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Rogers Communications (NYSE:RCI)

Q2 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Nadir Mohamed - Chief Executive Officer, President, Director of Communications Division and Director

William Linton - Chief Financial Officer and Executive Vice President of Finance

Robert Bruce - President of Communications

Bruce Mann - Vice President of Investor Relations

Keith Pelley - President, Rogers Media

Analysts

Robert Goff - NCP Northland Capital Partners Inc.

Maher Yaghi - Desjardins Securities Inc.

Dvaipayan Ghose - Canaccord Genuity

Robert Bek - CIBC World Markets Inc.

Phillip Huang - UBS Investment Bank

Greg MacDonald - Macquarie Research

Glen Campbell - BofA Merrill Lynch

Simon Flannery - Morgan Stanley

Richard Prentiss - Raymond James & Associates, Inc.

Matthew Niknam - Goldman Sachs Group Inc.

Jeffrey Fan - Scotia Capital Inc.

Tim Casey - BMO Capital Markets Canada

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Rogers Communications Inc. Second Quarter 2011 Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Tuesday, July 26, 2011, at 08:30 a.m. Eastern Time. And I would now like to turn the conference over to Mr. Bruce Mann of the Rogers Communications management team. Please go ahead.

Bruce Mann

All right, thanks very much, and good morning, everyone. Thank you for joining us for the Rogers Communications Q2 '11 Investment Community Teleconference. Joining me on the line this morning, almost all of them are here with us in Toronto. We have Nadir Mohamed, our President and Chief Executive Officer; Bill Linton, our Chief Financial Officer; Rob Bruce, who is the President of our Communications Division, which includes both Rogers Wireless and Rogers Cable; Keith Pelley, who is the President of Rogers Media; and Bob Berner, our Chief Technology Officer; as well as a couple of other members of their respective teams including Ken Engelhart of our Regulatory Group.

We released our Q2 results earlier this morning. The purpose of the call is to crisply provide you with a bit of additional background upfront, and then get on with answering as many of your question as time permits.

Today's remarks and discussion will undoubtedly touch on estimates and other forward-looking types of information from which our actual results could ultimately be very different. And you should review the cautionary language to that effect in not just our earnings filing today but our full year 2010 MD&A.

Those include the factors, assumptions, risks, et cetera, with respect to how things could differ, and those cautions apply equally to the dialogue today. So if you don't already have copies of the full Q2 MD&A or our 2010 annual report, they're both on the rogers.com website. They're on SEDAR, they're on EDGAR, or you can get a hold of any us in Investor Relations, and we'll get it to you post haste.

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

Nadir Mohamed

Thanks, Bruce. Welcome, everyone, and thank you for joining us. As you can see from this morning's earnings release, we've delivered another quarter of growth in new subscribers, revenues, adjusted operating profit and earnings per share, clearly reflecting the strength of our asset mix.

We continue to gain traction on the customer retention front, maintaining strong margins and generating significant free cash flow despite the planned increase in our capital spend as we continue to invest in maintaining our leading network position.

Stepping back and looking at the quarter, the most notable observations I would point out are that we had strong customer growth in Wireless, with sales up 17%, and we had very good traction on both Wireless and Cable churns despite the continuation of what is clearly an intensely competitive environment in both of those businesses.

We demonstrated very solid cost control across the business. We continue to drive rapid growth in our Wireless data business. We grow Wireless data ARPU by 23%, but we saw continued pressure on voice ARPU resulting in blended postpaid ARPU coming down by 4%. And finally, we executed very strongly in our Media business, delivering terrific growth.

So across Rogers, a solid performance in the quarter, both with financial and subscriber results, delivering solid growth in a highly competitive environment.

More specifically, on the Wireless side, we sold our higher number ever, 235,000 smartphones to new customers in a single quarter. And we activated the second highest number of smartphones ever, those being to a combination of new and upgrading subscribers totaling over 591,000. So we're seeing continued if not accelerating success on the high-value smartphone category.

The smartphone metrics, ARPU, churn and upgrade rate remain healthy and at the same time, are both attracting and retaining our high lifetime value customers. And so importantly, the most significant driver of our topline growth was the continued strong growth in our Wireless data revenues.

In Q2, Wireless data revenues were up almost 32%, increasing from Q1 and now representing 35% of Wireless network revenue. In keeping with our Wireless data leadership position, we are also now seeing tangible success in deploying M2M solution, and this I strongly believe will be one of the next S curves of growth for our business.

As you can see by the number of gross wireless subscriber additions and our success with smartphones, Wireless sales in the quarter were healthy and concentrated in the higher end of the market. And arguably, more importantly, we've successfully managed postpaid churn, which sequentially improved from Q1.

As expected, the results also reflect the continued impact of increased wireless competition, particularly on the voice side. While the strength of our wireless data offset much of this pressure, the rate of overall ARPU dilution did accelerate sequentially from Q1, and we are sharply focused on managing the rate of this decline to the extent possible, given the competitive environment.

At the same time though, we're driving very meaningful cost efficiencies. And you can see this when you consider that we added 73% more new smartphone customers in Q2 compared to Q3 of last year and yet, we were able to put up a strong 47% Wireless service margin.

Strong cost control on the Cable side as well. The result of that focus are clear, with Cable Operations EBITDA margin almost 48% in Q2, which is the highest it has been in quite some time. This, combined with the sequential increase from Q1 in the revenue growth rate, led to excellent operating leverage, helping to drive Cable Operations EBITDA up by 17% from the same quarter last year and their unlevered free cash flow up by 22%.

So a couple of things to factor in on the quarter are on the Cable Operations side. We're now very close to completing the phased divestiture of the circuit-switched telephony business, which we've began late last year. And excluding this, the year-over-year revenue growth would have been even higher and Bill, in a moment, will provide a bit more color on this.

On the flipside, you should note that the growth rate in the quarter's revenues also reflect, amongst other things, the timing of pricing changes made in March 2011 this year versus July 2010 last year. So I'd expect we'll see the growth rate moderate in Q3 as a result.

Turning now to Rogers Media, a terrific quarter across both the top and bottom line, with good momentum developing on several fronts. This is almost all organic growth, and they reflect growth pretty much across the portfolio with particularly strong results in Sportsnet and at our Television properties generally, with good cost controls across the Media group in Q2, driving margins up to levels frankly that we haven't seen in a number of years.

At the same time, we continue to invest in initiatives at Media that would help drive the momentum further, including the launch of the new CityNews Channel, the launch of reality TV competition series, Canada's Got Talent, the new sports magazine and more that will follow.

Turning now to the capital investment side. You can see that our overall CapEx is up modestly year-over-year, consistent with our guidance, reflecting primarily network investments and also the timing of spend within the year.

On the Wireless side, we continue spending associated with the deployment of LTE, where we are again leading the industry in Canada on wireless networks. In fact, just days after the end of the quarter, we've flicked the switch to launch the first commercial LTE network deployment ever in Canada.

Speeds with LTE are 3x to 4x higher than HSPA+ with significant lower latency, which is key for interactive applications like gaming and also much more efficient use of capacity. As we said earlier at the time of launch in Ottawa, we expect to have 4 major markets up and live before the end of the year, with 25 markets covered during 2012. We also began a sizable investment program to significantly increase 4G wireless coverage across the Maritimes.

On the Cable CapEx side, lower CTE costs reflected the lower subscriber volume, but investment continues for On Demand and Internet capacity as, well as for projects to further enhance the Cable TV user experience from menuing to search to whole-home PVR and remote multi-device access to the guide and the PVR.

I'll stop here and just say that overall, we're tracking to plan for the year so far and showing some good momentum in multiple parts of the business, reflecting the strength of our asset mix. We have a robust product portfolio, great brands, unmatched distribution, super leading networks, a really solid financial position and a seasoned management team that's focused on execution.

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

William Linton

Thanks, Nadir. I will provide a little bit of additional detail on the financial results and metrics for the quarter.

On the topline, our consolidated revenue growth was 3% for the quarter, which reflects revenue growth of 3% at Wireless, 5% at Cable Operations and 13% at Media. On the adjusted operating profit line, you see a sequential acceleration to 4% year-over-year, up from 0% in Q1.

Overall, margins expanded sequentially by 30 basis points from Q2 last year, with solid cost management more than offsetting the incremental device subsidies from the much higher Wireless sales volumes and the pressure from the decline in voice ARPU.

At Wireless, we now have 48% of our postpaid base of higher-end smartphones, up from the 35% level we were at this time last year. As we've emphasized before, these are and continue to be higher ARPU, lower churn, higher lifetime value subscribers. And as Nadir mentioned, sales remained solid and concentrated in the smartphone segment at the higher end of the market.

As you can see, in terms of our Wireless results overall, the 1% increase in network revenue is a bit of a deceleration from what we have seen in the past couple of quarters, and it continues to reflect double digit softness on the voice ARPU line, consistent with Q4 of '10 and the first quarter of this year and with the level of competitive intensity we continue to see in the wireless market.

On the prepaid side, we improved year-over-year on both the gross and net lines, reflecting a combination of continued additions under our chatr brand, as well as continued activations of the iPad tablet.

In terms of Wireless network margins, I think it's significant to note the continued strong 47% level in Q2. This, despite the largest ever number of smartphone sales to new subscribers, which Nadir mentioned, the second highest number of total smartphone activations ever and the continued competitive pressure of voice ARPU.

So obviously, we had very solid OpEx controls and efficiency gains, helping to offset the large increase in equipment subsidies and retention expenses, as well as the decline in voice ARPU.

Turning to Cable Operations. The revenue growth rate reflects the impact of the circuit-switched telephone business, which we are essentially at the tail end of divesting which was diluted to the rest of the Cable Operations business, not just in terms of margins but in terms of topline growth as well.

Normalizing for the year-over-year decline in that part of the business, topline growth at Cable Operations would have been 7%, or 180 basis points higher. However, keep in mind that the sequential acceleration in the Cable Operations revenue growth rate also reflects the timing of price changes that last year occurred in the summer time frame and this year occurred in March.

What is a highlight of Cable Operations for the quarter is the excellent cost controls there, which combined with OpEx benefits of lower activity-based cost, helped drive EBITDA up 17%, with margin expansion to almost 48%. Solid margin expansion at Rogers Business Solutions as well, with very strong operating profit growth.

The results here reflect a couple of things. First, being the integration of the Atria and Blink acquisitions of last year and a significant culling of portions of the lower-margin, legacy off-net businesses we were engaged in. Together, these drove the drop off in revenue but significant increases in operating profit and margins.

In terms of costs, if we look at Wireless and Cable together, operating expense is actually down almost 2% year-over-year when you exclude equipment subsidies. That's very significant given that we're continuing to grow the topline at respectable rates at the same time.

At Media, a solid combination of double digit topline growth with excellent margin expansion at the same time. This operating leverage drove adjusted operating profit up 47% year-over-year.

Below the operating profit line on a consolidated basis, there really wasn't a lot of unusual items to talk about. Probably worth mentioning that we did see a bit of a step-up in depreciation and amortization from the year-ago period. This reflects a combination of certain IT systems that had been under development that we've put into production during the quarter, as well as the depreciation and amortization associated with the Atria acquisition which closed earlier in the year.

This took the rate of growth of adjusted net income down a bit from the level that operating profit grew. But with the accretion from our share buyback activities over the past year, diluted adjusted earnings per share was still up a respectable 8%.

From a cash perspective, during the second quarter, we generated almost $560 million of free cash flow, one of the 4 or 5 highest quarters of free cash flow generation ever at Rogers and on a per-share basis, was up 3% year-over-year, in part reflecting the accretion from our share buyback program.

With this free cash flow, among other things, we paid out $195 million in dividends and paid down all the draws on our credit facility. There weren't any share repurchases under our buyback authorizations during Q2, in part due to uncertainty around recent changes that have been proposed in the 2011 federal budget that would impact the tax treatment of certain structured share repurchase transactions that we were planning to otherwise have executed, similar to the 9 million shares we repurchased in Q1.

Our operating assumption at this point is that these issuer bid exception transactions aren't going to be available to us going forward and that activity under the buyback program will all be normal course market purchases. Don't read anything into the lack of activity in Q2, as management's current intention is to continue to be active under the buyback program in the latter parts of the year.

I'll finish by saying overall, on a consolidated basis, we put up a solid quarter in Q2 despite an intensely competitive environment, giving us a good first half of 2011. We continue to be in a very strong position financially, with an exceptionally solid balance sheet, $2.4 billion of liquidity available under our fully committed multi-year bank facilities and no near-term maturities.

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

Bruce Mann

Okay, thank you. Operator, we'll be ready to take questions from the participants in just a couple of seconds. But quickly, before we begin, we will request that everybody, as we do on each of these calls, that those participants asking questions would be courteous to all the other participants and limit the questions to one topic so that as many people as possible have a chance to participate. And then to the extent we have time, we'll circle back and take additional questions or we'll get them answered for you separately after the call. So with that, operator, if you'd explain to everyone how you'd like to organize the Q&A poll in process, we'd be ready to get going. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from the line of Bob Bek of CIBC World Markets.

Robert Bek - CIBC World Markets Inc.

Just a question, I guess, for Nadir or Rob, on the voice ARPU decline acceleration. Can you give us a bit more color on the -- the pressure is obviously competitive pressure. You talked about -- I'm sure roaming is still a component of that. I know you've also won some government contracts of late. Is there any effect on bringing down ARPU that comes from that? And related to this, you've talk in your MD&A about the initiatives aimed at slowing this decline. If you can give us any sort of broad strokes at what you can do so where we can sort of market -- sorry, model out this decline going forward?

Robert Bruce

Certainly, Bob. It's Rob. There's obviously a number of things driving the voice ARPU decline. Retention efforts to keep our most valuable customers, customers rightsizing their plans down the lower MSFs, some of those driven by the decreases in price that we've seen in the greater marketplace. And frankly, as we get deeper in the penetration or higher mix of lower-value customers being acquired just in general, albeit our focus, as Nadir pointed out in his opening remarks, is very strongly focused on the top end of the market. When you break it down into the way we look at revenue, which is MSF, airtime, LD and roaming, are some of the key areas where we're seeing the voice ARPU pressure, driven by things like discounts and adjustments, conversion credits. Your comment about price plan changes, specifically, there was an item on -- as we moved the Government of Canada business, there were some price plan changes downward that drove some minor movement there as well. Airtime, as buckets get bigger, people go out of buckets less often, resulting in lower volume of other bucket airtime. And we continue to feel pressure on roaming, interestingly enough, and the roaming pressure is international, both inbound and outbound. And we see some outbound, some pressure on the outbound numbers into the U.S. as well. So it seems like the roaming market really has not bounced back nearly as well as we would expect. In terms of expectations going forward, I think it's important to set those appropriately. We expect this and over time, voice ARPU is going to continue to be under pressure. Clearly, as we reach the end of 2011 however, we'll been laughing some of the declines, and many of our most price-sensitive customers will have made plan adjustments. Further, we've redoubled -- doubled our effort on protecting and improving voice ARPU. And net-net, we expect to see some modest improvements in the rate of decline by year end, assuming of course that we don't see anymore significant price movements in market.

Operator

Your next question comes from the line of Glen Campbell of Merrill Lynch.

Glen Campbell - BofA Merrill Lynch

Again on the ARPU question, Rob, could you talk a little bit about where ARPU is on your high-end customers? And in the wake of the new pricing from Telus on the Koodo brand, which sort of gives you all-you-can-eat for about $80, can you give us your forward view on where you think ARPU might settle out for those high-end customers?

Robert Bruce

Glen, in terms of high-value customers, I think go to smartphone customers, what rate away. Again, we continue to like the ARPU and churn profile of smartphone customers, and we continue to be successful acquiring and upgrading our customers to smartphones. Their ARPUs, they're still running 1.9x normal voice ARPU customers, with churns significantly lower. So the economics of smartphone customers continue to be highly attractive and favorable. In terms of Koodo, we definitely saw the move. We're in, I think, in a great position, we have Fido with a great value proposition that well aligns with the needs of our target market. And our 3-brand structure overall, I think puts us in a great position to be flexible in terms of how we respond to the changing pricing dynamics in the market. So again, speculating on the long term of where prices will settle out in terms of the high end of the market for smartphones, they seem to be relatively resilient right now, and we'll just have to watch and see how it unfolds over time.

Operator

Your next question comes from the line of Tim Casey of BMO.

Tim Casey - BMO Capital Markets Canada

I'm wondering -- I'm going to try and sneak in a 2-parter. Can you talk a little bit about your LTE spending to date and your appetite for any potential partnerships with other cable companies or whatnot on LTE? And second, Media was very strong. Could you talk a little bit about why margins were up so much and how sustainable those trends are?

Nadir Mohamed

Let me start with the LTE, and by the way, thank you, because Keith has been dying to talk on these calls, so we've finally have a Media question that he can respond to, and one that I'm sure he's going to be happy to do. So I'll put it over to you, Keith, in a sec. But just on the LTE, I think if you look at what we've said so far, in terms of the guidance for our capital this year, the guidance as you know was modestly up year-over-year, and we attributed that very much to the LTE spend this year. So think of it as about $200 million for this year. And as you recall from what I said at the start, that will include having 4 cities up and running. And beyond that, we haven't given any specific guidance for LTE or generally in terms of 2012. But I think, just to be helpful, now one of the things I look back on, and you guys were around when we did the deployment of HSPA, it was really a 3-year program to get to the core market so that we're still rolling it out, and they cost about $500 million. It gets very tricky to think about costing because what is capacity versus the new LTE is a challenge. But I think, fair to say, that if you think of the envelope in similar terms, you're probably looking at about a couple of hundred million this year and next year and a $500 million envelope to hit what I would consider the core part of the network deployment. Obviously, it's speculating out because one of the things that we're really looking to is the spectrum auction for 700 MHz. And 700 MHz is going to be absolutely key with respect to any rule or kind of deployment. And so that again is a condition around some of these numbers. But hopefully, that gives you at least a framework to work with. And on that, I'll go ahead and pass it on to Keith.

Keith Pelley

Thanks, Tim, and I'll try to be incredibly brief and not take the rest of the call. We are obviously very pleased and encouraged by our results. Q2 had a very high operating margin of almost 20%, and all our verticals continue to see revenue growth over last year and cost are highly controlled. Some of the key factors contributing to the quarter is growth this -- this time is we had outstanding conventional and specialty revenue growth. Q2 will be the strongest quarter for Sportsnet ONE because the highly priced NHL games are not in this quarter. Our digital portfolio continues to grow, and our ad network now sees us represent more than a thousand websites, and sales were very, very strong this year. And Tim, you will appreciate this, Blue Jays ticket sales in attendance are up 17% compared to last year. And in terms of sustainability, our business foundation, our organizational chart has been established, and this will allow the media portfolio to continue to evolve. And it really is positioned for additional growth. And Nadir mentioned some of the recently growth initiatives, the magazine will launch in September, the 24-hour CityNews Channel will launch this fall as well. The acquisition of Setanta Sports with the rebranding to Sportsnet World will happen in October and a critical digital initiative, which will be announced shortly and provide fantastic growth opportunities for the future. So all in all, a very optimistic time at Rogers Media.

Nadir Mohamed

And Tim, I think to do justice, I think you had a 2-part within the first part of your question. I didn't answer the second part which is, I believe, with respect to network sharing. And I think again, you go back to what we've done in market. I think as you know, within the past done deals with MTS, TBayTel in terms of network arrangements, definitely in the sense that they're not related to LTE specific. But this is a case where you're looking at building out in areas that we didn't have network. So going forward and looking out, I suspect of the kinds of things you're looking at. The challenge becomes when you have a network and you're looking to do an arrangement with the party that doesn't, there's a lot of factors that go into that. We're certainly being open on discussion as we always are, but I think it's fair to say that in the circumstances that you're referring to, it is much more challenging because you've got to look at it not just from a cost point of view but also what happens in market and so on. So there's different options. I'll say not impossible, but certainly difficult to think of scenarios that will be a win-win. But we're certainly open to any discussions.

Operator

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

Phillip Huang - UBS Investment Bank

My question is on the data side of the Wireless ARPU. I was wondering if you guys could maybe comment on how you see Wireless data pricing trending in the year ahead? Do you see any pressure coming down at all? I think I was a bit surprised to see some of these price changes. For example, Koodo recently introduced a more attractive data plan, a $25 for 2 gigabits per month, and it used to be, I think, for only 500 megabits. So I'm just wondering if you guys are seeing any evidence of smartphone subscribers perhaps rationalizing their plans or going to a lower tier?

Robert Bruce

Yes, Phillip, data pricing continues to be strong. As you all know, we launched LTE pricing, which we recognize customers are going to need larger buckets. So for sure, we're making the buckets larger. And as buckets get larger, the price per gig moves down. We see lots of stability in data pricing right now. Certainly, no evidence of customers cutting back in terms of their spending or their usage on data. Usages across all devices continue to be robust. So I think data looks like a strong and growing part of the portfolio. We're executing really strongly on the Wireless data strategy, as evidenced by the smartphone numbers. Data revenue growth year-over-year of 31%, now making up a full 35% of our revenue. So we'll continue to be enthusiastic. The other thing that's going to continue to propel that data portfolio, and we think as one of the next S curves, is the machine-to-machine business. We're very active in that space, and we look for great things in the future there as well.

Phillip Huang - UBS Investment Bank

Quite that you mention the machine-to-machine, I was just going to say. And to what extent that similar subscribers or just even data-only subscribers like data specs contribute to the postpaid ARPU decline in the quarter?

Robert Bruce

Yes, the impact of data-only customers actually puts about $2 of pressure on the voice ARPU. And that's factored into the numbers that you see in front of you.

Operator

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

Jeffrey Fan - Scotia Capital Inc.

I want to ask a question on the Cable side of the business. Growth has been very good on the operating profit front. Just wondering whether the growth that you generated in the first half, about 15%, is sustainable? And just on that point, with respect to growth on the Cable side, one of your peers out west has made some pretty meaningful moves on their broadband products with respect to speed and cap to differentiate the service versus their Telco competitor. I'm wondering what your thoughts are on there from a strategic standpoint?

Robert Bruce

Yes, let me start with the second part, Jeff. We've continued to be quite successful in our market and recognize that all of these markets across the country are different markets and people try different things. We're constantly readjusting the things that we're doing with our pricing to better meet the needs of our customers, and we're more than satisfied with the results that we're getting. In terms of the sustainability of our growth, we were really pleased this quarter with revenue. I think as Bill highlighted on the call, core Cable revenue growth for the quarter was actually 7% if you remove the switch business, which most of you know that we're exiting. It's healthy growth. It's growth that comes from both PSU growth and growth from some of the rate hikes that Bill touched on. We've had great success with churn dropping on our Cable portfolio, again, something that really propels the sustainability of EBITDA, converting lots of satellite customers. On the Internet, we've made some significant adjustments that I think are very favorable for customers. We've launched SpeedBoost, which customers really like, and download speeds are now 8x faster than our competitors. We continue to emphasize our value message on the Home Phone and really getting terrific traction in terms of business. Revenue growth in the small business part of the portfolio up 21%, and great numbers both on Internet, Home Phone, IBLC in the sub-base. So I think we're poised to continue to progress strongly. Nobody should misunderstand, Cable is really a mature portfolio, and it's not a place to go crazy in terms of aggressively chasing growth. But lots of sustainable pockets that we can mine in an intelligent fashion.

Operator

Your next question comes from the line of Greg MacDonald of Macquarie Capital.

Greg MacDonald - Macquarie Research

Just a quick clarification question, first on the government impact. Was that a reprice of existing government customers? Or was that a new government contract that was added?

Robert Bruce

So Greg, there's both. So there is some reprice on existing government lines that we have. And then, of course, we won a whole bunch of new business on top of that.

Greg MacDonald - Macquarie Research

Okay, and is it possible to give us some indication of the magnitude of subs that government represents?

Robert Bruce

The total account or in quarter?

Greg MacDonald - Macquarie Research

I'm sorry, what was that?

Robert Bruce

So were you asking about that size, the incremental size of winning the entire account? Or the end quarter impact?

Greg MacDonald - Macquarie Research

No. What's the magnitude of total government subs you now have on -- just so I can make an assumption of what future government ARPU is?

Robert Bruce

It would be -- we had about 40 on. I think we've added about another in the range of about 45, we've added on. It would probably have another -- so we have for the 2 quarters and we have -- that's for the 2 quarters, not in one quarter. So I think in this quarter, in the 20s. In the mid-20s in terms of adds coming from government.

Greg MacDonald - Macquarie Research

So you had 40, you added in the mid-20s, and so you're going to have somewhere in the mid-60s?

Robert Bruce

Right. We had about 40 before we won the business. We had about 40 of the total business. We added 20, roughly 20 last quarter. I can't remember the exact number. And this quarter, about 25.

Nadir Mohamed

And Greg, it's Nadir. Just to put it all in context, right, this is less than 1% of our base.

Greg MacDonald - Macquarie Research

And the major question I wanted to ask is, it looks like the metrics of smartphone continue to look pretty good. You've got record -- second most number of record adds on gross, 40% of which is new. That's a nice stat. Can you give us some indication of the profile of the subs that are being added? Are these high-end smartphones? Are these iPhones and Android phones? Some other carriers had a nice iPhone quarter. Maybe you give us some context there? Or are we starting to see more of the lower-end smart phones in this mix where we can assume naturally that the ARPU is going to be declining? Because it's nice to see 1.9x voice, but the voice is declining. And so we need to get some sense of the magnitude of smartphone ARPU subscribers.

Robert Bruce

No, actually it's a great question. You just sort of said you thought about the world of high-end smartphones and you thought about of our mix and iPhone, Blackberry and the high-end Android. That makes up about 62% of the mix. There's a few other smartphones in there, but I would say that the people that we're adding resemble in terms of their commitment to ARPU and commitment to expensive and significant devices, they are the same as what we have in the base. They're not dramatically different. So we're not seeing any huge different trend in terms of the folks that we're adding. Again, we continue to see nice creeping improvements on churn amongst those customers. Again, sort of improving the lifetime value economics, and we're working hard to drive those subsidy prices down at the same time.

Nadir Mohamed

Greg, if I may, it's Nadir. I just wanted to add one thing because -- just to make the connection. Because to your point, we're obviously very excited about the performance of smartphones. And in particular, your reference to 40% new, if you look at the smartphone new customers that we added, we added about 235,000 in the quarter. So it's really remarkable, and that's where the things aren't necessarily obvious. But if you look at the impact on margin, the fact that we could deliver 47%, even including the effect of adding these customers, I think speaks to the strength of the franchise. Obviously, you can make the adjustment if you were to level it off. In terms of year-over-year, the margins would have been even higher.

Operator

Your next question comes from the line of Dvai Ghose of Canaccord Genuity.

Dvaipayan Ghose - Canaccord Genuity

A question for Bill, if I may, regarding the return of capital to shareholders. I totally understand your comment not to look into much into the fact that there's no share buybacks in this quarter. But having said that, given the elimination of the tax arbitrage, the fact that your debt to EBITDA sort of crept up to about 2.3x, you have a spectrum auction as well as LD upgrades largely still ahead of you and cash taxes. Do you think that your return on capital has to slowdown both in terms of NCIBs going forward, as well as dividend growth? Or can you maintain the pace we've seen over the last couple of years?

William Linton

Thanks for the question. I mean, those are the decisions that we go through every year. None of those things that you mentioned are actually new to us when we were doing our planning for this year. So as I said in the comments, you shouldn't read too much into the buyback in Q2. And we fully expect that we're going to continue on for the balance of the year with normal course buybacks. Next year, we'll again look at all of those factors, and we will make an appropriate decision. And once that's made, we'll inform everyone to the regulatory filings that we have to do.

Operator

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

Richard Prentiss - Raymond James & Associates, Inc.

I wanted to go back to the voice ARPU focus a second...

Robert Bruce

Just a little louder, Rick.

Richard Prentiss - Raymond James & Associates, Inc.

Yes, sorry. I wanted to go back to the voice ARPU question. Could you identify for us -- you mentioned, I think, a couple times about the initiatives you wanted to take. Can you kind of highlight what's your top one or two initiatives are to try and moderate the decline in voice ARPU?

Robert Bruce

Well, Rick, I mean, they are a bunch of fairly operational things, and they would be things like managing price plan downward migration in call centers. When people call in to get their plan adjusted, doing an intelligent job of putting them on the right plan and not taking them down to the lowest possible plan that may, on the surface, look attractive, it may not perfectly meet their needs. That is probably one of the biggest single things that gets done in that space. In this business, as you know, there's lot of credits and adjustments and other things that go through, lots of operational controls around those things and of course, looking for opportunities where there's untapped services, opportunities to bundle and protect revenue. All of those things are things that we're focused on.

Operator

Your next question comes from the line of Rob Goff of Northland Capital Partners.

Robert Goff - NCP Northland Capital Partners Inc.

My question would be on this SME side, and can you address whether or not the 21% growth in the quarter is sustainable? Expandable? And then delve a bit into the product set and the distribution for the SME.

Robert Bruce

Again, I assume your focus is at Rogers Cable?

Robert Goff - NCP Northland Capital Partners Inc.

Yes.

Robert Bruce

So listen, to be honest with you, we are gaining momentum from the business side in terms of Cable. The places where we're getting the best traction are the ones that I highlighted in my earlier comment. Internet and the Home Phone product and the IBLC version, the more business-oriented version of it, are the areas that we're getting significant traction. And I see us continuing to build momentum in that place. So I think it's more than sustainable going forward. Of course though, and Bill referenced it, the acquisition of Atria and Blink will only help us to move more quickly along with his market segment, given the connectivity and other things that they provide. So we're optimistic going forward, and we're pushing hard to get more out of the SME segment.

Operator

Your next question comes from the line of Matthew Niknam of Goldman Sachs.

Matthew Niknam - Goldman Sachs Group Inc.

My question is on the guidance. And the unchanged guidance currently implies that EBITDA in the second half of the year stays flat at the midpoint despite 2% EBITDA growth in the first half of the year and easier comparisons that you face. And so I'm wondering what sort of assumptions you've built into your forecast, specifically around the macro outlook and competition?

William Linton

Matthew, you’re probably a little bit new to our history on guidance. We tend to be relatively conservative. Our position is that we like to overachieve our guidance, which I think we’ve done in the last couple of years. So you’ll find that we, maybe like some other companies, don’t do a lot of fiddling with guidance during the year. Our expectation is for a continued, very competitive marketplace. But our expectation is, as we’ve done in the first 2 quarters of this year, to operate very well in that marketplace and continue to put up numbers that exceed the expectations that we have set for ourselves.

Operator

Ladies and gentlemen, we have the time for 2 more questions for the question-and-answer session. And your next question comes from the line of Maher Yaghi of Desjardins Securities.

Maher Yaghi - Desjardins Securities Inc.

Nadir, I just wanted to hit on the machine-to-machine opportunity you guys have been working on. We’ve seen some pretty decent announcements on that front. Can you maybe talk about when we should start to see a real impact on revenues and profitability from these new opportunities you're looking into? And maybe if you can give us some sizing of the opportunities, that would be very helpful.

Nadir Mohamed

Maher, when I look at the success we’re having, and I made reference to tangible whether it's Quebec Hydro, BC lotteries, those kinds of applications are around smart metering through to a point-of-sale applications, telematic. You can see vertical markets really embracing this solution set. One of the things -- and it's difficult, it’s not a metric that people really speak to on calls, but one way to frame it is we’ve got over 500,000 connected devices. Now these are devices that -- think of them as being sub-$10 ARPUs but pretty good margin. You don't have the subsidy associated with these sales, and most of that revenue flows through the margin. So you’re starting to see this tangible. I think when we get to '12 and beyond, these numbers become ones that we can speak to that are at significance from a revenue profile. I'd say 2011 for me would be a building year in terms of setting up the sales and getting the customers onboard, which we're happy to say is progressing nicely. So I can’t give you more specific guidance on that, but I think these are real numbers. It really reminds me about 5, 6 years ago when we started on Wireless data and we described the next opportunity as being wireless data. A lot of questions at that time. Is it meaningful and so on. And it’s obviously turned out to be a huge business for us. And if I was to predict, I'd see the same thing happening with machine-to-machine. And for me, what is very, very encouraging is the breadth of adoption by real customers, real applications in a moment, real revenues. But I will hope to frame it better for you as we go forward in '12

Operator

And our final question today comes from the line of Simon Flannery of Morgan Stanley.

Simon Flannery - Morgan Stanley

We talked about today about voice ARPU, we've talked data ARPU. Can you talk a little bit about text messaging SMS? Been a lot of concerns in Europe about pressure on that revenue stream. What are you seeing both in terms of usage for SMS and revenues and to the extent to which people are on bucket plans versus pay-by-the-use?

Robert Bruce

Yes. Thanks, Simon, it's Rob again. We’re in kind of a unique position and a very different position than the Europeans in that an awful lot of our SMS is in buckets. And it's in buckets that our buckets that have other things like calling line ID and everything that people buy in clusters. So in many ways, we are relatively well insulated from the changing usage in SMS. That said, SMS continues to chug along quite strongly. And at this point, we’re seeing no major trends towards deterioration in SMS.

Operator

And ladies and gentlemen, this does conclude the question-and-answer session. Mr. Mann, please continue.

Bruce Mann

All right. Well, thanks, everybody, for participating this morning. We appreciate your interest and support. If you have questions that weren't answered on the call, please give myself or Dan Coombes a call. Both of our contact info is on today's earnings release. This concludes our call. Thank you very much.

Operator

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

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Source: Rogers Communications' CEO Discusses Q2 2011 Results - Earnings Call Transcript
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