ready to take questions from participants in just a moment, but quickly before we start, the management team here would just ask as we do on each of these calls that those of the participants that are going to be asking questions be courteous to all the other participants and limit questions to one topic and to one part so that as many people as possible have a chance to participate and then to the extent that we have time, we’ll circle back and take additional questions and we’ll get them answered for you separately after the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Breen – Thomas Weisel Partners.

James Breen – Thomas Weisel Partners

Just with respect to the network, obviously in the U.S. you’ve taken some flack for network quality post the I-phone. We haven’t heard that from you up there. I was wondering if there were things that you did on the network side heading into the launch last year and then this year to bolster the network pre the I-phone launch.

Robert Berner

There’s a number of factors that affect network performance and I think we’re well positioned in all of them. Firstly, in terms of quality, Rogers deployed our 3GUMTSH8 SPA network in all markets at 850 megahertz and that gave us a better building penetration and reach. As you know, most carriers deploy at higher frequencies which provides a greater degree of challenge in the quality.

We’re also deploying at 1900 megahertz for additional capacity but we have both frequencies in all markets, and that means our voice and data will move back and forth between those frequencies giving our customers the best quality and data speeds at any point in time.

In terms of capacity, if you don’t have enough capacity in the market that impacts quality and that impacts your data speed. This is the greatest challenge for all mobile operators, is to achieve these broadband data rates, is to implement enough back hall capacity.

Rogers invested upfront in back hall. We launched 3G with much more back hall capacity than the vast majority of 3G operators around the world. Our back hall at the get go supports data rates at every step of the network and data capabilities and device capabilities from the initial 1.8 megabyte a couple of years ago right through to the 7.2 megabytes that we’ve already deployed nationally.

For SHPA Plus, at 21 megabytes, we’ve deployed and continue to deploy a combination of high capacity IT microwave radios that support up to 300 megabytes per second per site along with fiber optic transmission to our end sites and aggregation points. And we started two years ago to re-architect our entire transport network to an all IT network that supports mobile data traffic well into next generation.

Now customer demand, Rogers was the first carrier to launch broadband data to the homeowner, the first carrier. We learned a lot about customer usage patterns that we were able to apply to our mobile wireless networks and to predict what that usage would be in a very effective manner.

From a customer experience perspective, we’ve had 7.2 megabytes per second in market for almost a year and a half and we were the first in North America to deploy 21. Many carriers are just now deploying 7.2 megabytes in selected markets.

So we’ve got the capacity in place. We’ve got site density in place. We’ve got radio spectrum position both in terms of the best frequency and the right quantities.

James Breen – Thomas Weisel Partners

On the ARPU’s, Nadir mentioned that roaming was still down 20% year over year yet your dollar rate ARPU is down about a little over 2%. Can you give us any color on what the ARPU looks like when you factor out LV and roaming, sort of the I-phone effect on the ARPU levels?

William Linton

You were breaking up a little bit at the end. Did you say what the ARPU’s would look like if you took out the LV and roaming fees?

James Breen – Thomas Weisel Partners

Yes, just to get a feeling for what the impact has been from the smart phones in the larger part of the base.

William Linton

The impact of roaming fees a couple of dollars, roaming in LV being roughly $3.00 impact on the ARPU.

Operator

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

Jonathan Allen – RBC Capital Markets

Question for you on enterprise telecom, a few years back after you brought in Bell and bought Call Net, Rogers made an effort at first to get into the medium and larger enterprise space and then pulled back after a year or so of trying. I’m just wondering particularly now with Edwards new roll running RBS and also involved in some of the M&A activity, I’m wondering what Rogers’ appetite might be to get back and expand beyond just the small medium business and get back into the larger enterprise space particularly if either organically or through something you may be partnering with Shaw or other cable companies or whether Rogers doesn’t have an appetite to actually acquire some of the networks and expertise to get into that kind of business.

Nadir Mohamed

I should start by saying what I hope is obvious to everybody that the change in the roll of the organization by no means suggest a change in strategy or focus in terms of acquisitions or where we’re looking to have Edwards spend more time so we’re building a growth platform that doesn’t in any way signal a change vis a vis our emphasis on M&A or any strategic shift.

I think that going back to your RBS question, I would say we’re repositioning RBS and let me remind everybody of the strategy for RBS. It very much plays in the space that’s on that. In other words, move up from retail. It gives you a sense of what markets that make sense for us to be in. That would largely be in Ontario and the Atlantic where we’ve got networks.

We’ve also said the key segments for us is our small and mid segment. Frankly, wireless and wire line, I wasn’t worried about trophy accounts in the enterprise side. That’s the domain of the large companies, phone companies, not a space that you can win without pricing.

And the last piece, our interest very much is on IP not on legacy wire lines. The Legacy wire line is not where we would see growth. I think the focus remains on IP on the smaller niche for RBS and one of the things that I know we’ll be working hard on is actually improving RBS and I would remind that we’re just giving an update on the performance.

When we talk about what the priorities are it’s in terms of the scale to Rogers and obviously the cable and wireless products that we’re going to sell to the smaller business there will be a revenue piece in total than our existing larger enterprise business.

As was said, we continue to concentrate on the business that we have and we’re refocusing that as has been discussed, as had been said, and we’re re-investing in certain areas that meet our strategy and the focus.

As we get up to speed on that strategy, we’ll look to the future but our focus today is on the business that we have, growing where it makes sense, on bidding on the RP’s that make sense. We generally won’t if it doesn’t make sense and we won’t buy enterprise, but there are accounts that do. And we’re focused on our cost structure and right sizing the cost structure.

There was kind of two phases to it. One was pulling back from the original strategy and taking out costs. We saw a good bump in EBITDA in 2008 and this year we continue that. There is some revenue pressure on that business unit but we now as we place some stats on some areas, we see some pressure on the overall EBITDA in 2009. But we hope to look to grow that business unit and EBITDA as we go forward.

Operator

Your next question comes from Jeff Fan – Scotia Capital.

Jeff Fan – Scotia Capital

On the same lines of enterprise with Bell and Telus coming in with their new network and HSDA devices, specifically into the enterprise and presumably you have a pretty good market share in the enterprise business especially on smart phones and Blackberries over the year. I’m just wondering how you plan to keep those customers. Maybe give us some stats on the contracts that you have in place and whether there are any relationships out there that you can strengthen, i.e., the NTS All Stream agreement whether that’s sufficient for you to maintain your lead in the corporate segments especially on the Blackberries.

Nadir Mohamed

It’s interesting when we started going after the data side of our business a few years ago we made it very clear to all our channels, distribution approach the key focus even then was on small and mid. The concern earlier has always been at the large enterprise level, pricing becomes unfortunately too much of a lever as opposed to value.

Having said that, in the early base clearly we had an advantage with data and roaming, but to be honest on the Blackberry front, which we were told would be the key to that market, the other guys have had Blackberry for some time now, but a lot of people roam.

So that’s an issue that we’ve already had. I think we come back to our reliability, our speed on the network. It’s one thing to have a new network, but too actually we have a network that has the quality that we do and the speed that we do. So we’ll rely on our core strengths and differentiation to come in and play in that market, but we shouldn’t let anybody assume anything other than we actually have better market share in the small and mid segment and relatively speaking, the other guys can have the enterprise side.

Operator

Your next question comes from Simon Flannery – Morgan Stanley.

Simon Flannery – Morgan Stanley

I wanted to touch on wire line margins. It looked very impressive, back above the 50% level. I understand about the drivers on the upgrades. As we think about getting in Q4 and some of the dynamics we were just talking about on the HSPA launch and then into early next year, it would seen that the pressure on hand set subsidies may less somewhat unless you start cutting prices aggressively. So I guess the question is, is there anything in these numbers of 51% or so that is sort of unsustainable beyond reasonable seasonality or could we start to see the margins remain at these high levels. Certainly AT&T has been talking about margins going from 38% level to a mid 40% level over the next several years as some of the I-phone subsidies unwind. So any color about the direction there would be great.

Bruce Mann

Obviously as Nadir referenced a lot of the positive move in margin into the 51% range was a result of our focus on continuing to be cutting costs which you saw in the quarter. Costs of handsets were reduced minus 2% against base growth of 8%. We’re going to continue to stay very focused in what we think is still a fragile economy on driving costs down. We’re going to work hard on that.

Going in the other direction however, I think probably starting late in Q4 or mid Q4 and early next year for sure, we expect a lot more activity from new interests, and I think that in fact will push margins the other way and I think in reality over time, we should see margins migrating down towards to the mid 40’s and that’s the prognosis as we see it.

Operator

Your next question comes from [Vince Tarantini – TD Newcrest]

[Vince Tarantini – TD Newcrest]

I have a question on what Shaw said last week, but first let me just clarify a couple of questions on the MTS there. Can you confirm, is that deal between you on the roaming side and the MVNO side, has that been finalized and signed now or is it still pending.

Nadir Mohamed

It was finalized and signed just at the last analysts call we announced it, so it was a done deal then. We have not launched an MVNO. They have the opportunity to launch MVNO as a result of that contract.

[Vince Tarantini – TD Newcrest]

You probably heard last Friday, Jim Shaw said he would be open to discussions with Rogers about some sort of partnership in wireless and he said he may be talking to you soon. Can you give us your thoughts on the mutual benefits of partnering with new entrants as opposed to competing with them and where or where not you may be on discussions.

Nadir Mohamed

We have to start with we’d love to have discussions with them any time as well. I think you can see with what we’ve done with MTS we believe that anything that we can do to share networks, to reduce capital and deliver better networks and better services to our customers are very close to our heart. So obviously we embrace the opportunity to partner with Shaw or anybody else frankly who is interested in sharing a quality network and helping us reduce CapEx.

Operator

Your next question comes from Randal Rudniski – Credit Suisse.

Randal Rudniski – Credit Suisse

A question on wireless data, in the quarter there was a very large sequential improvement in data revenues and continued strong year over year growth. Can you help us understand what drove the improvement in sequential revenue in wireless data?

Robert Berner

We gained strongly from a few places, places frankly where you’d expect. A very large portion of it came almost equal in size from smart phones and the continued growth of smart phones and the revenue that came from smart phones. So that was nearly half, a little less than half, say 40%.

Another 40% coming from the continued growth in S&S and I should stop and pause and say the change to the way we build S&S only accounted for about $7.5 million of that so a really significant portion, 40% of that $112 million would be again from S&S.

And then the remainder from other areas including data roaming and the like which accounts for virtually all of it.

Operator

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

Greg MacDonald – National Bank Financial

Can we jump back to the wireless margin for just a second. What I’m trying to do, in addition to Simon Flannery’s question, trying to understand what actually happened this quarter vis a vis the mix, and so let me sort of set it up. $100 million decrease in cost of sales yet you actually saw gross adds for smart phones at 370,000 versus what I think was 255,000 in the third quarter last year. Correct me if I’m wrong. So you’ve got an increase in gross adds in smart phones. You had a decrease in the absolute number of cost of sales which is actually pretty big. Is there something going here vis a vis mix? Are the I-phone gross adds a lot less and other less expensive or less subsidized phones a lot higher. So there is a mix issue? And what does that mean for subsidies on a go forward basis if we’re going into a 4Q where Telus and Bell are actually going to be selling I-phones?

Robert Berner

I didn’t hear all your questions but one of the key things I think that was in your comments was a big reduction in I-phone comps during the quarter and comps in general were down pretty significantly which had a really positive effect on EBITDA.

Greg MacDonald – National Bank Financial

So if I’m trying to extrapolate, you said 45% of gross adds for smart phones overall are for I-phone.

Robert Berner

No. 45% for smart phones overall, down a little more than half of that for I-phones.

Greg MacDonald – National Bank Financial

So there really is a mix issue going on as well.

William Linton

It’s also the mix between I-phones and Blackberry which as you know last year, you see what our first I-phones were and we had probably the highest percentage in terms of upgrades. So be definition you’ve got both working, one at a lower level that Rob referred to and the change in mix between Blackberry and I-phone.

Greg MacDonald – National Bank Financial

Is there at some point soon are you going to start breaking out the wholesale segment of wireless?

William Linton

That’s something that we’ll look at as we have these roaming deals that will start contributing a more material set of numbers but it’s obviously not something we’re doing now, but if it makes sense in the context of 2010. I’m not saying we will but I’m sure working with Bell, we’ll figure out what the right timing is. [inaudible] I know south of the border, people have already started breaking out wholesale.

Operator

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

Dvai Ghose – Genuity Capital Markets

I think what you said, you sold 255,000 I-phone in Q3 ’08, 185,000 in Q3 ’09. So to what extent was that a shortage of I-phones in the quarter, a reduced demand or indeed a conscious effort by the company to manage margins, because it certainly seems that your non I-phones smart phones such as Blackberries generate much better returns because the ARPU’s are similar, the subsidies much less on the Blackberries. It seems the network expenses are less because Blackberry supports you and the CapEx is probably less as well because the I-phone is the mother of all bandwidth. So was this a conscious attempt?

Robert Berner

I don’t think we actually provided you those numbers.

Dvai Ghose – Genuity Capital Markets

You said half of the 370,000 were I-phones.

Robert Berner

Approximately. I just could track exactly where you got that number from. To answer your question, the focus on I-phones we had ample inventory by the end of the quarter, so we caught up and we’ve done what we’ve done with respect to our back log and in terms of restraining upgrades in the base, we didn’t restrain our customers who wanted to get I-phones from getting I-phones.

So just over time gradually seeing more and more of a shift back towards the I-phones that we put in place are more on the acquisition side as our base gets more heavily penetrated with I-phones. So that’s probably the full story there.

Nadir Mohamed

Just to give you the strength in the market, we should point out that compared to Q2 of this year, so sequentially in Q2 our smart phone devices were 315,000 and in the quarter we’re at 370,000 so clearly still a pretty good market and pretty good growth.

Dvai Ghose – Genuity Capital Markets

It seems that you are for example with the Blackberry 9700 pricing it pretty high at about $300, a reduced subsidy. Is this also part of a strategy perhaps to give up some of the market share to Bell and Telus in order to reduce the overall subsidy burden?

Robert Berner

We’re in the game of winning high value customers. We try to price devices intelligently and reflective of what they cost. So that’s really more the way we make decisions.

Operator

Your next question comes from Glen Campbell – Banc of America/Merrill Lynch.

Glen Campbell – Banc of America/Merrill Lynch

Bob, you’ve clearly done a great job in thinking ahead about data traffic growth. Can you talk about what sort of growth you’re actually seeing in the market? We’ve seen some interesting data points from other carriers and this is a related question. If you wanted to keep CapEx to sales and wireless at a comfortable low teen’s rate, how fast could data continue to grow year over year. Could we take a doubling for the next three, four years? Could it be faster than that? Where would we start to see a point where CapEx would likely have to rise?

Nadir Mohamed

Data growth in broadband is clearly very high because the starting point is very low. Up until 3G where we changed the user experience from what we had on GPRS and edge to a true broadband experience, total data traffic was a relatively small proportion of our total traffic.

The growth has been very significant as you can imagine, but the majority of capacity is to roll out the initial networks. And so as we established the footprint, put in the back hole and established the capability, incremental CapEx for more capacity drops per unit cost dramatically.

So we can grow that demand or capacity to match the demand very easily within our guidance going forward and we don’t want to anticipate that there’s going to be any significant dollars going into a proportionate capacity growth beyond a linear pattern.

Robert Berner

I think the one thing I think it’s important to remember in our discussion with Rogers is we’re not flat rated and that we love to see the data growth because that data growth translates into date revenue for us and we continue to be excited about that.

What’s more is, we’re very confident that the margins that we’re getting on that data are accretive to the businesses that we run so again, we expect data will continue to grow. I think Bob’s in a position and has done a great job so far in terms of facilitating that growth with all the appropriate preparation on the network, and we’d be excited to see more because we could take it to the bank.

Operator

Your next question comes from Bob Bek – CIBC Capital Markets.

Bob Bek – CIBC Capital Markets

I wonder if you could update us on the views on cash taxes going forward. I saw that the taxes hit home in Q3. And related to that, perhaps Nadir if you could talk a bit more about the use of free cash flow has been material towards the buy back recently and your thoughts on that versus the dividend or the Board’s thoughts on the dividend going forward.

William Linton

We are going to as you saw this quarter start recording taxes as currently payable which mean that you would be paying them within the next 12 months. However due to some good structuring, the actual payments aren’t going to be for another year after that. So we won’t start paying significant amounts of cash taxes until 2011 but we will be close to fully taxable in that year.

Nadir Mohamed

Obviously at this point it’s more of a general comment given that we’re going into a planning cycle and something that we’ll work with the Board, but earlier on in the year we articulated our capital policy in terms of direction on leverage. But that’s the stage given the cash flow that we expect to deliver, it seems like buy back and dividends would be part of the mix.

We also made reference to the general idea that we would pay dividends with growth along what your expectations for cash flow growth would be. I think by definition one has to be sensitive to not looking at the short term perspective but looking at dividends as something that needs to reflect the cash flow profile over a number of years.

So it’s probably premature to give any specific, but history would say that those scenarios I think the last couple of years are key ways for us to give back to shareholders.

Operator

Your next question comes from [Rob Gough- Haywood Securities]

[Rob Gough- Haywood Securities]

On the wireless data, you’ve gone from 15% to 28% with the smart phones. Do you see that slowing or is 40% a good target to look for 12 months out?

Robert Berner

I heard that 28% penetration now, and I missed the last bit. Can you say it again?

[Rob Gough- Haywood Securities]

Do you see 40% as a good target looking 12 to 15 months out with respect to momentum on the smart phone penetration?

Robert Berner

I would say it could a little bit longer than that. Right now as you know we’re running at about 45% of our gross just roughly on smart phones and I think it’s quite conceivable we’ll get to 40% plus in the not too distant future.

Operator

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

Tim Casey – BMO Capital Markets

You mentioned in your media comments that you’ve seen a reversal of trend. Although you’re down you’re starting to see some indications of some optimism. I’m just wondering if that is across the board or if it’s still spotty and if we can extrapolate that into some of the other businesses. Are you seeing an improvement in trend in some of those discretionary buckets in wireless? And also, could you characterize any interest you have in the CanWest assets. Do you have an active file on the media side?

Robert Berner

With respect to the strengthening, I’d like to declare the recession over but I can’t. We are seeing some strengthening as we said in the release in the Shopping Channel and we’ve really enjoyed some good results as a result of much improved audience delivery of Citi television and some stabilization in our radio growth.

So it looks better than it did before but as we had said with respect to our businesses, a lot of that has to do with the comparables that we had a year ago.

With respect to the CanWest assets, we’ve always maintained that we’re in the media business and we’d like to be opportunistic. If an opportunity arose, we’d certainly look at it, but we have no specific interest in any of those assets at this time.

Robert Berner

We really see no abating of the pinch on discretionary revenues in the wireless business at this point or no obvious changes in the economy for sure. So right now we’ll wait and watch and look for some more hopeful signs in subsequent quarters and continue to stay very focused on cutting costs.

Again, good success this quarter with costs at minus 2% year over year against subscriber growth of 8%, so happy with the progress so far, but I think in light of where the economy is right now, we’ll keep our head down and focus on cost cutting.

Operator

Mr. Mann, please continue.

Bruce Mann

The management team here at Rogers wants to thank everybody for participating this morning. We know it’s a busy time in the quarter for everyone, but we basically appreciate your interest and your support and your coverage and we appreciate you making the time to join us this morning.

If you have any questions that weren’t answered on the call give Dan or myself a call. Both of our contact info is on this morning’s press release. And that concludes today’s call.

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Source: Rogers Communications, Inc. Q3 2009 Earnings Call Transcript
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