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Rogers Communications, Inc.(NYSE:RCI)

Q4 2009 Earnings Call

February 17, 2010 8:00 am ET

Executives

Bruce Mann – Vice President, Investor Relations

Nadir Mohamed – Chairman, Chief Executive Officer

William Linton – Chief Financial Officer

Robert Bruce – President, Rogers Wireless

Tony Viner – President, Chief Executive Officer, Rogers Media Inc.

Robert Berner – Executive Vice President, Chief Technology Officer

Ken Englehart – Vice President, Regulatory Affairs

Analysts

Mahir [Yagi – Dejarnett Securities]

Glen Campbell – Banc of America/Merrill Lynch

Bob Bek – CIBC Capital Markets

Simon Flannery – Morgan Stanley

Vince Valentini – TD Newcrest

Rick Prentiss – Raymond James

Jeff Fan – Scotia Capital

Randal Rudniski – Credit Suisse

Dvai Ghose – Genuity Capital Markets

Tim Casey – BMO Capital Markets

Philip [White] – No Company Listed

Jonathan Allen – RBC Capital Markets

Operator

Welcome to the Rogers Communications Inc. fourth quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Bruce Mann of the Rogers Management team. Please go ahead, Sir.

Bruce Mann

Good morning everyone. Thank you for joining us for Rogers’ fourth quarter 2009 investment community teleconference and webcast. Here in Toronto joining today are a few members of the Rogers senior leadership team including Nadir Mohamed, our President and Chief Executive Officer and Bill Linton, our Chief Financial Officer.

We released our Q4 and full-year 2009 results earlier this morning. The purpose of the call this morning is to as crisply as possible provide you with a bit of additional background up front and then to answer as many of your questions as the time permits. As today’s remarks and discussion will undoubtedly touch on estimates and other forward-looking information from which our results could be different, you should review the cautionary language in the Q4 release this morning and our full-year 2008 MD&A including the various factors and risks and assumptions with respect to those cautionary statements. Also about how our actual results could differ.

Those cautions [compare] equally to our dialogue on today’s conference call. If you don’t already have copies of today’s earnings release or of our 2008 annual report to accompany the call they are both available on the IR section of Rogers.com or you can find them on the Edgar or [CDAR] website.

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

Nadir Mohamed

Thanks Bruce. Good morning everyone and thank you for joining us. As you can see from this morning’s release we delivered another very solid quarter of results despite the very challenging economy and an increase in the competitive environment in Q4.

We generated double digit EBITDA growth. Our wireless data grew a strong 45%. We delivered meaningful cost efficiencies that drove margin expansion right across all three of our major business units. We added a healthy mix of high value customers while further reducing customer churn and importantly we delivered another strong quarter of free cash flow growth and return to shareholders to round off a very solid year.

Let me quickly cover a few of the highlights of the quarter and then Bill will walk you through some of the financial nuances.

On the revenue side, we delivered high single digit revenue growth in both our wireless network and cable operation businesses with 7% year-over-year top line growth compared to Q4 of last year. The most significant driver of our top line growth was the continued strong growth in our wireless data revenues which in Q4 were up 45% and now represent 24% of wireless network revenues. To put that in context, for the full-year 2009 wireless data revenue was almost $1.4 billion. I think this reflects the right focus and investments we have made not just over the past several quarters but frankly consistently over the past several years. Our early 3G and Smart Phone investments combined with our innovative product offerings, the quality of our networks and our focus on customer experience are clearly paying off.

In Q4 we focused on the high end of the wireless market and were successful in activating an additional 400,000 Smart Phone devices; predominately Blackberry, iPhone and Android devices that on average are generating almost double the ARPU of our voice only service. In fact, we activated more iPhones in Q4 of this year than we did in Q4 2008. As a result, we drove a healthy mix of higher value wireless subscriber additions in the quarter with 70% of our gross adds and 85% of our net adds being post paid subs. Importantly, even in the face of increased competition, post paid churn is once again down year-over-year to just 1.08%.

Today approximately 31% of our post paid pays are on the high end Smart Phones, up from the 19% level we were at this time last year. These are higher ARPU, lower churn, higher lifetime value subs and the results are clear in our financial and operating metrics. Our high focus on costs both operating costs and CapEx stands out again this quarter. Anticipating moderating top line growth, we have been vigilant on the cost side driving operating efficiencies to maintain strong margins and grow earnings and cash flow.

Part of that focus includes the streamlined organizational structure put in place in the latter part of 2009, the implementation of which is a reflection of the integration and restructuring charge you see in the Q4 results. We did, however, continue to see declines in discretion types of wireless usage especially roaming and out of plan minutes. There was significant drag on overall voice ARPU and which are to a certain extent reflective of the economy. Roaming in particular continued to be down year-over-year in the 20% range corresponding with the recessionary decline in business travel and increases in unemployment.

With our success in generating strong wireless data growth, blended ARPU was limited to a drop of just under 1%. We continue to make significant Smart Phone investments during the quarter yet at the same time we delivered strong wireless margin expansion as a result of also aggressively managing the cost side.

In our cable operations, solid top line growth combined with success in capturing efficiency gains enabled good EBITDA growth and continued margin expansion. In addition to continued cable operating leverage we were also able to drive down capital intensity which together helped to deliver unlevered free cash flow growth of $160 million year-over-year at cable operations. I believe we are very well positioned on the cable side with our market leadership and superior broadband network.

On the media side, for the first time since almost two years we saw an acceleration in our broadcast and specialty TV along with our shopping channel revenues. The real standout though was City TV with very strong audience metrics that drove impressive top line growth. Not only was media in Q4 able to hold the top line flat year-over-year for the first time since early 2008 but as a result of significant cost reduction work done over the past year operating leverage was strong and adjusted operating profit was up in a healthy double digit range.

Overall for 2009 we delivered on our commitments. We grew subscribers, revenue, EBITDA and cash flow, all at very acceptable rates and we continued to invest at a healthy pace for the future. Net/net, free cash flow for 2009 was up 29% to $1.9 billion and for the full year we repurchased 44 million shares for $1.35 billion and paid out dividends during the year of another $700 million. So north of $2 billion returned to shareholders in 2009 reflecting a 16% dividend increase and the execution of the largest share buyback the company has ever done.

We are well positioned with a terrific asset mix and strong market and financial positions. We are and will continue to build on our operating and financial strength by staying focused on execution. Consistent with this outlook we announced this morning that the Rogers’ board has approved a healthy 10% increase in our annual dividend to $1.28 per share and also reauthorized a share buyback program for 2010 of up to $1.5 billion. This underlines our board’s continued confidence in the strategic position and cash flow generation capabilities of this company.

Let me now turn it over to Bill and then we will take your questions.

William Linton

Thank you Nadir. A few quick comments on the financial results of the quarter. Our consolidated revenue growth was a respectable 4% for the quarter. This reflects the solid top line growth of 7% for wireless network revenue and cable operations revenue, partially offset by a decrease in the negative margin wireless equipment revenue and also from year-over-year declines in RBS and retail.

Respectful top line growth aside, I think the operating leverage and free cash flow generation are real highlights. From an EBITDA perspective, adjusted operating profit of $1.1 billion on a consolidated basis is up a very strong 14% year-over-year and represents 310 basis points of operating profit margin expansion and this does not include any benefit from the reversal of Part II regulatory fees.

Up front I want to quickly explain how and where the Part II fees reversal impacts the results for the quarter and the full-year. In total, the amounts reversed were $79 million. Of that $61 million related to prior years and $18 million related to the first three quarters of 2009. In the 12 months or full-year results we reported today you see that $61 million is reported below the adjusted operating profit line and the other $18 million of the reversal is included in adjusted operating profit. However, in terms of the fourth quarter results the 14% adjusted operating profit increase excludes the entire $79 million reversal since it relates to earlier quarters of the year and not to Q4.

You can see this in the release where the full amount of the $79 million reversal is recorded below the adjusted operating profit line for the fourth quarter. Versus last year, we have obviously now lapped the second half of 2008 when we first introduced the iPhone and also the timeframe when the economy began cycling down at an accelerated rate. Equally as important, these results again reflect some very significant progress around cost controls. In fact, we saw margin expansion in all three of our operating businesses.

At wireless, strong wireless data growth as Nadir highlighted but importantly good cost containment across G&A as well as sales and marketing costs. This despite the fact that we activated roughly as many Smart Phones this quarter as we did in the fourth quarter of 2008. We grew wireless, adjusted operating profit of 16% and expanded wireless service margins 390 basis points to 47%.

Cable operations adjusted operating profit grew by 8% and margins expanded by a further 30 basis points to 41% representing the 10th straight quarter of year-over-year margin expansion for cable operations.

At media revenue was flat. However, we had solid year-over-year growth at City TV, Sports Net and the Shopping Channel while growing overall adjusted operating profit by 13% and expanding margins by 150 basis points. Operating leverage and margin expansion at media reflects not just very strong year-over-year ratings improvements at City TV but also what seems to be the start of a turn in the ad market as well as significant cost reductions.

Our focus on cost efficiencies extended across CapEx as well where you see year-over-year CapEx reductions across all three business units. Amongst other things, this enabled us to pull forward the CapEx to accelerate our HSPA plus launch within our current year’s budget and guidance. This obviously contributed to strong free cash flow growth.

As you look at unlevered free cash flow growth by unit and on a consolidated basis both for the year and for the quarter it is strong double digit growth pretty much across the board. With interest up only modestly, as we kept our leverage within our target of 2-2.5 times EBITDA, free cash flow on a consolidated basis for the fourth quarter which is adjusted operating profit less CapEx and interest expense, was up a very strong $329 million year-over-year. On a full-year basis we grew free cash flow at a very respectable 29% to $1.9 billion as Nadir has already mentioned. So it was actually above the high end of our 2009 guidance range.

On a per share basis, free cash flow grew by 32% reflecting the accretive impact of the $43.8 million share buyback we executed in 2009 which reduced our shares outstanding count by about 7%.

A couple of items to note below the operating profit line on the income statement that impacted net income and earnings per share. First, I will point out a $90 million change on the foreign exchange line. However, this for the most part is offset by an associated change in the value of derivative instruments. The net of these two currency related shifts which relates to the increased strength of the Canadian dollar in the quarter contributed about $10 million to the year-over-year increase in net income.

Also below the operating line, depreciation and amortization is lower by $47 million which principally reflects lower amortization of intangible assets. These items together with the growth in adjusted operating profit and the lower number of shares outstanding as a result of our share buyback resulted in adjusted earnings per share of $0.61 which is more than double what we reported in Q4 of last year.

Lastly I would point out the $276 million swing related to goodwill impairment we reported in the fourth quarter of last year and the $79 million reversal of previously accrued Part II fees that I spoke about a moment ago. Those two items were partially offset by higher restructuring and integration costs this quarter reflecting severances that occurred during the latter part of Q4 associated with streamlining and reorganization of our communications group.

During the quarter we bought back 13.4 million RCI-B shares for $130 million under our share buyback program and we also paid out $177 million in dividends. So we have returned over $600 million in cash to our shareholders in the fourth quarter alone. Also in the quarter we closed a $1 billion Canadian denominated investment grade debt offering and in turn redeemed our U.S. $400 million 8% notes at a net present value positive 102% redemption price. This served to reduce our average cost of debt and keep us within our targeted leverage range of 2-2.5 times debt to EBITDA.

In addition we were opportunistic in purchasing for investment purposes 3.2 million shares of Cogeco Cable and 1.6 million shares of Cogeco Inc. for $163 million. This increased Rogers’ ownership investment in Cogeco Cable from 14% to 20% and in Cogeco Inc. from approximately 20% to approximately 30%.

Separately, in January we acquired a municipal hydro business called Blink Communications. With revenues of about $20 million, Blink provides on net data communication services to businesses the majority of which are within our Rogers Cable footprint so it is a nice tuck-in acquisition for our business services division.

In terms of our outlook for 2010, as we said in our release this morning we are targeting continued growth across the board in terms of revenue, EBITDA and free cash flow while at the same time our overall capital intensity continues to moderate. A little bit of slowing in top line and EBITDA growth in both wireless and cable operations but still some strong, mid single digit growth rates which are very respectable in our industry in this ongoing economic slowdown.

With regard to the timing and amounts of cash income taxes during 2010 we are effecting certain legal entity restructurings within the Rogers Group for corporate simplification purposes. While this won’t have any impact on how we report externally on a consolidated basis from an accounting perspective, several of the entities involved have different tax year end’s and the net effect of this is we expect to be able to essentially shift out by one year into 2012 a large portion of what we previously assumed our 2011 cash income tax payments would have been.

So while we had previously assumed relatively full cash taxation beginning in 2011 we are comfortable at this point saying this won’t occur until out into 2012. Although as you can see in our guidance today we do expect some modest cash payments to occur in the interim during 2010 and 2011.

I will finish by saying we continue to be in a very strong financial position. We have investment grade ratings and relative low leverage at about 2 times debt to EBITDA. We have $2.4 billion of liquidity available under our fully committed multi-year bank facility and over $380 million of cash on the balance sheet. We have no material debt maturing until mid-2011. This strong financial position combined with our strategic position and cash flow generation enables the continued growth and returns of capital to shareholders including the 10% dividend increase and the renewed share buyback program we are announcing this morning.

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

Bruce Mann

Thank you Bill. Operator we will be ready to take questions from the participants in just a couple of seconds. Quickly, before we begin we are going to request as we do on each of these calls that those participants that ask questions be as courteous as possible 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. Then to the extent we have time we will circle back and take additional questions or we will get them answered for you separately after the call.

With that operator would you quickly explain how you would like to organize the Q&A polling and then we will dive in?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mahir [Yagi – Dejarnett Securities].

Mahir [Yagi – Dejarnett Securities]

I just wanted to ask you a quick question on the wireless side. I noticed you signed up about 400,000 smart phones in the quarter. How much of that increased your cost of equipment sales and when you are looking forward into 2010 how do you see the market reacting to the new wireless players on the market? Are you seeing them grabbing more than expected market share in the Smart Phone market or more to the low-end priced subs?

Robert Bruce

In terms of speculating about what the new entrants are going to do, I think at this point it is early days. I think the wind guides have launched now and are focused mainly on flat rate, slightly higher value customers although they do have Smart Phone offerings. Others have commented that they too will have Smart Phone offerings. It is unclear to be whether public will but again this is all speculation. We really will have to wait and see. Our investment in Smart Phones as an investment as Nadir touched on in the call that we are very happy with. The Smart Phone investment is driving almost half of the growth we are seeing in wireless data.

Although as you know the investment and subsidy up front continues to be high and has been a source of discussion in the past, we are seeing those ARPUs flowing through almost double what we see on normal phones. So think $100 for a Smart Phone customer versus roughly $50 for a non-Smart phone customer and as well we are seeing significantly lower churn so the economics of the Smart Phone really work for us and the investment we are making and subsidy seems to be paying off and I think the proof of that is in the great data growth we are seeing.

Nadir Mohamed

I will add to what was said. I think in terms of understanding the P&L impact it is important to note that with 400,000 this quarter. Last quarter I believe that same number was about 370,000 so we really were focused on the high end of the market in Q4. That is in our strategy. I thought it was very important to stick with the team given the competitive environment that we stay focused on the customers that we value the most.

Mahir [Yagi – Dejarnett Securities]

A follow-up on that, more on the pricing side are you seeing any pricing impact from the new competition on new customers and the willingness of the customers to stick with Rogers instead of going to another player?

Robert Bruce

It is very early days in the life of the new entrants. We are not seeing any kind of material changes in the landscape.

Operator

The next question comes from the line of Glen Campbell – Banc of America/Merrill Lynch.

Glen Campbell – Banc of America/Merrill Lynch

I have a couple of questions on capital expenditures. First, in your guidance can you give us a sense of how much CapEx is in there at the corporate line? Also what the EBITDA loss you are expecting at corporate. Then just broadly on CapEx you did a lot in 2009 with the acceleration of the anticipated cost build out. You are guiding for flat to up spending for 2010. Could you talk about what you are hoping to do in 2010 and whether there is some chance you could bring in CapEx below 2009 levels?

Nadir Mohamed

I will let Bill answer some of the specific questions on numbers. I did think you were going to start with congrats on actually getting capital intensity down as a preface to your comments. Anyway, we will look forward to it on another call. In terms of the plans for 2010, on the wireless side obviously we are looking to continue to build out capacity for both voice and data and increasingly data. We have HSPA ruled out as you know with 21 and 7.2 will extend to the full footprint and we will continue to build out the HSPA on 21. As we go we are not putting a number out there but we have that obviously included.

Beyond that we are not looking at if the question is around LT that is not something we see in the near-term so that is not factored in. On the cable side same sort of capacity and RGU growth expenditures. The two strategic initiatives would be the continuation of DOCSYS 3.0 and some investment in more switching. Beyond that I think fairly straightforward year in terms of CapEx.

On the corporate side, the one initiative we continue to invest in as I think people know we have been looking at changing out our billing and front end systems that feed into billing. That is factored into 2010 and is a significant part of our investment.

Glen Campbell – Banc of America/Merrill Lynch

A quick follow-up on tax I just wanted to clarify. Is the low cash tax rate for 2011 does that simply reflect the deferral of cash tax into 2012 so that your effective cash tax rate in 2012 would be higher than the statutory rate or do you expect 2012 to have a cash tax rate no higher than the statutory rate?

William Linton

We will be fully taxable in 2012 which actually has the lower statutory rate if all of this legislation goes through than in 2011. It is just we are deferring the taxable income until that year. You can do that by the use of losses, the use of year-end, etc., etc. so we will be taking advantage of the lower rate we get in 2012.

Operator

The next question comes from the line of Bob Bek – CIBC Capital Markets.

Bob Bek – CIBC Capital Markets

My question is on media if Tony is there. Obviously a nice bounce in the quarter and the ad market seems to be turning. Can you talk a bit more about some of the details? Television is obviously key but radio looks to be just moderating but perhaps a bit light in the bounce back. Any commentary on the overall market and radio in particular would be helpful.

Tony Viner

Sure. Radio is coming back but it hasn’t come back as strongly as television. As Nadir pointed out in his comments there has been a modest rebound in demand but it has been pretty modest. The real growth in revenue over the air television is the result of frankly the exceptional growth we have had in our primetime ratings. Across the country we are up by about 57% and in Toronto which is our most important market obviously they are up about 142%.

With respect to radio we are closing the gap quickly. I would say that television has come back more quickly but it is followed by radio.

Bob Bek – CIBC Capital Markets

Your guidance is quite solid for 2010. Can you talk a bit about, I guess the first quarter how much should we see from some of the Olympics coverage? You obviously have a great deal of exposure in the market. Any thoughts on how that might bump Q1?

Tony Viner

Remember we are part of the Olympic consortium. So both our revenues and expenses which will be generated over the 17 days re included in that consortium. The results will flow from that consortium. I have been around for a long time and if you are not an Olympic broadcaster you don’t do much revenue. So any foregone revenue as a result of contributing to the consortium is more than made up for by the fact there is less in demand if you are not an Olympic broadcaster.

Robert Bruce

I think the other probable impact on our business from the Olympics is clearly one of the other key players in the Olympics who is [inaudible] and no doubt you have seen the advertising and the requisite push that is going on in their story so we expect it to be a good quarter for Bell as well, particularly on the wireless side.

Operator

The next question comes from the line of Simon Flannery – Morgan Stanley.

Simon Flannery – Morgan Stanley

I think you touched on the iPhone having a stronger quarter than a year ago in terms of adds. Perhaps you could talk through that a bit more. Is that you think there is a real association of Rogers with the iPhone so even though other people now have it people will still when they think of iPhone they will think of you? Any comment you could make on the iPad as well would be appreciated.

Robert Berner

Listen, absolutely we think our reputation for the iPhone both in terms of the savvy of selling it in stores and the comments and compliments we get in terms of how we service the device I think have helped us have another terrific quarter on iPhone. In terms of the iPad obviously it is early days and like most things around Apple we have NDA’s in place that prevent us from commenting on the iPad but just as a consumer obviously a really exciting device. We look forward to hearing more about that in the future.

Robert Bruce

The only thing I would add, and it is very early so I wouldn’t want to read too much into it but we are certainly very encouraged and pleased that our post pay churn was down again at 1.08. Even with all the stuff that is going on with more intense competition and the economy.

Operator

The next question comes from the line of Vince Valentini – TD Newcrest.

Vince Valentini – TD Newcrest

There seems to be a lot of fears out there about not what you did in Q4 but what may be coming down the pipe in terms of wireless competition and market share. Given that I am wondering if you can break yours subs into some buckets for us to try and give people some comfort. If there is anything you can give us in terms of your subs that are in bundled contracts with video or other products, percentage of subs on 3-year contracts and I think most importantly for people these days given the Bell Telus HSPA and their power in the enterprise market some context on what your market share might look like amongst large business customers or government customers and if you see any risk in that over the next year or so from not the new entrants which I think are irrelevant but Bell and Telus?

Robert Bruce

The challenge with giving you the bundled customers is they are not really that meaningful because obviously we only bundle in the cable base. So if I gave you the combinations of 1, 2 and 3 they are actually not that helpful. In terms of percentage of our customers in contract, most of our post pay customers are on 3-year contracts. In quarter about 90% of the subscribers come in on contract and about 85% of our base are on contract, again most of those being 3-year contracts so some significant business there. So you talked about three things…I talked about contracts. I responded on the bundles. What was the third one? Oh, on business customers our share of business customers we have always acknowledged that Bell and Telus have been stronger in this space. We have been gaining share.

Our focus is on the small and medium business. We are working hard to leverage across both cable and wireless to continue to grow that share. We have seen some success in both wireless and cable and we hope to build on that going forward. Again, we would be a smaller player on the government and large account space compared to Bell and Telus.

Nadir Mohamed

I think you are talking about both Bell and Telus in terms of them having HSPA but also new players. I think sometimes it is important I should state what we take for granted but what others tend not to remember and that is, and this is particularly important vis a vie new players, it takes a long time and a huge investment to get networks to the quality we have so we are very confident in terms of our quality of the networks both on the wireless side specific to your question and cable.

We like our device line up. I think it is unparalleled. Our distribution has been built over 20 some odd years. It is not something one could replicate right away. Not for many years. A brand that resonates with customers early on. We talked about iPhones being associated with Rogers. To be we are known as the company that always has the latest to bring to the market. To your point we have multiple products to bundle and package and bring to the market. So I think those are capabilities in a sense that obviously we will look to in the market every single day. Yes there will be new competition but we are confident in terms of what we bring to the table.

Robert Bruce

The last point maybe to add on business customers is that the amount of effort to scale up and serve business customers particularly the medium to large business customers we think is an area that probably will be less affected by the actions of new entrants.

Operator

The next question comes from the line of Rick Prentiss – Raymond James.

Rick Prentiss – Raymond James

Where I would like to probe my question is on the 2010 wireless revenue guidance. As you think about the increase in data subs, data ARPU, Rob I think you mentioned about $100 on a Smart Phone versus $50, as you look at your guidance for 2010 what are your thoughts as far as the Smart Phone sales, share of gross adds and kind of how the ARPU plays out in 2010?

Robert Berner

I think over time as we dig deeper into the Smart Phone base I think it should be a logical conclusion to think that ARPU is probably going to go down gradually as it has as we have penetrated other layers with other content devices. So first and foremost. Our mix right now of our total devices has kind of hovered in the 43-49 range. I think that has the potential to kind of creep up at least 10 basis points in terms of the mix. It could be more than that depending on the availability and the pricing of the [audio break] devices like the Android devices and along that are less expensive. I think we will see a penetration of Smart Phone that goes even deeper into the base of customers out there who are looking for cell phones which I think bodes well for the business and I think will help us to grow our revenue. As always, as Nadir has highlighted a couple of times we are determined to keep on the edge of those innovative devices and deliver them for our customers and build our revenue along with it.

Rick Prentiss – Raymond James

On share of gross adds?

Robert Berner

In terms of share of gross adds, growing that share of gross adds, the share of Smart Phones as a percentage of gross adds.

Rick Prentiss – Raymond James

As far as your guidance on high versus low end, what would it take to hit the high end and what would it take to hit the low end? Kind of as you look at your initial guidance how do you feel about how you have laid out from a conservative, achievable kind of sense?

Robert Berner

We are committed to hitting our guidance every year. So the guidance that we have put out there we are comfortable we can hit with our assumptions with respect to Smart Phones.

Operator

The next question comes from the line of Jeff Fan – Scotia Capital.

Jeff Fan – Scotia Capital

I want to ask a question regarding the cyclical factors impacting the wireless ARPU. I think Nadir you mentioned earlier in your comments there was some drag in roaming ARPU down about 20%. A couple of related questions. One, perhaps you can walk us through how that has trended over the last several quarters and when we saw the first dip over the past year as the recession started. Also, whether there is any factors whether cyclical factors are being included in how you look at 2010 guidance. Also just looking at the roaming ARPU impact just to distinguish between whether roaming ARPU is impacted by the number of roamers or whether people are changing their behavior and spending less as they roam?

Robert Bruce

The key driver of course on the positive is the numbers that Nadir has already alluded to. Strong growth probably not cyclical. Definitely not cyclical on data but voice ARPU is where we have seen the effects of the cyclical impacts of the recessionary pressures. Our voice ARPU is off about $5.83 to be exact. Roaming has been a pretty significant contributor, a couple of dollars of that. About say $1.25 of that is from our customers just doing a lot less roaming and about $0.75 of that is from customers around the world also feeling the impact of the recessionary pressure, not roaming into Rogers.

The other impacts we have seen are again impacts that we think are recessionary driven that affect MSF, air and now with some of the changes we have made to [SAP] and kind of rolled [SAP] into that as well. That is about again $3.50 worth of impact in terms of that voice ARPU. Lastly, a much more minor impact which is LV. You asked how we were thinking about it as we go forward in 2010. I think we are cautiously optimistic that we will gradually emerge from some of the recessionary pressure we are seeing. I think it is fair to say as we emerge almost simultaneously we will see a continuous acceleration in new competition which will likely offset some of the positives of the emergence from the recession. That is sort of how I would tie it together.

Operator

The next question comes from the line of Randal Rudniski – Credit Suisse.

Randal Rudniski – Credit Suisse

A question on wireless retention activity. Retention expense is obviously down in the quarter on a year-over-year basis. The question pertains to the outlook for that element. I was hoping you could provide us with a bit of an outlook as to how you will approach potential activity in 2010 and what that might mean for retention expense?

Robert Bruce

As you know, churn has been one of the hallmarks of our success. It is an area of focus that as Nadir pointed out we were at 1.08 this year, down another four basis points in an industry leading position. We feel strongly that continuing to do our best to mitigate churn and do the best job at retention is the best investment we can make so we will continue to be aggressive in that space. We are happy with where we are. We managed to spend slightly less on retention in Q4. I think we were off about $23 million on a year-over-year basis or 13%. But we have hovered in the range of 9-12% of revenue for retention and we expect going forward we will continue to be roughly in that range. Of course given the leverage that retention brings us we will do what we think is appropriate to drive the business in an appropriate fashion.

Operator

The next question comes from the line of Dvai Ghose – Genuity Capital Markets.

Dvai Ghose – Genuity Capital Markets

A question on the Rogers business solution if I may, but if we look at both the organic as well as the acquisition environment in terms of organic again you saw significant revenue and [dollar] declines this quarter because you were weaning off from some of the unprofitable businesses you acquired in 2005. Is that done because it has been 3.5 years? As far as acquisitions are concerned could you give us some sort of idea of the rationale behind Blink and the valuation because I have heard terms as high as $100 million plus for $10 million of EBITDA. Also, finally I think Nadir answered a question regarding the All Stream quite clearly on the Q3 call but there has been a lot of follow-up questions regarding potential interest in All Stream. I am wondering if you wouldn’t mind revisiting that topic?

Nadir Mohamed

Just on the RDS ongoing business there is no question we had as you recall about half a billion of legacy business or business that we picked up from Call Net. A reasonable amount of that I would consider legacy as opposed to the business we want to be in which is much more on the IP side. So that base we are working through frankly. One of the things that we are trying to do even within that base is keep the good stuff with relatively higher margin so don’t think of it as something we want to exit from in terms of seeing that disappear.

At the same time as we are trying to mitigate the reductions on the legacy side we are obviously investing to grow the new IP. The inflection point takes a bit as you know because you start with half a billion and a very small number on the new. So that is work in progress. More to come and you will see more of the upside in 2010.

On the acquisition side with Blink, a small tuck-in acquisition. It fits our strategy of being on that IP based small media so those are the three criteria. The three criteria I reminded everybody when questions came up on All Stream which would obviously not be consistent with our criteria. Hopefully that puts Blink in context. It is not something I want to get into in terms of the specifics of valuation but very much in line I would say with some of the other deals on the hydro type transactions you would [compare] it with.

Operator

The next question comes from the line of Tim Casey – BMO Capital Markets.

Tim Casey – BMO Capital Markets

Could you talk a little bit about what your expectations are for the digital transition in 2011? What I am thinking is do you have any more thoughts on how will it impact the cable group, if you still expect the analog section to be shut off in August 2011? Any insight you have regarding spectrum auctions? Have you heard any messaging from Industry Canada on timing of the auctions?

Nadir Mohamed

We have Ken Englehart who heads up our regulatory group. Ken if you want to address the question?

Ken Englehart

We expect a proceeding from Industry Canada fairly soon on where people will be allowed to comment on the auction. So look forward to that I think in the next few weeks. In terms of the television cut over date, no we don’t expect any change there although some television broadcasters say they will not be ready and we expect the CRTC to give them a bit of latitude to complete the transition.

Operator

The next question comes from the line of Philip [White] – No Company Listed.

Philip [White] – No Company Listed

Going back to wireless, in Q3 last year I think you introduced two big bucket minute plans, [City plan] I think that came in at $40 and $60 for 2000 and 4000 minutes and I think recently there was a $45 prepaid version offering 1000 minutes. I don’t think you have pushed these very hard but nonetheless they are in the market to address new entrant pricing plans out there. How significant are these plans contributing to the erosion of voice ARPU through repricing? Do you see your voice ARPU decline maintained at a steady pace in 2010 or further acceleration going forward?

Robert Bruce

You are right, we do have $40 for 2,000 and $60 for 4,000 minutes. Again it is important to remember that it is in a very restricted footprint and that unlike new entrants it is all you need, not all you can eat. It is a capped plan. These plans are very modest in terms of the impact on our gross loads in the quarter. In fact they would be roughly 2-3% of our gross loads for the quarter so again very modest. If you took the entire impact of the things that we have done on FIDO and the associated impact on voice ARPU it would be in a range of around $0.50 in terms of voice ARPU over time. Again, not significant.

Operator

The next question comes from the line of Jonathan Allen – RBC Capital Markets.

Jonathan Allen – RBC Capital Markets

Looking at the 2010 wireless guidance on EBITDA you are looking at 2-6% EBITDA growth. A fairly wide range. I am wondering there seems to be a lot of factors that are going on in 2010. You have the economy which Rob you already discussed, a potential pricing war or whatever happens with Bell and Telus on the HSPA network, you have new entrants launching and on cost cutting. I am curious with the wide range of EBTIDA guidance what would it take or what are you assuming at the low end and high end there? In particular what are you assuming as far as timing and intensity of some of the new wireless entrants and what has been your experience so far with the Bell Telus HSPA competition?

Robert Bruce

First and foremost we are not expecting a pricing war between Bell Telus and Rogers. Listen, our focus is and I will speak for Rogers, highest quality network, best distribution, really strong brand. Our focus is not going to be driving price down on a super high quality brand like Rogers. The timing of new entrants, obviously you know that [Wind] is in market and has talked about expanding those markets over the course of the year. It looks like the other new entrants are more likely to arrive in the latter part of Q2 or early parts of Q3. That is kind of what is built into our focus.

Our focus is also that we are going to continue to do a lot of the work that we have done around cost control. We will continue to feel the benefit of the restructuring that we put in place that will have an impact in the range of $100 million plus. We have talked about the work we have done to outsource IP. We renegotiated a lot of contracts, continued to grind out our operating costs, reducing the reasons that our customers are calling us and thereby reducing calls to our call centers and doing a lot of process re-engineering work. We think all of those things will work hard for us to keep us strong on the EBITDA front.

Operator

Mr. Mann this concludes our question and answer session for today. Please continue.

Bruce Mann

Thanks very much. By the way, I am not sure we answered 100% of your question and we would be happy to take it off line afterwards. Maybe I will just add quickly that we are looking at a range of maybe $100-120 million on adjusted operating profit at wireless on a base of $6.5 billion. If you were sitting on this side of the table I don’t think you would feel like that was a real wide range to work within. Nonetheless, I want to thank everybody for their participation this morning. We appreciate everyone’s interest and support. If you have questions that weren’t answered on the call please give us a call. Both of our contact information is on today’s release.

If there was anyone stuck in the queue that didn’t get a chance to ask a question we apologize for that but please contact us to get your questions answered. This concludes today’s call. Thank you very much.

Operator

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

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Source: Rogers Communications, Inc. Q4 2009 Earnings Call Transcript

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