Rogers Communications Inc. (RCI) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Rogers Communications First Quarter 2012 Results Conference Call. [Operator Instructions] I would like to remind everyone this conference is being recorded today, Tuesday, April 24, 2012, at 5 p.m. Eastern time. And I would now like to turn the conference over to Mr. Bruce Mann with the Rogers Communications management team. Please go ahead, sir.

Thanks very much, Luke. Good afternoon, everybody. Thank you for joining Rogers for our first quarter 2012 investment community teleconference. It's Bruce Mann here. Joining me on the line in Toronto is Rogers' President and Chief Executive Officer, Nadir Mohamed; Bill Linton, our Chief Financial Officer; Rob Bruce, who's the President of our Communications division; Keith Pelley, who's President of Rogers Media; and Bob Berner, our Chief Technology Officer, as well as a couple of members of their respective teams. And also joining us is Tony Staffieri who, as we announced back in October of 2011, will be succeeding Bill as Rogers' new Chief Financial Officer shortly. We released our Q1 results earlier this afternoon. The purpose of this call is to crisply provide you with a bit of additional background upfront, and then we're going to answer as many of your questions as time permits. As this afternoon's remarks will -- and the discussion for that matter will undoubtedly touch on estimates and other forward-looking types of information from which our actual results could be different, you should review the cautionary language in the earnings release today and in our 2011 annual report. These include various factors and assumptions and risks as to how our actual results could differ. And all those cautions importantly apply equally to our dialogue in today's call. If you don't already have copies of both our Q1 release and our 2011 annual report to accompany the call, they're both available on the Investor Relations section of rogers.com or on the EDGAR or SEDAR website. So with that, I'm going to turn it over to Nadir Mohamed and then Bill Linton for some brief introductory remarks, and then the management team here will take your questions. Over to you, Nadir.

Thanks, Bruce. Welcome, everyone, and thank you for joining us. As you can see from this afternoon's earnings release, we delivered a relatively balanced set of financial and subscriber results. There are some clear areas of strength, and there are some areas that we are focused on doing better over the balance of the year. Overall, the results reflect the strength of our asset mix, as well as the continuation of what is an extremely competitive period in the market. In terms of asset mix, we are uniquely positioned as Canada's largest wireless provider, complemented by our healthy and growing broadband and Media businesses. During the first quarter, we had strong execution in Wireless on both the sales as well as retention front. Postpaid gross additions and postpaid net additions were both up year-over-year. In fact, it was one of the strongest Q1s for postpaid gross additions in a number of years. We made solid improvement in stabilizing one of the key metrics on the Wireless side, postpaid churn. While it was up a modest 3 basis points year-over-year, this is by far the smallest year-over-year increase we've seen in nearly 2 years and is a sequential improvement, a significant one from Q4 as well. It was also the third straight quarter in which we've been able the slow the year-over-year rate of decline of postpaid voice ARPU, which is another key metric for us on the Wireless side. It's still obviously under pressure in the face of intense competition in the Wireless market, but we have continued to focus on managing this decline as much as possible, given the environment. While the strength of wireless data offset much of this pressure, we still saw an overall 4% decline in postpaid ARPU. We're also continuing to drive our wireless data strategy. Despite what was an intensely competitive environment in Q1, we activated over 640,000 smartphones, the second highest number of smartphones ever in a single quarter and the highest during the first quarter. Embedded in that and one of the drivers of expense growth in the quarter was that iPhone activations, including upgrades, were up a full 35% from Q1 of last year. This in part reflects residual demand from Q4 of last year where we were supply constrained for a good portion of the quarter. With continued solid success in the high-value smartphone category, and we now have 60% of our postpaid subscriber base on smartphones. The smartphone metrics, ARPU, churn and upgrade rate remain healthy given the competitive backlog. And at the same time, we're both attracting and retaining our highest lifetime value customers, which is squarely on our strategy. As a result, we continue to drive double-digit revenue growth in our wireless data business, which is the most significant driver of our top line. We did however see a sequential slowing again in Q1 in the rate of growth of wireless data revenue. This is attributable to a combination of higher number of new wireless subscribers coming on to new-entry level wireless data pricing plans, as well as the new outbound data roaming plans that we talked about in February. We obviously have work underway aimed at helping to improve the trajectory of the wireless data growth. As I said in February, I think we can do better on this metric, as well as ARPU more broadly, and this is an area of focus for us from an executional perspective. At the same time, we're driving very meaningful cost efficiencies. You can see this when you consider that despite adding 20% more new smartphone activations in Q1 this year over last year, a 75% year-over-year increase in iPhone activations and continued ARPU pressures, we were able to achieve a strong 46% Wireless service margin. We also continue to invest in platform and services on the Wireless side, including the further expansion of our LTE network across a number of additional cities. Rogers is Canada's first and largest LTE network, and today, we already cover approximately 35% of Canada's population and we have the biggest selection of LTE devices available in Canada. We also delivered solid margins in the Cable Operations portion of the business. While Q1 is generally a seasonally slow quarter in Cable, we did also face intensified IPTV competition in our territory during the quarter. Clearly, we're entering a period of stepped-up competition where our primary telco competitor, who already has a broadly deployed satellite offering, is now pushing with deeper concessions on its more widely available IPTV product. You see the effect on the year-over-year change in basic cable subscriber nets and also the impact of retention and promotional offers that we've needed to utilize in the dampened rate of growth you see on the revenue line. Having said that, the reported Cable ops revenue growth somewhat understates the organic growth of the core business as it also reflects a divestiture of the circuit-switched telephony business which occurred late in 2011. As in Wireless, we continue to have good cost management in Cable. Even with some additional cost in customer care and service associated with supporting the analog-to-digital tier migration that we started in Q1 and the deployment of our new digital set-top box, we were able to deliver a healthy 46% margin in Cable Operations. As many of you are aware, this quarter we began going live across the majority of our cable territories with our new digital cable user interface. This includes Whole Home PVR capabilities, as well as a new fully refreshed guide and search capability. This greatly enhanced functionality in UI is combined and marketed under our next NextBox 2.0 umbrella, and it's being very well received by our cable subscribers. In fact, we're ahead of our internal projections in terms of subscribers opting to move over to NextBox 2.0. At the same time, we continue to highlight and reinforce the strength of our Internet services underpinned by our DOCSIS 3.0 platform, which covers essentially 100% of our cable footprint. The combination of superior broadband speed and an enhanced user interface complements what is already a superior video offering in terms of the underlying content, which bodes very well for our Cable business. At the Rogers Business Solutions division, where our wireline enterprise focus is, we continue to just concentrate on the planned exit of lower margin legacy services and off-net businesses, where there were some step function declines that impact EBITDA in Q1, that we expect to begin to offset as we go forward. As well, the Q1 results last year reflected a onetime revenue item that also makes the comp to Q1 frankly quite difficult. But the on-net and next-gen portions of the business actually grew at 8% on the top line or 19% if you exclude this high-margin nonrecurring revenue item from Q1 of last year. This reflects our focus on growing our presence in this SME segment, the small medium segments of the business market, in areas where we have our cable and fiber network facilities. Now turning to Rogers Media. We achieved continued top line growth across almost all of our properties despite what was a somewhat tougher ad market than we originally expected coming into the year. As a reminder, Q1 is historically a seasonally slow quarter for the Media properties. What you're seeing in Media is good cost containment being offset by continued investment in new properties and content to generate additional growth going forward. These include new channels such as CityNews and FX Canada, as well as new programming and initiatives, including Canada's Got Talent and a number of other initiatives. Also on the content front, we're still on track at this point to close on our investment in Maple Leaf Sports & Entertainment this summer. This will further advance our strategy to be the #1 destination for sports in Canada. To sum up, it was a good quarter of good solid postpaid wireless subscriber additions with continued strong smartphone sales. We also stabilized postpaid churn while slowing the rate of decline in voice ARPU for the third straight quarter, so some good progress showing in some of the key metrics. We also made a number of important investments during the quarter across the business in our cable set-top box and UI interface of analog-to-digital transition, growing our LTE footprint, the launch of our Rogers One Number service, new programming and other initiatives as needed. So we continue to invest at a healthy rate to deliver new and innovative products and services and to maintain our leading network positions. And importantly, we continue to focus our execution and manage cost to deliver continued core profitability, which you see in what are very respectable margins. Having said that, we are seeing a softer rate of top line growth than we would've liked, and that's a reflection of the continued intense wireless competitive environment and a further slowing in the rate of growth of wireless data. At the same time, the competitive intensity heated up at Cable as IPTV became more widely available and the ad market softened at Media, particularly late in the quarter. As such, we also accelerated a number of cost-reduction initiatives aimed at offsetting the top line pressures. We took some decisive actions late in Q1 on the cost side, and we will continue to do so as required to protect our margins and cash flow. And while I expect it will continue to be a tough period, I have no doubt whatsoever that the strength of our franchise and our superior asset mix will remain a great platform for continued success. Before I turn it over to Bill, I wanted to quickly remind everyone of the CFO transition that we announced this past October. That transition officially becomes effective tomorrow after our board meeting and annual shareholders' meeting, at which point Tony Staffieri will become Rogers' Chief Financial Officer. Bill, Tony and I have been working together in the background to prepare for this and ensure that this planned transition is completely seamless. And I expect that Tony will hit the ground running and add a lot of value as we go forward. With that, I'll turn it over to Bill one final time for a few remarks on the numbers, and then we will take your questions.

Thanks, Nadir. I will provide a little bit of additional color on the financial results and the metrics for the quarter. On the top line, our consolidated revenue was down 1% for the quarter. As you can see, Wireless network revenue was essentially flat, and we put up continued growth at both Cable Operations and Media. The offsetting declines at RBS and video took the top line down modestly year-over-year. As Nadir mentioned, much of what you see at RBS is the intentional culling of lower-margin legacy services. While at video, we are in the process of winding that business down, and these 2 items somewhat detract from the continued strength in our core business. The single biggest change year-over-year on the OpEx side was the direct result of our success during Q1 in attracting more new smartphone subscribers at Wireless, 20% more in fact than in Q1 of last year. Now much of this was driven by the 35% increase in the number of iPhone subscriber activations and upgrades in Q1 of this year versus the same quarter last year. And this was a function of the timing of Apple's product launch during late 2011 and our being supply-constrained during Q4. Secondly, on the OpEx side, were the significant number of important investments during the quarter across the business that Nadir spoke to a couple of moments ago. The combined impact of these 2 areas was the modest decline in adjusted operating profit you see year-over-year for Q1. But as you can see from our release, we've been able to hold overall margins at very healthy levels with continued solid cost management. In fact, if you exclude the cost of Wireless equipment sales, year-over-year operating expenses were only up 1% on a consolidated basis despite a considerable number of incremental investments that we made. And we've accelerated a number of cost-reduction initiatives aimed at offsetting as much as possible the top line pressures. As Nadir said, we took some very decisive actions late in Q1 and will continue to do so as required to protect our margins and cash flow. So that's clearly an executional focus that continues. At Wireless, 60% of our postpaid subscriber base now has a smartphone. And during Q1, almost 70% of our postpaid gross adds came in on smartphones. So we're continuing to have good success, concentrating in the higher end of the market. And as a result, wireless data revenue, despite some slowing, was up 16% and now represents 39% of Wireless network revenue. Turning to Cable Operations. The revenue growth rate reflects a few things going on. We've got pricing changes that have been made over the past year, and this is partially offset by the impact of some tactical, promotional and retention pricing activities we've needed to respond with in the face of aggressively priced IPTV offerings. And then you add back the impact of the now-completed circuit-switched telephony business divestiture, which you normalize for, would add almost 90 basis points of growth to Cable Operations. At Media, the top line growth of 4% is modestly improved sequentially from last quarter and remains consistent with the slowing we continue to see in the advertising markets. Also keep in mind that Rogers Media is on a calendar year reporting cycle versus a number of our other Media companies in Canada who are in a broadcast calendar, and that Q1 is historically the seasonally slowest quarter of the year. While the decline in Media's adjusted operating profit, more than anything, reflects those Q1 dynamics, combined with a whole number of investments and new programming, stations and other initiatives, which Nadir spoke to earlier. Looking on a consolidated basis, below the operating profit line, there really weren't a lot of unusual items to talk about in this year's quarter. Adjusted EPS was down year-over-year by $0.08 with a step-up in depreciation and amortization more than offsetting reduced income tax expense. This increase in G&A is almost all related to the increase in depreciation on assets. It reflects a combination of IP systems that became available for use in the second half of last year, the acceleration of depreciation on certain network transmission assets and the timing of readiness of certain network and system initiatives, including the launch of our LTE network in various cities throughout 2011. So there are no significant onetime items in depreciation and amortization that contributed to the increase. Below the line, there were $64 million of integration and restructuring costs incurred during the quarter. Those were split into 2 categories: with the first approximately 1/3 of the cost representing the closing of a number of video stores earlier in Q1, including the related lease exit cost. As many of you are aware, for the past couple of years, we have been exiting the video rental and sales business in a measured manner that balanced lease exit cost against continued contribution margin. The video-related restructuring cost in Q1 represents basically the last of the closures associated with the remaining stand-alone video stores. In the stores where there were Wireless and Cable sales and service, as well as video rental activity, we are in the process now of exiting the video portion of the activity and liquidating the related inventory. We expect by the end of Q2 of this year, we will have completed the exit of that business. The balance of the integration and restructuring costs incurred during Q1 relate to severance costs associated with organizational changes and cost management initiatives that we implemented. On the CapEx side, the year-over-year increase was about the timing of our spend during the year. And at this point, we remain on target in the CapEx spend range we gave guidance for earlier in the year. We also are not making any changes at this early point to our adjusted operating profit or pretax free cash flow guidance ranges that we set out earlier in the year. As Nadir mentioned, the pressures on revenue are incrementally greater than we forecast late last year, but we've also accelerated a number of cost management initiatives that we believe at this point can offset the top line pressure we've seen to date. From a cash perspective, during the first quarter we generated $413 million of after-tax free cash flow and $485 million on a pretax basis. With this free cash flow, amongst other things, we paid out $187 million in dividends. We did not buy back any shares during the relatively short one month window we had after we reported our Q4 results but fully expect to do so as the year goes on. We generally seek to be opportunistic in our purchase -- in our repurchases. And during the last month of the quarter when we could have been active, the market was extremely volatile, so we kept our powder dry. As Nadir mentioned, we remain on track to close the MLSE investment transaction this summer. From a modeling perspective, we have determined that this 37.5% ownership stake will be recorded as an investment and accounted for under the equity method. So you won't see revenue or adjusted operating profit pick up in our operating results once that transaction closes. I'll finish by saying that we continue to be in a very strong position financially with an exceptionally solid balance sheet. We have an investment-grade ratings and relatively low balance sheet leverage at about 2.3x debt to EBITDA, with no near-term debt maturities, and we have approximately $1.9 billion of liquidity available under our fully committed bank facilities. So in terms of the balance sheet from the perspectives of leverage, liquidity and maturity, we continue to be in a very solid position. With that, I'll pass it back to Bruce and the operator so we can take any questions you have.

Well thanks, Bill. Operator, we'll be ready to take questions from the participants in just a couple of seconds. [Operator Instructions] So with that, Luke, won't you please go ahead and explain to everyone how you would like to organize the Q&A polling process, and then we'll jump in.

[Operator Instructions] Your first question today comes from the line of Adam Shine of National Bank Financial.

What I'll do is I'll start with IPTV perhaps. Any color in terms of particular areas or types of customers which opted to switch to Bell? And obviously, maybe as a little bit of a follow-up, did the launch of NextBox 2.0 just after the midpoint in the period help slow any of the losses experienced in TV?

It's Rob Bruce. Yes, Adam, with respect to the quarter, starting off with NextBox TV, for us it was one of the highlights of the quarter. I think what it did is it gave us a platform to reassert our video leadership in the marketplace, and we leveraged it to do that. We saw it as quite successful with high take rates above our plans. But as you pointed out, only midway through the quarter and with particular appeal to the higher-value and bundled subscribers that we treasure most. Where we actually saw the losses in subscribers, again, were more at the bottom end of the market with bundled offers that were extremely cheap, what we would call unsustainable, aggressive bundled offers with price points down in the mid-70s, $70 range for Triple Play for the first 6 months. So those were the places where the plans were most prominent. Just in terms of coming back and talking about our overall plan from a video leadership perspective, as you know we've been video leaders in this market for a very long time, and NextBox represents 1 of the 3 thrusts that we have to continue to be dominant in that video category. And that was to bring home the -- our investment in delivering Whole Home PVR, remote PVR, the new guides, the better UI in search and to enable that streaming experience to the tablet, which is becoming ever more important for customers in the home, and that was all delivered in the NextBox. The second key plank of our platform, to continue to grow our data -- rather, our video leadership, was to extend the video offerings to new platforms. We continue to grow our success of Rogers Anyplace TV, which we formerly called Rogers On Demand Online, and continue to grow our leadership of our VOD offering. And lastly, and it will be reflected in some of the capital numbers that you see, we continue to make investments towards our IP-based video platform that we've referred to as Wave 3. That continues on track, and that we believe in the longer term will put us in an even stronger leadership position in the video category. Thanks for your question, Adam.

Bruce, if I can just follow up -- just very quickly, just in regards to any improvements towards the end of the quarter and-or into early Q2, just as it relates to retention of TV subscribers, let alone growth.

Yes. To be honest with you, in the back -- very back part of the quarter, we started to notice some swing back from a churn perspective. But honestly, Adam, 3 or 4 weeks in my mind don't really make a trend.

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

A quick question on the Wireless margins. We saw AT&T report better Wireless margin today, partly due to slower handset upgrades. And they sounded very bullish on margins going forward, given I guess recent initiatives essentially putting in more stringent handset upgrade policy. It sounds like these initiatives are quite similar to what you guys -- in fact, what all 3 companies in Canada have done recently. Do you see the same potential for your Wireless margins to improve in the foreseeable future? Or do you see sort of the competition competing it away?

Phillip, it's Rob again. I think we've said over a long period of time that we think realistically the mid-40s is kind of a zone that we expect. That if you're in that zone, you're in probably the right and realistic zone for Wireless margins in the long run. We will continue to do things to propel ourselves in terms of margin into the kind of place -- into that zone where we think it's appropriate. But at the same time, also working to ensure that we get our share of subscribers and the growth in the marketplace.

Phillip, it's Nadir. Maybe just to add to it -- to your point, looking at AT&T and looking at ourselves, it's important to note the Q4 margins were about 41% going by memory and obviously, this quarter we're at 46%. The thing that I wanted to highlight going to your question about smartphones and iPhones is that 46% that we've delivered in the quarter includes the impact of significant uptake of iPhones and smartphones. Generally, smartphones were up 20% year-over-year, iPhones up 35%. So that cost the subsidies embedded in the structure that we had to deal with this quarter. Some of it obviously was a carryover from the shortage we had on iPhones in Q4. But it speaks, I believe, to the strength of our franchise and our cost structure that we can deliver 46% margin even with those factors.

Got it. So with the spillover demand for the iPhone over -- I mean, you made a comment earlier about greater-than-expected pressure on EBITDA. Is it just on the Cable side, or is it both on the Wireless and the Cable side?

I think we've seen it on both sides. So if you look at the top line pressures that we've already spoken to, whether it's on the IPTV side and then on Wireless, we just talked about the cost of equipment subsidies and so on. So I think the pressures are on both. But what's important for me is even with that pressure, we're getting 46% margin both in Cable and Wireless. And I think it's really important for me to really look at the -- I'll call it the subscriber side in the quarter. Because what we're starting to see is some real good success on metrics that we care a lot about: the net additions on postpaid but also the churn number. And as you recall, we talked about it in the last conference call. Q4 churn was higher than what we liked, and we worked hard and what's really impressive, I think, is how quickly the churn has gone down to 1.26%. And when I looked at and I went back a few quarters, it was actually -- I think it's been 8 quarters before you would find the kind of performance we've had where the 3-basis point change. And as you know, throughout the year -- last year, it was more like a 14, 15 basis point delta. So we are feeling across both sides in terms of top line pressure, but we're quite encouraged by the progress we're making on the underlying business.

Your next question comes from the line of Bob Bek of CIBC.

Just a question on ARPU, I guess the data ARPU in particular. So we're seeing the same trends from Q4 as part of some of the roaming changes and some of the pricing plans. I would take it that this is going to take a few quarters to kind of work through for this, and so we're going to see some headwinds on the data side. But how do we reconcile with the smartphone growth? You've had massive smartphone growth. What point does that start to really take over some of the pressures we're seeing on some of the pricing? Or does it really require some smartphone usage that kind of grows materially? And just while I'm on, since Tony is on the call, is it possible that he could perhaps offer up any comments, any initial thoughts, observations on priorities, since I guess he's in the chair? As Nadir said, he's hitting the ground running. So if appropriate, just thought I'd throw that out.

Bob, let me start off, and then maybe I'll hand it over to -- for Tony and Nadir for further comments. So there's no question, and Nadir highlighted, we're obviously excited about our success on smartphones. I think the one thing that's important to say is the smartphone market as we penetrate 60% of our base and the market in general is starting to be penetrated with smartphone, the kind of customers that are going to be getting on smartphones more and more are not going to be customers that are willing to spend north of $100 to get on smartphones. So it's incumbent upon all of us, as we figure out how to intelligently penetrate this market, to figure out how to put offerings in front of a customer that will bring on those smartphone customers that have slightly lower ARPU and find devices and combinations of plans that will actually let us get at that revenue and that magic because in the long run people really want smartphones. So let me tell you a few things about what we saw on data this quarter beyond the fact that we're excited because our data revenue is at 39% now and we continue to have good momentum on smartphone. Sequentially, you're right, we did see a slowdown in data of about $10 million, taking us from the 19% growth we talked about in Q4 to about 16% growth. And last quarter when I talked about it, I talked about 3 factors being instrumental. So let me go back to those 3 factors. Firstly, we talked about data roaming. Data roaming this quarter is flat to Q4, and we have made some adjustments, but fairly recently, to try to tweak some of those things on data roaming, try to improve the experience with customers and try to ratchet back some of that data roaming revenue. Those efforts have recently gone into market. We have a few more tweaks to make, and my guess is you're exactly right, it'll probably take multiple quarters to get all the way to bright. The second one was SMS and MMS. I'm pleased to report that this quarter, we've ratcheted back about $5 million in terms of performance on that line. So that's going in the right direction. The part of the formula that still needs some tweaking to kind of get it right and some fine-tuning is the data plans and the data attach that goes with those plans. We're seeing lower data attach and lower data revenues on some of those plans than we'd like. So balancing that smartphone data penetration and data revenue in totality is one of our key executional focuses going forward. And I think if we can figure out how to fine-tune it and win the customers and get our fair share of data at the same time, we'll be well ahead of the pack on this one. So look for more on coming calls, Bob. Maybe with that, I'll turn it over to Tony.

Thanks, Rob. Thanks for the question, Bob. I look forward to meeting you and working with you, and same as well for those of you on the call that I haven't had a chance to meet in the past. Let me say at the outset that I'm extremely glad to be part of Nadir's management team and to be a part of the Rogers organization. I think the company has a terrific asset mix and with a very entrepreneurial growth-focused culture with -- together really highlight the opportunities here. In answering your question, let me keep it simple. I intend to stay focused on activities that drive sustainable shareholder value. And as you know, in this business, that will revolve around a few key fundamentals. Firstly, it's the ongoing monetization of our assets and specifically, it's driving penetration and ARPU. The second is the continual shaping of our cost structure to ensure we continue to deliver strong margins and meet the financial commitments we make in terms of guidance and deliver the returns we are looking for on the investments that we choose to make. And then finally, a continual focus on maintaining the strength of our balance sheet, ensuring that we have an optimal cost of capital. As I continue into the role, clearly, more priorities are going to evolve, but you can expect that these fundamentals are going to be at the core of my focus. Thanks for the question, Bob.

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

Let me ask another one of Tony actually. A decent free cash flow number in the quarter. I noticed there were no shares purchased. Any particular reason for that? And can I still assume that it is the company's intention to fully execute on the buyback plan?

Greg, it's Bill. I haven't gone yet.

You'll never fully go away, Bill.

Listen, we only have a month between that wasn't blacked out, and we didn't buy any in the same quarter last year because it's a very short period of time. We're opportunistic about this, but we are serious about our NCIB that we filed this year, and you'll probably see buybacks in the future.

Okay. And just to make sure I'm correct, you're now past the blackout period as of tomorrow?

That's correct.

Your next question comes from the line of Vince Valentini of TD Securities.

A question on the iPhone. Given how impactful it seems to be from quarter-to-quarter depending on how many you sell, I'm wondering, in your guidance for the year, have you explicitly factored in the launch of yet another iPhone? Because you're obviously starting off with a bit of a whole at minus 6% on EBITDA versus 0% to 4% guidance. If there is an iPhone 5 launch and it's widely adopted by consumers in Q3 or Q4 or sometime this year, does that put your guidance at jeopardy in your view?

Yes. Vince, it's Rob Bruce. Yes, we've taken it into consideration and yes, we remain committed our guidance.

Yes, Vince, let me just pick up on that because I think it's really important. Clearly, you've already heard me and others talked to the softer top line growth that we saw in Q1. And frankly, as we look over the, call it the near term, I think it's prudent and we've taken a prudent approach to assume that we'll have continued pressure on the top line, and what we've done is taken some very decisive actions. To me, there's no question that we need to reduce our cost, and you saw the restructuring charge in Q1. But importantly, we will continue to drive out cost reductions to protect our margins and deliver cash flow. We are well aware of what our commitments are. So you can be rest assured we're very focused on the cost side of the equation in the face of what we see, continuing pressure. We think it's prudent to assume that and obviously, we've got other measures in terms of restoring the growth on the top line, but we're very focused on managing our cost structure.

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

My question is on the spectrum auction regarding the 700 megahertz. I was wondering since this is the first call since those new rules came out, wondering if you can comment on how you see the rules. And specifically, with respect to the cap of 10 megahertz on 700, how do you see sort of the roadmap with 4G LTE come along with your spectrum position on 700 plus I guess the AWS?

Jeff, it's Ken. Obviously, we were disappointed with the spectrum decision. We don't think it was the right decision. We advocated strongly for a wide open auction, and we think that would have been best for the Canadian wireless market. You know that we think that a cap is problematic because Bell and Telus built their networks together, so a cap we think affects us more than it affects them. As to our future plans, I really can't talk about it, but we will figure out a way to make sure we have an industry-leading LTE offering. But we're still working on it.

Yes, Jeff, maybe I'll build on Ken, because obviously you know our stated view on both -- on the spectrum, which was to make sure that it was an open and fair auction, unrestricted, and also on the foreign ownership file or that side of the policy direction. Our view was that if there was going to be a change, they should apply to all parties, and that's not what happened. But I think what's useful to gleam out of the decisions maybe on a macro level is something that I believe that the minister alluded to as well, which is what you're really seeing is a policy that essentially could serve as the catalyst for consolidation. The minister I believe made reference to a fact that you could see a world where 4 or so players would be in the market. And as you know currently, we have way more than 4 players in any given area. And I think this could become a catalyst for consolidation. In my view, I've always felt this is scale-driven business. It is very hard to see with the population we have and the scale we have, and frankly very good, well-built up wireless network service providers, to see how we can see going beyond the 3, let alone going beyond the 4. So we'll see what happens. But I think the decision is an important one in terms of how this plays out. But one other thing that perhaps has not been discussed as much as I think it will be over time, and that is that -- I included in many of the rules that surround the big picture is a reference to carriers opening up their networks for roaming. And as you know in the past, that's been very much a new entrant issue. It's now open to all carriers to be able to roam on any other carrier. And I think when you think of distant rural markets in particular, but it could be more than that, there's the opportunity to leverage roaming relationships to avoid some CapEx and deliver service more effective, more efficiently. So I think there are things that will become important over time. We're sensitive but aware of the issue around caps. And I think it would be premature, given the rules aren't out with respect to its closest [ph] entities, but you can rest assured we have our plans.

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

On the wireless data ARPU, can you talk a little bit about what's going on with data usage? As we get more powerful devices, as you start to roll out LTE, it seems like people are choosing lower tiers. Are you starting to see for people who had devices who trade up to the 4S that their usage is getting higher and that ultimately that will drive people to move up to tiers and buy bigger data buckets or else generate overage revenue? What are you seeing there?

Simon, it's Rob. Listen, it's -- we have, over time, seen a gradual creep-up on smartphones in the range of getting to be sort of a half a gig kind of usages but not very significant. Frankly, tablets have been relatively stationary, at levels not much higher than that as yet. Sticks, again, higher but not anywhere close to the very low end of what we've seen on landline Internet. And that at the high end of the usage continuum on Wireless, we would see hubs. But again, across the board, Simon, no big moves yet in terms of significant increases of consumption of data. But I think LTE could be the critical catalyst to start driving those usage levels up, again, favorably impacting our revenues going forward.

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

My question is on prepaid. Churn was up but your gross adds were down, and it seems that there was very much a postpaid focus in the quarter. But could you talk a little bit about the components of the change in demand and prepaid? I mean, were there changes in what was going on with Chatr, with tablets? And maybe just to follow up, with the launch of the LTE iPad, are you seeing an inflection point in terms of the proportion of iPad buyers who are now connecting to the network?

Thanks, Glen. So some words about prepaid. I mean needless to say, and I think it's evident in everyone's numbers, the traditional prepaid offering of 5 years ago has lost a lot of its shine with customers. The competitive low-end postpaid plans have driven, I think, prepaid churn across all carriers, as they've managed to hit a sweet spot. And prepayment too has also siphoned off those customers. So for us, our base is composed, as you identified, of really 3 critical pieces: kind of the traditional post -- or the traditional prepaid, which is declining relatively rapidly; a very successful Chatr franchise, which seems highly relevant to customers and is highly successful, and we believe is bringing on new users to the category and people that aren't nearly as committed to their cellular offering; and lastly, prepaid in terms of an activation mechanism for iPads and other tablets. So key things to take away is traditional prepaid in significant decline; Chatr, very, very successful, vastly achieving. And most of our activations these days are on postpaid, on tablets. A very, very small percentage, less than 5% of the tablets being activated on prepaid. Part of the reason our numbers aren't as large as you would expect is that traditionally, as you know, the Q1 quarter is a quarter of relatively high churn because of the 6 month deactivation policy. So lots of take up in the summertime and through the back-to-school period typically results in churn at this time of the quarter. At the same time, as the Chatr base has grown bigger and become more mature, that base is starting to rise to a normative level of churn just like other prepaid offerings. So all of these things are factors that really shape the numbers, and we are very postpaid-focused. We are very focused on high-value customers and smartphones. And I think it's important and we remind ourselves regularly that prepaid revenue is only 5% of our total network revenue. And that we have to measure the amount of energy that we put into it and stay focused on what is our core strategy, which is the higher-value customers.

And any uptake on LTE tablets?

We have some, but it's fairly limited at this point.

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

I just want to go back to the basic cable number. It was obviously surprising that you lost 21,000 in the quarter. It's not an isolation. You've seen accelerating losses at Cogeco show off for some time. But the fundamental issue seems to be your legacy cable boxes do not have the functionality of the media room boxes, which the telcos are rolling out. Now I think your next-gen Cisco box is a much more viable and competitive product, but you are charging customers for the upgrade whereas the telcos are generally subsidizing aggressively. Do you have to revert to a subsidy model in order to maintain cable share? And what does that mean for financials going forward?

So Dvai, we're working away. And I think as we've said on past calls, long before we launched NetBox 2.0, we had distributed in the marketplace almost 350,000 boxes that were compatible and enabled to be able to work with NetBox 2.0. Currently, we're letting customers opt in to the 2.0 service, and we continue to be active in that regard. In terms of going forward, back into the legacy base, we're trying to make boxes available at attractive prices for our subscribers from a rental perspective. And we'll continue to try to make the NextBox 2.0 offering available to our customers that are interested in it at while at the same time being as responsible as we can in terms of subsidizing boxes and offers in the process.

Okay. Can I ask you a quick follow-up? Is there any point in still selling the legacy boxes? Because I believe you still are, which seem to me, they are rather antiquated.

Yes. Frankly, Dvai, there's still a lot of people out there that are looking for a fairly basic television offering. And I think to be able to provide that for them at a low cost of activation, both to us and the customer, it continues to be a relevant part of the products as far as I'm concerned.

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

A couple of extra questions on the smartphone side. With smartphone up 20% year-over-year, do you expect that you're going to sell more smartphones in 2012 than '11? And Rob, you mentioned maybe trying to -- as the new users come on, they are a little bit lower ARPU, positioning the right device and plan. Can you talk a little bit about what you see the lineup being from the different handset manufacturers?

Okay. Listen, it's hard to have a crystal ball. We are driving to try to have the most smartphone customers that we can and obviously looking to get the ones at the highest ARPU. And shifting from that, Rick, to what the handset lineups are, I think I can comment in a relatively informed fashion. I spent some significant time in Barcelona. I went through the handset lineups with almost all the major manufacturers and I tell you, there has never been a better lineup of great smartphones that cover the range from the low end and very accessible with relatively low subsidies to sport models that will be waterproof and everything else. So the universe of smartphone ahead of us makes me feel even more confident that our success in smartphones and for that matter the success of smartphones in general in terms of penetrating the market is probably going to be stronger in 2012 than it ever has been before. So maybe I'll just leave you with that, unless you have any follow-up questions, Rick.

And just also maybe on the VoLTE lineup, too, as far as when you think you might see that and how important is it to get the voice onto the LTE device?

Yes. Maybe I'll let Bob follow up a little bit on VoLTE. Our belief and the things that we've heard from people from a roadmap perspective that makes us think that it's going to start to appear in devices in the latter part of 2012. And maybe with that, Bob, I'll turn it over to you for a few more comments on VoLTE.

Yes. I think what we're seeing in the U.S. among the LTE carriers is that we'll see some market trials of VoLTE service voice on LTE in the latter part of 2012, with commercial availability starting Q1 of 2013. So there's a lot of work being done in the industry, and we're seeing capabilities in that timeframe promised by manufacturers across the value chain. So I think you can expect to see something similar in Canada.

And ladies and gentlemen, we have time for 2 final questions today, the first of which will come from the line of Tim Casey of BMO.

Could you talk a little bit about smartphone economics? I acknowledge it's not just a Rogers problem, but with subsidies for iPhones remaining high and by your own admission, you're penetrating a lower ARPU segment of the market and the turnover rate of handsets doesn't seem to be getting any longer. Are you still comfortable with this economic model, this high subsidy and declining ARPU basis?

Thanks, Tim. It's Rob. Listen, our smartphone customers continue to deliver robust ARPUs, $80, in that range. 1.8x non-smartphone customer and they have much, much lower churn. And I think it's really important to remember how much lower that churn is. So therefore -- and the reason that we're attracted to them is the higher LTV. The great thing about that churn is not only is it very low, but it's also very, very stable. So there has not been a verbal of any significance when you look at the longer term in the churn yet. ARPU is, as you identified, is declining slightly over time. And as we would frankly expect as we get to kind of 60-plus percent penetration and we fully expect, as you do, that this will continue. So the key is we've got to continue to work on driving hardware costs down, driving channel costs down and taking a real hard look at other support costs like upgrade rates and the cycle with which we move customers up that upgrade cycle so that we can continue to take more costs out and make it even more economical to be able to deliver that smartphone experience for all of the customers going forward. So we've got a very sharp eye on that and a very sharp eye on protecting the long-term LTV of our smartphone business, and we're going to continue to be very focused on that.

Tim, it's Nadir. I'll just build on what Rob said. I think to your question and kind of the structure of how one views smartphones, you will see more and more segmentation on the market. As we get deeper in the penetration, you will start to see at simplest level of bifurcation. Some of the issues that we've talked about really at the, I'll call it the low end of the market. When you look at new customers coming on board versus existing customers we've have had for some time that are high ARPU customers. So how we upgrade and what kind of subsidy the devices do we offer to what kind of customer will become more of the approach of market, whereas I think, to be fair, in the early days of smartphones, we were getting customers with much higher ARPUs than today. So the level of subsidy you could warrant in that case is different from what we'll be doing going forward. And I think that will play out in the market. And the good news is we are seeing a broader range of smartphones with different subsidies associated with them. So you start matching them up a lot more as we go forward.

Your final question today comes from the line of Colin Moore of Credit Suisse.

Great. My final question is just going back to Cable. You touched on a number of drivers you can look at to combat against IPTV. I was wondering to what extent the priority is, perhaps rolling out increased packaging flexibility. And maybe in answering that question to the extent you can do, I know it's competitively sensitive, perhaps just touch on some of the high-level results you saw in your London market trial.

Yes. Thank you, Colin. I appreciate the questions. In the long run, we see a world where it's a world that's more consumer-driven and not nearly as driven by a regulatory or broadcasters or other things. And it was in that spirit that we undertook the trial that we did in London to try to see whether we could re-engage some of the customers that have unique needs and are not as well served by what I call more conventional cable television-type offerings. And I guess what I would tell you right now is it's still early days. We extended the trial after 3 months. I would say the results were modest. We had some enthusiasm for some of our lower-end packages, but we felt that it was too early to draw conclusions. But at the end of the day, much as it sounds like you do, we're committed to try to make and deliver products that work for all our customers and all the people who potentially want to be customers, and we're going to continue on that path. And maybe on a future call, we can talk more about the final outcomes and learnings on the London trial.

Ladies and gentlemen, this does conclude the -- I'm sorry, this does conclude the question-and-answer session. I'll now turn the conference back to Bruce Mann.

All right. Well, thank you very much, Luke, and we appreciate everybody joining us this afternoon. We appreciate your interest and your support. If you have questions that weren't answered on the call, please give myself or my colleague, Dan Coombes, a call this evening or in the morning. Our contact info is on today's earnings release, and we'd be happy to provide whatever color or clarification you might require. Thank you again. This concludes today's teleconference.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation, and you may now disconnect your line.