Rogers CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Rogers Communications (RCI)

Rogers Communications Inc. (NYSE:RCI)

Q3 2010 Earnings Call

October 26, 2010 8:00 am ET

Executives

Bruce Mann - Rogers Management Team

Nadir Mohamed - President and CEO

Bill Linton - CFO

Rob Bruce - President, Communications Division

Keith Pelley - President, Rogers Media

Bob Berner - CTO

Analysts

Greg MacDonald - National Bank Financial

Simon Flannery - Morgan Stanley

Tim Casey - BMO Capital Markets

Phillip Huang - UBS Securities

Jonathan Allen - RBC Capital Markets

Bob Bek - CIBC

Vince Valentini - TD Newcrest

Rob Goff - Northland Capital Partners

Jeff Fan - Scotia Capital

Rick Prentiss - Raymond James

Peter MacDonald - GMP Securities

Operator

Welcome to the Rogers Communications, Inc. third quarter 2010 investor community conference call. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, Tuesday, October 26, 2010 at 8.00 am Eastern Time.

I would now like to turn the conference over to Mr. Bruce Mann in the Rogers management team.

Bruce Mann

Good morning, everyone. We appreciate you joining us for Rogers' third quarter 2010 investment community teleconference and webcast.

Joining me on the line this morning from Toronto are Nadir Mohamed, Rogers' President and Chief Executive Officer; Bill Linton, our Chief Financial Officer; Rob Bruce, President of our Communications Division; Keith Pelley, who is the new President of Rogers Media; Bob Berner, our Chief Technology Officer as well as a couple of other members of their respective teams.

We released our third quarter 2010 results earlier this morning. The purpose of the call is to crisply provide you with a bit of additional background upfront and then answer as many of your questions as time permits.

As today's remarks and discussion will no doubt touch on estimates and other forward-looking information from which our actual results could be very different, you need to please review the cautionary language in our earnings filing of this morning and also in our full year 2009 MD&A. They both include various factors and assumptions and risks and how our actual results could be different than what we might talk about today, and those cautions apply equally to our dialogue on this morning's call.

If you don't already have copies, both are available on the rogers.com website where they are both filed with SEDAR and the SEC.

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

Nadir Mohamed

As you can see from this morning's earnings release, we delivered another quarter of continued growth in new subscribers, revenue and free cash flow across the business despite an increase in the competitive environment.

Our Q3 financial results were consistent with our guidance for the year, and reflect significantly heavier volumes of both smart phone sales as well as upgrades. Between our sales to new subscribers and upgrades by existing subscribers, we have never activated more smartphones in a single quarter. And on the growth additions front, it's the second highest quarter ever for the smart phone sales for new customers.

This was supported by the launch of the iPhone 4, of which we were somewhat supply-constrained during the quarter, but also the new Blackberry Torch, host of new Android and Windows Mobile devices. In fact, this was clearly one of our heaviest quarters of Blackberry activations ever.

You can clearly see both of these dynamics reflected in the results issued today. You can see the healthier mix to high value customer loads in our strong, postpaid wireless growth additions for the quarter, and you can see the impact of the heavy volume of sales and upgrades in our wireless equipment subsidies and margins.

As expected, the results reflect an incrementally more noticeable impact of increased competition, being really the first quarter where we had almost all of the new competitors up and running in multiple markets. You see the impact of this on our postpaid churn level, which ticked up incrementally, and the continued decline in wireless voice ARPU reflects this competitive environment as well as what we see as an increasing maturity of the voice market.

Importantly, in this environment, we strategically focused on and invested in our customers, with a sharp focus on retention to help ensure that we minimize churn in the most valuable segments of our base. Rogers continues to lead in terms of wireless data metrics, with our innovative offerings and high quality networks.

The continued strong growth in our wireless data revenues, which is again the most significant driver of top-line growth was not enough to completely offset the voice ARPU pressures, which in the net had the impact of moderating our top-line growth. We have also increasingly been applying more of the same methodical focus on retention and value-oriented segmentation on the cable side of the business.

You can see the improvements on the cable subscriber side, which are driven as much by lower churn as by new sales. At the same time, we have been driving meaningful cost efficiencies across the company, both in terms of OpEx and CapEx, which has helped us to maintain strong margins and continue to grow free cash flow.

Excluding the year-over-year change in the cost of equipment sales, we essentially held our OpEx flat year-over-year Q3 versus Q3. And coupled with our lower CapEx that we delivered this quarter, we had strong growth in free cash flow. We're up 16% on a per share basis, reflecting our ongoing stock buyback program. Free cash flow per share was in fact up 24%.

Importantly, to reinforce the future growth of our business, we continue to make significant investments not just in our leading networks and customer retention initiatives, but on opportunistic acquisitions consistent with our strategic priorities.

We made several tuck-in acquisitions this quarter on the broadband, wireless and digital media side. These include Cityfone Wireless, TV, Media and Kincardine Cable. The most significant was our acquisition of Atria networks which fits squarely within our Rogers Business Solutions strategic priorities. On that, IP based services in the smaller medium segment of the business market, principally in and around our cable footprint.

Turning now to Rogers Media, I'm absolutely thrilled to have Keith Pelley join us as the new President of Rogers Media. Keith is one of the top forces in Canadian media. And while he joins us from CTV, we have worked together closely over the past couple of years as Keith, as most people know, amongst other things led the 2010 Vancouver Olympic Broadcast Consortium of CTV and Rogers Media.

Keith will lead all over of Rogers Media properties, a portfolio that spans across the country with broadband and specialty television, radio, home shopping, digital media, print and sports entertainment, generating over $1.5 billion of annual revenue. I'd like at this time to also thank Tony Viner for his significant contributions to Rogers over the past 28 years and wish him the best in his retirement.

The Rogers Media portfolio of category leading properties was further reinforced during the quarter with our launch of Sportsnet ONE, national televised sports network during the quarter. This will leverage the brand value of our very successful Sportsnet franchise as well as many other facilities and infrastructure that are already in place. And we secured a key anchor talent content for the new Sportsnet ONE TV network, announcing a ten-year program and partnership with Alberta's two National League Hockey teams, the Edmonton Oilers and Calgary Flames.

So we're excited about the potential growth that comes with the expansion of the Sportsnet franchise. Gaining this powerful Alberta-based content further increases our exposure in the West and literally comes just one quarter after we strongly reinforced our regional presence in the BC market. As you know, we secured the naming rights of the NHL Canucks Hockey Arena and now called Rogers Arena.

As we focus on investing on our strategic platforms, we also took the opportunity to divest the remaining portions of our circuit switch telephony assets. As many of will know, we worked consistently since late 2005 to transition as many of these circuit switch telephony subscribers as possible on to our cable telephony platform. As we're successful in doing so, the related collocation and switching facilities became increasingly underutilized and a fixed cost that would have soon caused what is already a lower margin portion of our business to become unprofitable.

We have provided some specifics in the release in terms of the timing of the divestiture and the level of revenues involved.

To conclude, despite an increasingly competitive market, we continue to deliver solid subscriber numbers, very respectable margins and double digit growth in free cash flow enabling us to return more than $1.5 billion of cash to shareholders in the third quarter of this year. I'm confident it will very well position going forward, not only in terms of asset mix and financial strength, but also with robust product portfolio, great brands, great distribution, terrific networks and a seasoned management team that's absolutely focused on execution.

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

Bill Linton

Thank you, Nadir. I will give you a little bit of additional color on the financial results and metrics for the quarter. On the topline overall, our consolidated revenue growth was 3% for the quarter; that reflects a topline growth of 4% at Wireless network, 3% of Cable operations and 3% at Media. At Wireless, we now have 37% of our close paid base on higher end smartphones up from 28% level this time last year. These are higher ARPU, lower churn, higher lifetime value subs.

Wireless data revenues now make up 28% of our Wireless network revenues and represent one of our most significant growth drivers. As you can see, in terms of our postpaid Wireless results overall, the 4% increase in network revenue is a bit of a sequential deceleration from Q2 of '10 and reflects continued softness in out-of-bucket usage and roaming.

But as Nadir pointed out, and as you can see from our gross additions, sales remained very strong. On the prepaid side, the year-over-year increase in subscriber additions reflects the combination of continued iPad additions and additions under our new Chatr brands. We categorize both of these in prepaid, as both have prepayment features and don't require term contracts.

I'd point out that to date, both of these products have ARPU and churn characteristics that are accretive to our historical prepaid metrics. However, because of the early stage of both of these offerings and for obvious competitive reasons, we're not going to get anymore specific in terms of providing metrics for you at this point.

In terms of Wireless network margins, I'd point out a couple of factors to consider. First is that the third quarter of '09 was a difficult cup as it was one of our highest margin quarters ever, and as we said at the time, was likely not ever repeatable. Second, as Nadir mentioned, we had a significant number of smart phone sales during the quarter, combined with an extremely large number of upgrades for existing smart phone subscribers both happening at the same time.

Together, these had the effect of increasing equipment subsidies almost $70 million year-over-year. And third, because of very solid cost controls, we were still able to put up very respectable 48% wireless service margins.

Turning to Cable operations, we see good, continued subscriber growth metrics. The revenue growth rate reflects a couple of things that are worth mentioning. First is that the declining circuit-switched telephone business, which as Nadir mentioned we're in the process of divesting, was dilutive to the rest of Cable operations business, not just in terms of margins, but in terms of top-line growth as well.

Secondly, we had about 50% lower volume of subsidized digital box sales in Q3 of this year versus last year, as our focus continues to be on the box rental model. So this had the impact of bringing down the revenue growth rate a bit as well. Thirdly, only about two-thirds of the video pricing changes we made in July of the quarter are in the results versus a full quarter that were in Q3 '09 results. So this was a bit of a drag on the revenue growth rate as well.

If you adjust for these items together, I'd say a normalized level of revenue growth rate for Cable ops would be 5% versus 3% that we reported. Even with the timing of price changes and the increase in subscriber loading, Cable operations still expanded its EBITDA margin in the quarter to 46%.

Good cost controls drove a portion of the increase, but there were certain one-time items as well. If you isolate the operations from the one-time items, I'd say a normalized level for the quarter would have been in the 44% range versus 46%, which still represents a continuation of the margin improvement we've been seeing relatively consistently the past number of quarters.

On the Media side, we're starting to lap the quarters where we started to see markets improving last year. So there's a bit of that going on. Our broadcast TV continues to do phenomenally well. We saw some revenue pressure for different reasons in the publishing, shopping channel and sports entertainment divisions. These are to a degree more quarter-specific items than trends, and we're expecting a strong Q4 in terms of revenue growth rate.

An important piece of color on the expense side at Media is the launch during the quarter of the new Sportsnet ONE network. We acquired quite a bit of incremental new programming to launch the network, but are just at the start of the revenue ramp. So we have the programming expenses, but the subscription revenues haven't started yet.

Without these start-up costs, Media's operating profit growth would have been approximately 20%. We'll see a continuation of this in Q4 with an additional estimated $20 million of EBITDA dilution. And then we start ramping up revenues early in the next year.

Stepping back to a consolidated view, still respectable top-line growth combined with good progress around OpEx and CapEx containment helped drive solid double-digit growth and free cash flow.

During the third quarter we bought back $9 million Rogers shares for $335 million under our share buyback program, and also paid out $187 million in dividends. With this, we have already returned about $1.5 billion of cash to shareholders so far in 2010. Also during the quarter, we closed $1.7 billion in two investment grade debt offerings consisting of $800 million of 6.1% 30-year notes and $900 million of 4.7% 10-year notes.

Among other things, proceeds were used to redeem Canadian dollar equivalents of almost $1.5 billion of higher cost debt and associated derivatives that were completely outstanding, with the result being that we both reduced the average cost of our outstanding borrowings and extended our maturity schedules.

Let me hit a couple of items of note below the operating line on the income statement that impacted net income and EPS growth. The 6% decline in adjusted net income was largely the result of a $58 million year-over-year swing and foreign exchange gains on unhedged debt. This was a result of a very significant strengthening of the Canadian dollar relative to the U.S. dollar in Q3 of last year. This gave rise to a very large foreign exchange gain we recorded in that period.

This didn't reoccur this year because the Canadian dollar didn't appreciate as much as it did last year. Normalizing for this swing, adjusted net income would have grown by above $30 million. The reduction in GAAP net income was the result of the swing in currency gains I just mentioned, combined with almost $100 million of cost related to the repayment and the issuance of long-term debt associated with the refinancings we did this quarter and also a $34 million increase in stock based compensation. These items were partially offset by a $15 million help in depreciation and amortization, and another $15 million in the change in the value of derivative instruments.

In terms of the outlook, as we say in our release this morning, we are maintaining our full year 2010 guidance ranges at this time. However, given the results to-date at this point in the year, directionally, our bias is to the higher ends of both the adjusted operating profit and free cash flow guidance ranges.

Looking out to next year, I'd just remind everyone of the transition to IFRS accounting that will become effective in the first quarter of 2011. Based on the IFRS standards as they exist today, combined with all the work and estimates that we have done to date, we don't believe that this is going to have a material impact on what we report our revenue, operating income or earnings to be versus under Canadian GAAP as we report today. There will be some changes to how the actual income statement will be presented and to the financial statement notes, and there will be a one-time transition. But for the most part we currently expect to be able to present and discuss our results in the MD&A largely as we do today.

On our Q3 MD&A today, we've provided some condensed Q3 and year-to-date income statement and balance sheet prepared under the current IFRS standards and compared them to how we report today under Canadian GAAP. Then we've noted where and why items differ between the two. And there's a good discussion in terms of what the differences are and how the transition is effected. We'll provide additional information with our year-end results. And again at this point, given what we know and are estimating, I don't expect this transition will be an issue one way or the other for the investment community.

I'll finish by saying, overall, on a consolidated basis, we've put up healthy but somewhat moderated top-line and operating profit growth, reflecting a combination of successes on the sale side, investments on the retention side and a bit of what is essentially the new competitive reality.

We continue to be in a very strong position financially, with an exceptionally solid balance sheet. We have investment grade ratings, relatively low balance sheet leverage at two times debt to EBITDA, and we have $2.2 billion of liquidity available under our fully committed multi-year bank facility and $344 million in cash on the balance sheet. So in terms of the balance sheet, from both leverage, liquidity and maturity perspectives, we continue to be in a very strong financial position.

With that, I'll pass it back to Bruce and the Operator, so we can take any of your questions.

Bruce Mann

Thank you, Bill. And Operator, we'll be ready to take questions from the participants in a couple of seconds. Quickly, before we begin, as the management team, we'd like to request as we do on each of these calls that those participants that are asking questions be courteous to the other participants and limit 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 will circle back and take additional questions, or we'll get them answered for you separately this afternoon after the call.

With that, would you please go ahead and explain how you'd like the participants to queue up for questions and do the polling?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Greg MacDonald of National Bank Financial.

Greg MacDonald - National Bank Financial

Question I have is on postpaid ARPU. Sequential decline there is more than what I would be willing to describe as volume-related. My best guess is with churn up to 1.2% that there is some retention re-pricing going on. Could you comment on the magnitude of expectations going forward on that re-price? Is this as bad as it gets? Are there any one-time items in there that might be describing what's going on?

And more importantly, I think right or wrong, the biggest concern from the operating side of things for the market is on the prospect for margin compression. So one of the things that I note that Verizon really benefits from is the OpEx control, and you showed that this quarter.

So what I am looking for is not necessarily some margin guidance but some indication of your confidence and ability to keep OpEx and G&A as a cantilever against revenue weakness on the wireless side, because you did show a pretty decent number there. And Bill, you seem to suggest that material margin compression is not really in your budget in your comments, but you didn't say that exclusively. But you seem to suggest that. Am I right in that assumption?

Rob Bruce

Listen, I touched on our focus on cost controls last quarter and I tried to highlight some of the things, but let me reiterate some of those again for you. As you will recall, we did a significant restructuring in 2010 where we restructured the company, the operating divisions, which we said would result in savings.

I think we're starting to see those savings come through, and those will continue to come through over time. We've taken initiatives like outsourcing some of our IP support. We're doing a lot of processed re-engineering, re-negotiating of contracts, working hard to drive our cogs down, very focused on taking calls for the call center out through a variety of initiatives, including ramping up our efforts on self-serve through both the web and our touch-tone IVR, lots of work being done on credit improvement strategies, e-billing and on other long lists. So suffice to say, very, very focused on pulling the cost control lever to offset anything else that's going on in other parts of the business.

The story from a revenue perspective really was, voice continues to be under pressure, lots of activity and focus. Certainly some, as you referenced Greg, some plan migrations. As people hear about lower prices in the market, without question, they call the call centers and continue to ask for opportunities to go to different places.

We feel are in a very good position, offering three different brands with different value propositions, which we feel has brought us some success in terms of mitigating some of that downward pressure. Certainly as well, there is significant promotional activity out there to drive gross loads and we've continued to see that reflected in declines in Airtime and MSF revenue lines on voice.

Also, not surprisingly and a continuation of a trend that we've seen before is, roaming continues to be under pressure, down significantly year-over-year, not quite as much as Airtime and MSF which is off about 50 million roamings, off about 20 million, it's both inbound and outbound, both volume and rate. We're driving the rate a little bit, Greg, to be fair, because we are trying to increase the penetration in our base of Roaming and continue to stimulate that business.

On the flip side, as Bill touched on the Data Revenue story, it's a terrific story; we're up 28% year-over-year, 37% of our customers are on smart phones. And if you compare us to the North American blended rates on ARPU, I think Verizon's now only a nickel ahead of us; we're at $18.15, Verizon is at $18.20. So you know, amongst North-America's best in terms of producing data revenue.

It has fallen sequentially year-over-year as was referenced to 28%. Still fantastic growth, driven by growth from smart phone success, representing about three-quarters of the growth and SMS and Data Roaming representing the rest. But clearly the number that was in the mid-thirties last quarter was bound to decline. I think we referenced the lapping of the SMS price increase, and frankly the size of data now at almost $0.5 billion in the quarter, the numbers are just too big to keep going at plus 30%. So, anyway that's a bit of a situation.

Bill Linton

Very good said. Just maybe tie it back in terms of margin, the one thing that I would highlight along with what Rob said is, obviously we've made some very important decisions in terms of investing in our customers, and you can see it in terms of the subsidies. When you look quarter-over-quarter between Q3 this year and last year, well over 150,000 more devices that we subsidized in terms of hardware. And think of it as somewhere in the $60 million to $70 million of incremental costs that have been absorbed in the quarter.

And when you factor that in, it really highlights the cost control we have on the other side because the margin, even with the impact of that additional $60 to $70 million, it's about 48.3%. So one of our issues is, last year as you know Q3 2009 was at just over 50%, which as I said before, I don't think those kinds of margins are sustainable over the long term. But we feel pretty good about our opportunity in terms of controlling cost and I think you see them in quarter.

Operator

Thank you next question comes from Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley

I wanted to talk about the capital spending for a moment. You touched on some pretty good CapEx numbers, helped the free cash flow generation. Where are we in terms of sort of base capital spending for this year and for next year? Are we at a sort of a new stable level? And can you tie in the announcement about LTE testing? We have Verizon launching in a few weeks, AT&T rolling out next year.

Are we likely to see any major deployments or trials in 2011? Or is it really 2012 and beyond and any impact on how much that might cost from a CapEx perspective.

Nadir Mohamed

I'll start off and then Bob can fill in with some color if we need to. But I'll just start with, we haven't given guidance for 2011. So you can only be directional from that perspective. But let me set the stage before we talk about LTE. On the HSPA front, today I think most of you know, we have actually rolled 7.2. Let's say 85% of costs already covered on 7.2.

We have been rolling out 21. We've covered now the 25 top cities in 21. So that is I think north of 60%. I would describe between the two we've got virtually the country covered by next year in terms of fully rolling out HSPA. Clearly, our view is that the next platform is LTE; we're keenly observing what is happening south of the border between Verizon launching and now AT&T talking about launching including trials. We took the opportunity to announce a trial of LTE and may be I will get Bob to describe what it is we are trying to do with the LTE trial. And give you a sense of how we see the (inaudible) evolving.

Bob Berner

Simon, I guess it's safe to say that there is a lot of companies filling around with LTE trial and lab trial and that sort of thing. We and the others have been doing that, but what we announced was a much more comprehensive real life technical trial in the greater Ottawa area. So that we can understand how the technology operates in the various frequency bands and how it interoperates with our existing HSPA plus and GSM networks. Because as you can imagine, there are going to be a combination of networks that are in the market in the whole country. And we need to be able to get some deployment experience, understand what the benefits of the technology need are and what are the true uplifts in data speed.

So we're going to continue do that. We are going to try it in our AWS frequencies. We're working with Industry Canada on development licenses for 700 MHz. So there will be a significant number of real life sites out there where we can test interference, speed, capability. We haven't made any announcements concerning commercial launch of LTE, nor have we forecast the expected commercial deployment costs.

Nadir Mohamed

Simon, just one last thing I think Bob made reference to 700 spectrum. Obviously, to us that's very important that we get access to that spectrum because at that frequency you get the in-building penetration that we need and the ability to have rural coverage that we'll require so. That question really ties into what's the timing for when the auction will unfold for 700? One of the reasons we announced the trials was to make sure people knew that we were going to be leading on LTE as Canadians, and frankly, to have government recognize the need for spectrum, particularly the 700 spectrum, to actually enable that deployment. So partly, the timing will be dependent on how we see the frequency and the ecosystem rollout.

Operator

And your next question comes from Tim Casey of BMO Capital Markets.

Tim Casey - BMO Capital Markets

I have a follow up and then a question. What is your working assumption on when the auctions for 700 and 2.5G are? What are you guys assuming? My question relates I guess to Keith Pelley in the outlook in the media, as you wrap your hands around it, what are your expectations and how you are going to grow the media business? And specifically, we heard more talk about programming inflation particularly coming out of these sports networks. Obviously, you guys own one, but can you talk a little bit about the implications both for the Media and the Cable cost and revenue lines?

Nadir Mohamed

Tim, we've got Ken on the line. Let him maybe take a question on just where we see 700. Hopefully, you have some insights beyond the tweets from Tony Clement.

Ken Engelhart

It looks like the auction for 700 will be in 2012. It's not clear whether it's going to be early in 2012 or late; I think probably later rather than earlier. 2.5 is still a bit of a question mark. It might be done at the same time as the 700. It might be done earlier or it might be done later.

Nadir Mohamed

So Tim, before I hand it to Keith, I just wanted to put on record that this is pretty good for the new guy because with Tony, our batting average for questions for Tony was once every two or three years. So I'm kind of liking this.

Keith Pelley

I'd like that to continue after this. And what I really noticed very quickly is how diverse our portfolio is when you look at networks like the shopping channel to the Toronto Blue Jays to radio. And Nadir mentioned the Olympics early on. And one of the successes that we had and we drove more than $100 million in terms of incremental revenue as opposed to what our business win was in midst of a recession, was based on the way that we integrated and sold for a multiplatform perspective.

And the number one priority that we have right now is finding a way to integrate this diverse portfolio. So how does the shopping channel work with CHFI and how does CHFI work with Toronto Blue Jays. And that is the focus on a go forward basis; while at the same time, supporting Cable and Wireless.

And as for as the question goes on a programming content and the need for it, well there is no question that it is a consolidated world that is very, very competitive. It's feverishly competitive right now. And our strategy and we've been successful with it. And I certainly applaud Tony Viner and his team. The strategy really was in order to solidify long term growth and to understand the cost structure on a go forward basis was to secure long term deals. And that is what is happening with the lights of the flames, the Oilers, the Ottawa Senators and recently the Toronto Raptors.

And then you have the Toronto Blue Jays in there which we own and all of a sudden, our portfolio from a sports perspective is second to none. And that is because we have the long term deal. So we're poised for growth both from a Sportsnet perspective; and we can find a way to integrate our brands like we had some of this at the Olympics, then really there is tremendous growth potential in Media division.

Operator

Your next question comes from the Phillip Huang of UBS Securities.

Phillip Huang - UBS Securities

My question is on the prepaid results, obviously very strong Fibernet ads. And I just wanted to get a little bit more color on the main drivers behind that. I'm inclined to think that Chatr was the main driver. But given Chatr generates sub swift ARPU of $35 to $45, you don't seem to be seeing the uplift on prepaid ARPU? So wondering if you might be able to provide some color to help shed some light on that.

Bob Berner

May be I'll pick up on what Bill said that we weren't going to be particularly specific in terms of breaking our prepaid into it's component parts which as Bill highlighted were recognized; iPad, Chatr and the conventional prepaid business. Some of the things that are going on that are underlying the prepaid business right now. As we're seeing more migrations that we ever have been before in the original prepaid business, people moving to postpaid, I think that's leaving us with a base of slightly lower value conventional prepaid customers.

And I believe that the numbers point to the stronger ARPUs that we're seeing out of both iPad and Chatr actually pulling that ARPU back up again. So it's down as a result of migrations; as postpaid and up again as a result of both Chatr and iPad; that's what's really going on behind the scene story.

Operator

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

Jonathan Allen - RBC Capital Markets

Rob, you mentioned that you were seeing some plan migrations earlier out of the postpaid side. I was just wondering, was that a reference to customers migrating down from the Rogers brand perhaps to Chatr? And perhaps, you're talking anecdotally of what you're seeing there if anything? And also curious on the roaming side, you've mentioned the lower prices that Rogers was implementing to try to stimulate increased usage. I was wondering if there was any sort of fallout from the lower roaming revenues available on Chatr and whether that was causing any concern with enterprise customers.

Rob Bruce

Couple of things; in terms of migrations, really what I was referring to, is in these businesses, Jonathan, I mean there is a constant flow of customers calling in with questions, desires to change plans. As more competitive noise and activity go on out there, the frequencies of calling go up significantly. So that was the reference, and to some extent, the size of the downward migrations get larger.

I wasn't really referring to migrations to Chatr, those are very, very small in number. And my view is, migrations to either Chatr or Fido from Rogers are very positive because they mean that instead of a customer potentially leaving us through staying in the portfolio, brands we have. And we continue to meet their needs. But again, at this point a very, very small number.

In terms of roaming, Chatr is having no impact at all on roaming. Really, what we're trying to do, and you may have seen it as you go through the Airport, Jonathan, particularly in U.S. and international terminals, just really highlighting great buckets of roaming minutes available to our travelers leaving the country. It's starting to have a good stimulative effect in terms of getting people who hadn't previously tried roaming, because they were concerned that it was too expensive, start experiencing roaming. And we think we can continue to build that business and build the penetration of roaming in our Basin. That's really what I was referring to.

Operator

And your next question comes from Bob Bek of CIBC.

Bob Bek - CIBC

I just want to revisit the cost of retention. Nadir, you talked about $60 million to $70 million in subsidies absorbed in the quarter. And given Q3 had constrained iPhone supply and the Torch was fairly late, would we expect to see that subsidy number increase materially into Q4, given obviously the smartphone loading is going to continue to ramp up quite highly?

Nadir Mohamed

I'll get to Q4, but just on Q3, to make sure that we articulate what happened. We did have some constraint on iPhones, but between new and obviously a bias towards having our existing customers take advantage, we had a pretty good set of numbers on iPhone 4. We also had a very, very strong Blackberry quarter between both new sales and upgrades.

So on balances, that is one of the literally strongest quarters we've had in terms of activity both for new and upgrades. But it was driven primarily by Blackberry, although iPhone, not to get carried away with the inventories here, because frankly we had pretty good supply. We just had not enough supply for new, because we tended to prefer having our existing customers upgrade first.

Rob, why don't we talk a little bit about Q4?

Rob Bruce

Yes, let me just go back and just say, we're talking about the $70 million incremental. It's important to note that the total was more than $200 million, and it was one of the busiest quarters of the year.

Looking forward, there continues to be pent-up demand for iPhone. And we didn't come close to satisfying the demand for iPhone 4 as we exited Q3, so we expect that demand to continue. However, it's important to note that the special iPhone launch program, where we gave previous iPhone customer of ours the opportunity to upgrade easily to the new iPhone 4 is actually finished. And we've created policy changes to reduce the number of data-to-data customer upgrades.

However, I should say the general appetite by our customer base to upgrade continues to be strong. All this hype about new and exciting devices, iPhone 4 and Torch and others continue to drive our customer base to upgrade at more than the rate we're typically used to. Seeing that, I expect the numbers in Q4 not to be dramatically different than they were in Q3.

And maybe just to follow-up and hit in a little bit more detail our equipment margin numbers in Q3, really driven by retention. As Nadir said, of the equipment margin increasing about $65 million to $70 million that we've referenced, about $60 million of that was retention. It was driven by almost 190,000 more units than we'd seen a year ago.

And smartphone mix, that was up significantly from 43% a year ago to 52%, and the average device subsidy moving up from 205 to 241, largely driven by increases in subsidy on Blackberry's, which you've heard Nadir say were amongst the most popular devices in the quarter. Anyway, hopefully that gives you a little bit more of a comprehensive view about where we're going and what happened in quarters from an equipment margin perspective.

Operator

Your next question comes from Vince Valentini of TD Newcrest.

Vince Valentini - TD Newcrest

I want to follow-up on that with more of a longer-term view on the equipment subsidies. Can you first clarify, the change you made on the upgrade policy, is it now 30 months as opposed to 24 months for people to be able to get an upgrade? And does that feed into your thinking of the long-term economics here or are we starting to see the cycle get a little bit too tight, especially with the $600, $700 smartphone devices out there that you have to subsidize so heavily? Are you a little less comfortable re-subsidizing those every two years?

And what kind of trends do you see out there, with Android gaining some momentum? Maybe Blackberry is still there. And is there some offset to Apple's negotiating leverage that over time you can start to get the handset subsidies down and maybe get some better deals from some of the suppliers?

Rob Bruce

The policy change we made was actually a policy change to take the data to a minimum of 24 months to an upgrade. And where we'd like to get, and we're working to put the systems in place is to allow customers to pay at any point frankly beyond the year to buy a portion of an upgrade. In other words, upgrade in advance, but pay a portion of the upgrade cost themselves, because I think there's no mistaking that customers have appetite for new devices. We have to create the availability of those new devices.

Evidence would suggest from our customers, many of them are willing to pay; we just have to have the capabilities of letting them avail themselves of those new devices and protecting the cost of that upgrade cycle. So we'll continue to work down that path, Vince, and build the IT capabilities to support some of our desires.

And let me just turn and talk about the trends. The other thing that I think has not materialized that we talked about it in the past that will have a significantly positive impact is starting to get smartphone subsidies down. In fact, since the last time I talked to you, BlackBerry has actually been going in the other direction, and iPhone has been relatively stable.

We haven't had enough proliferation of great devices from others. We've had some Android devices which have started a little bit, but we need a greater selection and availability of lower cost devices, which I believe is what Android promises. The other thing we're pushing very hard on is to recognize the segmentation, and not push every single person necessarily to a smartphone, when maybe really all they want to do is text.

So we're trying to triage in-store, push people who are really going to be using text devices like 4D sliders which have subsidies that are very much like voice devices, and thereby reign in a little bit of the cost associated with the subsidies that we're seeing today.

Nadir Mohamed

Vince, maybe just to Rob, and to just give you a next quarter kind of comment that directionally I think if you look the next year or two, and Rob alluded to it a little bit, if you look at the quarter, it was dominated by BlackBerry and iPhone, there is a certain amount of Android. But clearly, the two powerhouses were BlackBerry and iPhone. I think in the next couple of years what to me is exciting is, you'll see that expand. And then lots of manufactures are getting into seeing some very strong device form factors coming on board, as well as Windows Mobile. We finally have an opportunity where we have a mix change, people like Samsung, others are getting into the act.

And I think that really holds promise in terms of the potential for a change in the subsidy. Again, as you know when we move from RIM to Apple, really if anything, we had a bigger hit if you want on subsidies, where as I believe, with Android and Windows Mobile the approach being one that says, multiple manufactures using the same operating system. That gives us the first promise of potential for a subsidy environment.

Only one last thing that just to make sure people know, you should know in Q3 when we launched the iPhone 4, one of our key priorities was to take care of our existing customers. And we were very generous in making sure that we allow very easy upgrades to happen. And that's what Rob referred to in terms of the exceptions we made in Q3 that obviously are behind us.

Operator

And your next question comes from Rob Goff of Northland Capital Partners.

Rob Goff - Northland Capital Partners

Is there a strategy (inaudible) within the business group, considering the Blink acquisition now behind you?

Rob Bruce

Sorry, Rob, we may have actually missed the first part of your question. The part that I picked up was the business strategy with Blink. I hope I didn't miss any in the front of that.

Rob Goff - Northland Capital Partners

You got the gist of it.

Bill Linton

Okay. I think if you go back, it ties a little bit to the comment I made with respect to Circuit. I think when you look at our RBS Division, we picked up a (inaudible) Call-Net acquisition, but certainly a lot of that was Circuit based off-net, if you will. And I think we've working hard to migrate that base over and also grow the new business which is IP on-net. What we've done in the last quarter or so is really try and (deuce) that up with the acquisition of Blink. Atria obviously we think will be done up in line early part of next year really (deuce up) up our portfolio in that area by giving us more fiber.

I think Atria off-memory is about 5600 kilometers of fiber, 3800 buildings that are on that. Again, the key thing here is growing our footprint, growing IT-based Ethernet type solutions. So that's part of the thrust on RBS.

What we shall lose sight, and I'm going to ask Rob to speak to it, we also have in the small business area, the same strategy as other cable companies, which is to grow on the cable footprint using our cable plant. And maybe Rob can give you some color on our steps in that area.

Rob Bruce

And Rob, we've touched on this a little bit before, but we continue to try to emulate what the U.S. cable operators are doing successfully, and that's penetrating the small and medium enterprise. And I know Edward has talked in the past about IBLC, our multi-line hunt business product that has some great features like fax mail as part of voicemail and business directory listings and other things.

And we've started to make some strides, although I think we have a lot of headroom yet. In terms of getting our business offerings into small business, 26% of our Cable nets were actually from SME. The numbers are still very modest, and again I would say there's a lot of potential. The ARPUs are stronger, and Consumer up in the 30-plus dollar range.

Internet too continues to grow with 6% of our Internet nets also coming out of business. And at this point we are starting to get some traction on (television). The numbers aren't big enough to be worth of mention, but we continue to push in that direction and will continue to emulate what the U.S. carriers are doing.

Operator

The next question comes from Jeff Fan of Scotia Capital.

Jeff Fan - Scotia Capital

I have one quick follow up and a question on churn, both on Wireless. The follow up is back to the question regarding ARPU and the changes within voice. I am just wondering did some of your data only devices have an impact on voice. ARPU changed this quarter like those devices that only bring in Wireless revenue. I am wondering if you can help us quantify to see if there was an impact there. And then the question that I have is regarding Videotron, I know it's only been less than a month in the quarter that they launched, but wondering what kind of impact are you seeing, the rationale for going unlimited in Quebec and perhaps a little bit color on what you've been seeing to date on the impact on churn?

Bruce Mann

Just to be clear on what you were thinking about, were you thinking about the impact of sets?

Jeff Fan - Scotia Capital

Yes. Like data only devices that doesn't generate voice revenue.

Bruce Mann

I think you were looking for an indication of whether it was having any impact on churn?

Jeff Fan - Scotia Capital

No, impact on the ARPU calculation, because I guess that the denominator would include these devices, yet they don't really generate any voice revenue.

Bruce Mann

Yes. There is a dilution of just a little bit under $1. That pool of sets that don't generate any voice revenue, it drives down our voice ARPU about $0.93, I think is the number if I recall off the top of my head.

To you second question, it's very, very early days for Videotron. To be honest with you, we can barely even feel them in market in terms of the ports, you know the offerings that they have in market are not very much different than we expected. And you know honestly, Jeff, beyond that it is hard to say really much more.

Operator

Ladies and gentlemen, we have time for two further questions. The first question comes from Rick Prentiss of Raymond James.

Rick Prentiss - Raymond James

One quick house keeping question, on the one timer on the Cable operations, sounds like that ball park was about $15 million in benefit in the quarter, was that anticipated in the guidance when it was previously given? And then also the circuit switch divestiture, I assume that really is a 2011 item as far as guidance? Then I'll get into the real question.

Bruce Mann

The one time item in Cable in the quarter was not anticipated when we did the guidance at the beginning of the year. And just so you know, there is one time items that go both ways, we just highlighted that one because of the impact it would have had in this particular quarter.

The second question was on circuit-switched, and the timing is going to be that the lines will start to migrate literally now over the course of the fourth quarter and completed in early part of '11, maybe by the end of the first quarter. So it's going to be a phased migration.

Bill Linton

And I think it's important to say that the revenue and cost impacts really are not material for the remainder of the year as Bruce said most of these migrations will happen over the next couple of months and it's not a one time cut-over.

Operator

And your final question comes from Peter MacDonald of GMP Securities.

Peter MacDonald - GMP Securities

Just trying to get my head around the focus on retention and smartphones in the quarter against the postpaid ARPU erosion and higher churn. I think you said in your opening remarks that you attributed direction of both the new entrants, but it kind of raises two questions; does it imply that new entrants are having a greater success at attracting higher value subs? Or are you also seeing something from the Bell, TELUS HSPA transition? And then if it's a new entrant, how should we be considering the impact that Videotron is going to have to start to have in Q4 and then Shaw later in 2011?

Nadir Mohamed

The reference wasn't to new entrants at all. It was just a reference as a fact that for us is important to actually invest in retention, because they tend to be the high value customers and fall short to the extent that they would make reference to churn and the increment in churn. It would be attributable to the market as opposed to the new entrants who for the most part have had fairly limited impact.

Operator

Mr. Mann, this concludes the question and answer session. Please continue.

Bruce Mann

Thanks Operator for conducting the call this morning and thanks everybody for participating. We appreciate your interest and your support and your coverage. And If you have questions that weren't answered on the call, please give my colleague Dan Coombes or I a call. Our remarks at the beginning were a little longer than they were historically but we did have a lot of color to add. So we do understand if there are a couple of people left in the queue and apologize to them. You can give a call to Dan Coombes or myself. Our contact info is in today's release.

That concludes this morning's call. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!