Rogers Communications Inc (RCI) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rogers Communications second-quarter 2005 results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Tuesday, July 26, 2005 at 10:00 AM Eastern time. I will now turn the conference over to Bruce Mann, Vice President Investor Relations. Please go ahead, sir.

Thank you very much, operator. Good morning everybody. We appreciate you joining us for Rogers second-quarter 2005 earnings teleconference. With me here in Toronto this morning are Ted Rogers, our CEO, and Alan Horn, our Chief Financial Officer. Also is Nadir Mohamed, the President and Chief Operating Officer of our Communications Division; Edward Rogers, the President of Rogers Cable; Rob Bruce, President of Rogers Wireless; and Tony Viner, President of Rogers Media along with selected members of their respective senior management teams.

Our detailed 2Q '05 release was made available this morning on the major financial newswires. If you do not already have a copy, you can find it on rogers.com, PR newswire, or any of the other wires. But you should review it fully including the Safe Harbor language towards the end as that language applies equally to the discussion we will have on the call this morning.

As we have done over the past two calls over the last couple of quarters following the 12/31 privatization of Rogers Wireless, this morning we will do one integrated conference call where Ted will make a few brief introductory remarks and then we'll take your questions pertaining to wireless, cable, media, or any of the other segments of Rogers Communications in whatever order you have them.

Two things quickly if I may before Ted starts. First as many of you are aware, we closed on the acquisition of Call-Net on July 1. As such, the second-quarter results which we released this morning do not incorporate any of Call-Net's results for the second quarter. We will for the third quarter pick them up for a whole quarter. However as Call-Net does have an outstanding public debt instrument, they continue to be a reporting issuer in their own right, just as Rogers Cable or Rogers Wireless are. So as such we filed Call-Net's 2Q results this morning on SEDAR/EDGAR and (technical difficulty). We posted them on the Investor Relations section of the rogers.com website. Starting with the third quarter as I said, we will start picking them up fully. And as you know Call-Net, which is now 100% owned by Rogers, has legally changed its name and is doing business as Rogers Telecom.

Second, just a quick note as we know many of you are curious in a couple of respects. First is around cable telephony subs and guidance around that; and second is around Call-Net integration specifics. We need to say up front that we're not prepared today to provide any specific outlooks on either of those topics as in both cases we are less than literally a month into the process and still have a significant amount of work ahead of us before we're ready to share specifics. But that will come in the coming quarters.

So with that, I will turn it over to Ted.

Thank you for joining us. I am pleased with our overall results for the quarter as well as the long list of accomplishments which should very much help us set the stage for continued strong growth in the future. On the subscriber side, wireless postpaid and prepaid subscriber net additions were very good thanks to strong sales combined with the lowest postpaid churn in many years, which bearing in mind with the integration of Microcell is quick remarkable.

At cable, high-speed Internet net additions remain strong in the quarter since we passed the one million subscriber mark. This was ten years from the month that Rogers launched the first high-speed cable Internet service in North America. At the same time, digital cable net additions in the quarter were the highest ever. Basic cable subscriber levels held their own. And media delivered solid financial results pretty much across the board.

Together these results are reflected in our strong consolidated financial performance for the quarter, 29% pro forma revenue growth, 27% operating profit growth. I think it is very much worth noting that our margins at wireless were back above where they were at this time last year before the Microcell acquisition, a tribute to our top-notch integration and management teams at wireless. I noted in the Wall Street Journal today that BellSouth had a significant reduction in profitability due to their merger when they bought a wireless company through Cingular and we have been fortunate that we have not had anything like that here.

We made significant progress integrating Microcell into our operations during the quarter, including successfully converting the Fido prepaid subscriber base over to our billing system and making significant progress executing the physical network integration. In fact on the network integration, we have essentially completed this highly complex task across the entire country with only the Toronto and Vancouver markets left to complete. They of course are large markets but all the rest is done.

Obviously a lot of hard work ahead of us on the postpaid billing platform and various other IT and back office functions but we have had good progress to date as it is tracking to our aggressive plans.

Also in the quarter we were successful in our acquisition of Call-Net, which is now called Rogers Telecom, announcing and closing that transaction within six weeks. We closed the acquisition on July 1, the same day we began introducing our cable telephony service in the greater Toronto area and exactly 20 years from the day that we first launched wireless telephone services in Canada.

You know, between Rogers Wireless, Rogers Telecom, and our cable telephony business, which we expect will continue to grow quickly, we now have over 6 million consumer and business telephone customers across Canada. Not bad. With our telecom offerings, we are now both in a position of scale and of being positioned well for significant growth; a good balance between the two and with enormous concentration in the most desirable areas of the industry, wireless and broadband.

From a product innovation perspective in addition to our cable telephony launch you saw in the quarter on the wireless side that we introduced several compelling new services in terms of wireless e-mail functionality and also in the quickly growing wireless music downloading space. In cable we continued to significantly reinforce the security and digital photo features of our Rogers Yahoo! Internet service, offering those even further sets Rogers high-speed Internet product apart from the competition.

During the quarter we also received approval from the CRTC to finalize our acquisition of the Vancouver NOWTV station, which while a favorable decision for Rogers also includes free transmission rights into the Victoria market and a license for a new Winnipeg television station as well. I understand from Tony Viner that that will be on the air in three or four months rather than the 12 to 24 months that perhaps many other operators perceive.

Momentum is something that we cherish at Rogers. As you know, the strategic initiatives we put in place late last year dramatically increased our exposure to the Canadian wireless industry, in fact changing the face of Rogers Communications as you know. In line with this, we put in place a new operating management structure during the past quarter to reflect many of these changes and to ensure we capitalize on the increasing number of opportunities we have as a combined company and how we can take a more integrated approach to our markets, distribution channels, and many back office operations.

As many of you saw, Nadir Mohamed was promoted to the position of President and Chief Operating Officer of our Communications Group with leadership responsibilities for both the wireless and our cable operations. Edward Rogers continues as President of Cable. Rob Bruce became President of Wireless. The combination of these three leaders is one that I have confidence in continuous along the track of profitable growth for many years to come.

I mentioned to you several months ago that we are serious about looking closely at our spending and margins. This is an important part of Rogers especially in the viewers (ph) notion of profitable growth is something we will be disciplined about. At the cable division this quarter, the margins dipped below 40% with increased expenses relating to our aggressive digital push. At the same time that we launched several large marketing initiatives, we are launching our cable telephony product and we are planning for and completing the acquisition of Call-Net. Some of the margin pressure relates to the ARPU impact of deeper penetration of our bundled offers.

All of these are investments that we are committed to in their own right, but we are aligned internally that we don't have to sacrifice operating leverage to achieve our strategic objectives. I think you will find as we go forward that the (indiscernible) with the support of myself and Alan will be diligent in striking that balance. None of us are happy with cable margins below 40%.

Today we announced changes to our Rogers bundling pricing for new sales effective as soon as our IT systems will permit, which will be sometime in the fall. With these changes we are taking the program from a straight 15% discount on two or three or four products to a progressive approach. Under this approach the discount for bundled offerings will began at 5% for two core products, increasing by 5% for more than two products, up to 15% only if the subscriber were to take all four of our core services; cable, Internet, wireless, and Rogers home phone. At the time we introduce that service, the existing bundled customers for the 15% discount on two, three or four will be grandfathered. We expect that this will provide the appropriate balance between ARPU on all our products and still delivering meaningful value and incentives to our customers. It will also to a great extent reduce repricing risks as we proceed to integrate the Call-Net acquisition later this year.

You have heard a month ago of the elimination of the $5 package for long distance which is being applied within Sprint customers would have been extremely costly. That is now gone and now we are taking charge on the discount program as well.

I am pleased with how quickly we have been able to accelerate the penetration of digital cable with all of the terrific work that went into enabling the launch of our cable telephony products. We waited patiently for this day for many years and now it has arrived; we're very fortunate to have Michael Adams, who has been in charge of that program, to steer us through the shoals and bring us to the Promised Land.

On the digital cable initiatives, we are already seeing that with increased penetration of digital terminals in the home, we are able to get more and more of our subscribers using On Demand and Pay-Per-View services. We have a significant potential perhaps selling more and more subscribers to our astounding array of specialty, premium, and ethnic channels all of which lead to greater choice, higher satisfaction, and higher ARPUs. We are committed to moving the cable customers as quickly as possible to an all-digital platform.

I will wrap up by saying that the first half of 2005 has been extremely solid for Rogers. It reflects the planning and execution strength of our management teams in depth and importantly the hard work day in and day out of the talented employees across the company. Overall we have accomplished a great deal and delivered continued strong sales of consolidated financial results.

Thank you for your support and I will turn you back to Bruce so that we can get to questions.

Thank you, Ted. Operator, in just a couple of seconds, we will be ready to take questions from the participants. But before we begin, I understand that repetition helps if for no other reason than through osmosis. So I will just ask the people on the call if you could limit your questions to one particular topic for the benefit of everybody on the call and let as many people as possible have a chance to participate. We would appreciate that and we think everyone else on the call will as well. And to the extent we have time, we will circle back and take your additional questions or we will get them answered for you separately off line after the call.

With that, operator, please go ahead? We're ready to begin.

Glen Campbell, Merrill Lynch.

Thanks very much. My question was on the new bundled offers and the fact that customers or existing customers will be grandfathered. Will the grandfathering extend beyond the two-year life of their bundled contracts or not? Can you talk about how what happens to, say, a grandfathered customer has two products on their third product? And can you talk what your thinking about the addressable market on these offers; the proportion of customers likely to sign up or who are able to sign up who aren't currently actually taking a bundle? Thanks.

We just announced -- I will start and Nadir might fill in here -- we just announced it, so we don't have all of the i's dotted and the t's crossed. As for what happens when the existing grandfathered ones two years runs out, I don't think we have addressed that yet. And we have a habit of trying to keep our customers happy and not disappoint them. But Nadir?

If I can pick up, Glenn, obviously in terms of all the mechanics I can you directionally we are committed to making this something that is friendly for our existing customers. One of the learnings we had from our experience with even Fido over the last year is the benefits from grandfathering. When I say grandfathering by the way, the mechanics of adding or subtracting products for the existing customers we will grandfather 15%. I think there is a tremendous retention benefit we get from actually telling our customers you have joined us, we want to make your experience with us as good is it can be. So we will honor it in its fullest sense.

I think in terms of moving forward in the addressable market, what we like about the new approach is it actually aligns value with pricing so the more business you do with Rogers, the more we value the customer. And I think it achieved a really good balance between retention and acquisition. The idea of being able to upsell a customer from the second to the third product and the third to the fourth by offering more incentives I think will work for us going forward. And at the same time obviously to a certain extent, it also creates a different incentive to move off from the multiple products.

Maybe just a quick clarification. If I am an existing bundled customer with two products, and I sign up for a third, is it still under the old 15% or would be at 10% under the new plan?

We would honor the existing arrangement of 15%. That's the direction we have taken. Obviously we will work through the logistics of this as Ted pointed out over the next short little while in terms of systems. But our commitment to existing customers would be around the 15%

Okay, thanks very much.

Jeff Fan, UBS.

My question is on cable. When we look at the operating costs of this business, Mr. Rogers, you mentioned that there is potential room for improvement. Can you talk a little bit about as we look out further where that improvement is likely to come from because we continue to see sales and marketing costs pick up as percentage of revenue and then on the year-over-year growth and also on the operating costs?

And then the second part to that is on the capital. A lot of the CapEx this year increase is due to digital phone service. But as you look out do you see capital intensity coming down from the current level well above 30% to something closer in the 20s?

I will start. And to say when we look at the balance of the year, there is a couple of things which will help us improve against the current margin level. First is the rate increases that we're putting in in the July timeframe which we are up to $2.00 for basic depending on where you were trying to get a rate of $24.99 across the base; $1.00 for tiers; $2.00 for TMN; $2.00 for sports pack; a couple of dollars for all digital and a few more smaller ones with an average when people ask on the core rate increases of just shy of $1.50 across the base. But that takes a few months to work itself in since our customers are on different billing timelines.

We look at some of the dollars that we give customers either in up front offers or on a recurring value through BCB and looking at how do we keep our sales strong and healthy but maybe moderate some of the investment that we're making either up front and the offers are on a recurring basis through BCB, which we're doing. We are expecting some of the churn to continue to fall on our products and we've seen some good news on Internet churn, digital churn, and some basic churn and hoping that that continues the right way as our bundled lifecycle continues to roll out.

Looking at installations and how we can moderate our number of trucks that we roll and change some of the installation fees to better incent people for self installations and looking at the marketing and sales costs and looking at keeping that and not continuing to decrease it in the levels that we have. When we add those up as well as some strong sales and the flowthrough that we get from them, we expect a decent third and fourth quarter and to hit our guidance for 2005 for EBITDA, probably on the lower range but within the range.

On the CapEx answer I would say that we tend to give guidance for one year at a time and we tend not to go on that, so we've given our formal guidance for 2005. But when you do look at some of the trends that you have mentioned, there are some that are nonrecurring investments so we get our telephony product up and running. There will be capital associated with the roll out of that business and all the CapEx associated with getting that business up and running. Spending some CapEx now to retire some old platforms on the Internet side and go to all boxes which will continue for 2005 and through 2006, But as that plan comes in that that won't be a recurring capital theme.

So I think at Rogers we had a strategy of continuing to invest to have a competitive environment and in growth for our future. But I think CapEx when you look out the next few years it would be safe to say it would not be at the same level as 2005.

When you say the same level, are you talking about intensity or just on a dollar level?

Both, I would mean both.

Okay, thank you.

John Henderson, Scotia Capital.

Thank you and congratulations on some great results particularly in wireless. Now I'm going to focus on cable. Edward, I just wonder if you could help me with the incremental digital revenues that you're getting on digital customers? What are the buy rates looking like now and what kind of costs would have been incurred in order to add all those digital customers this quarter? What is the COA or was there boxed up CD on some of the customers or was it mostly rented? That sort of thing.

I would say that the digital strategy is -- first it is a long-term strategy and so it is difficult to look at as we escalate within one full quarter in to look at and judge the strategy itself. But it is a strategy that says that the higher our base of digital customers, the more competitive we are, the lower the churn is for our digital customers and the affections to satellite and the VDSL. Obviously it is a launch pad. If you're going to get new services you need to be a digital customer.

As we digital simulcast our 750 and 860 areas, it did change our offer in terms that historically people would get a box to buy incremental services and now that every channel if you are a digital customer is of digital quality, we will try to get people if they are just taking basic or basic and/or tiers to be a digital customer as well. So the number of customers of new households being added have less incremental attached new programming than they used to. But again, it is a longer-term strategy in terms of getting them on the platform for the future.

So there is costs in the quarter. I think we are ramping up our sales of boxes while continuing with a strong rental program but to expand in the retail area. And of course you do push more boxes but when we looked at where our competitors sell for instance retail is the main channel that satellite sells in and it is important for us to be competitive in that channel. So it is also tough to look at digital in isolation and I think increasingly it will be tougher to look digital in isolation to itself. But what is the mix of cable television as a whole? Is there anything that you'd add to that?

John, its Don Huff here. I think maybe I will just add some more details to Edward's comment. We're definitely seeing greater than 15% (ph) less than the digital revenue that come with increases in subs in the quarter-over-quarter. And as you alluded to, there are some in-quarter costs associated with the digital push and they come in a number of forms. We have increased call volume into the call centers in response to our advertising. We have made a particular splash around two things this quarter, the Personal TV and the refocusing of our theme packages. As well, we had quite a splash around the launch of RI (ph). So we drove a lot of calls into the call center.

The increased level of connects also means more phone calls, more truck rolls out to install service customers. And so there as well box subsidy cost as Edward alluded to. So we had some in-quarter costs associated with the deployment. But we are seeing the lift in revenues. We're seeing the lift particularly in people taking more specialty, more ethnic, and we're seeing quite a strong lift in the Pay-Per-View activity.

It's Ted here. If I could just add. If you read the papers last week there was some articles about cable in the United States competing with satellite in the United States and with the new telco services on video in the United States. And basically the telcos were laughing at the cable saying that only one-third of them were digital and two-thirds were analog and that analog was sort of yesterday's news. And that they were 100% digital and offered all these hosts of services, high definition and everything else which you can't get on analog. And I think that is a very important point.

If you look at the basic subs and the loss of basic subs over the next couple of years the real way to stop that is to digitize as much of your base as you possibly can. And just to remind you, our targets we started the year at approximately 30%. At the end of '05, our target was 45%. At the end of '06 our target is 60%. That would allow us in the first quarter of '07 to move Tier 3 off of analog completely and that would free up 15 channels which would provide for 30 high definition channels using the present technology. But I believe by then the new technology will be out and it would allow 60 channels of high definition or even more if they were not high definition.

And then as we go through '07, you go to 75% and so on. And these are going to absolutely protect the company in my view on its customer base as well as allow us to offer a whole host of extra services that analog customers just can't get.

That is all very helpful. I just wonder if, is there any measure of say, cost of acquisition or incremental costs that would have been incurred for this quarter's digital push?

I'll try it again to explain. We had some particular in-quarter costs associated with the Personal TV launch.

He wants a number.

Have you got a number for each digital box that goes out, you spend a $100 on marketing and sales or what is the story? We don't know. So why doesn't Bruce try to get back to you with an answer.

Thank you very much.

Peter MacDonald, Griffith McBurney.

Just a couple questions on wireless. First could you add some color on the trend results in quarter and what I am looking for there is some detail on your initiatives from your internal initiatives as well as the reflection that these results have on the competitive marketplace in Canada? And then I will follow up with the second one.

Peter, its Rob Bruce speaking. In terms of churn, I think you know that we have been focusing on churn and driving our numbers down for some time. So many of these would be continuations of things that we have done with varying intensity over time. We have been strongly focusing a customer experience and customer satisfaction at every transaction and that has continued intensively through the quarter. We have seen a very significant change in network performance as we have integrated the two networks. We think that too has been particularly helpful in producing a great customer experience and thereby reducing churn.

We have continued to expand and better target our handset upgrade programs across our customer base, targeting our energies specifically at TDMA and analog customers who we know don't have quite as good of an experience as our GSM/GPRS customers. The expansion of contracts has gone on steadily across the base both on the Fido base, where it has been a huge increase. We are actually up to 77% of our entire base on contracts now and actually our ad rate on contract is over 93% currently. All of these things I think are key contributors.

There is one additional one. Several months ago we told you that we had some involuntary challenges produced by a product called TMN that we put in the marketplace. We have resolved those issues and our involuntary churn has come down in coincident with that. So across the board we have had a number of things that have been driving. A lot of them continuations of things that we have done in the past. And we will continue to work hard to reduce it further as we go forward.

And was there a change in the competitive marketplace within the quarter?

I actually thin it was a very competitive quarter. There were a lot of pockets of very intensive pricing activity driven largely by valve (ph). A lot of those zero dollar phones -- in fact zero dollar BlackBerries which were unprecedented; per second billing being extended to business customers which was something that we have not seen in the category for some time. And about half a dozen others that I think have made it one of the more aggressive quarters that we have seen for a long time.

But again in pockets, so a little bit harder for probably many people to see on a day-to-day basis because it will happen in one market or another market or against one segment or against another segment. So I believe it was a very aggressive quarter.

Okay, thanks. I will queue back in because of the length of your answer. It was great. Thank you.

Jonathan Allen, RBC Capital Markets.

Congratulations on a fantastic quarter. Perhaps just delving into some of the changes in your guidance for restructuring and integration, perhaps you could discuss what the sources for some of the changes? As well as, is this a reflection with the lower cost -- is this a reflection that the savings or synergies from the acquisition are potentially less? And discuss the change in mix between CapEx and OpEx that you're seeing.

Jonathan, Rob here. In terms of the change it was a reduction as you saw in the guidance. It is primarily driven by two things I think. The mix has obviously changed between what provision on the acquisition and what point of (indiscernible) on the income statement you (indiscernible) for the balance of this year. That is primarily a fairly technical accounting issue on how certain severances are treated. I think the absolute amount doesn't really change. It is just a question of which of the buckets it goes into. I think where the real reduction is coming from is on some of the network integration costs and primarily on some of the contracts where some of the duplicate vendors are being eliminated. That is where the real savings are coming on integration side.

I don't think that the reduction in cost indicates that synergies are coming down at all. In fact, those synergies are quite strong in the quarter and we're quite confident going forward. So I think that answers both parts of your question.

Perhaps I could just follow-up on one of the previous questions. In addition to the number of customers that you have on contract, what percentage of your customer base would still be on the TDMA network?

It is just a little $800,000 customers still on TDMA. Prepaid mix obviously a whole lot higher than the postpaid mix. I thin we've said on previous call by the end of the year we expect we would be probably down to about 250,000 TDMA customers and we continue to target them differentially with offers, recognizing that the experience and the additional capabilities of the GSM/GPRS phones allows to sell different services and products that are highly desired by the customers going forward.

Do you find the churn on the TDMA network is higher than the GSM network?

Yes.

Significantly so? Perhaps you can give me a sense (multiple speakers) Okay, great. Thank you very much.

Ben Swinburne, Morgan Stanley.

Ted, your comments on all-digital and the digital strategy were very helpful. If I can just ask a follow-up to the cable team, are you -- now that you have digital simulcast across the network, are the set-top boxes you're buying from SSA or any of their vendors, are those all-digital now; so there's no analog electronics and you're saving $50 to $60 a box?

This is Mike Adams. We are currently buying some all-digital boxes, and we're pointing (ph) them currently. So I don't know if that answers your question. I don't think we have given any guidance on the CapEx per box, not at $50 a box. I wish we were, but we're trying to get there.

And then one additional on the all-digital long term. Any plans for switched digital? We are hearing a lot of noise in the U.S. about some of the operators moving in that direction, maybe adding 30 to 40% more channels without having to deal with their analog problem. And I'm wondering when you look out '07, '08, do you want to at some point sort of force everyone and every TV over to a digital box so that you can completely take all the analog spectrum back? Or do you think IP/TV and satellite really are not going to get that dangerous, that you always at least have some analog out there which maybe even helps the cable platform to some extent?

Let me just remind us all that in the case of -- it is remarkable, isn't it, that the analog and the TDMA is very much similar to the analog here. And in the case of Rob Bruce, as he gets a number of customers down in TDMA, the use of the spectrum gets smaller and smaller for TDMA. Unfortunately, as Edward gets the number of customers down in analog, they still occupy two-thirds of all the spectrum. So, yes, in my view it will be essential to, at the appropriate point -- and don't forget the government is going to take the frequencies away from the broadcasters. So nobody is going to think analog. That is what people forget about. So I think the answer is that will proceed apace. And I've forgotten what your other question was.

Any interest in switched digital in the interim as a way to add capacity?

I think switched digital is something that Mike and our engineering people have been talking to Time Warner and others about. I went over to Japan with the Time Warner people, and I think they will have it operational by, Mike, this year?

Trial.

We will probably -- I would hope we would have it by the end of next year, but we are not going to be on the bleeding edge. We're going to be a follower there.

I think if you look at switched video, the repatriation of some analog services and MPEG-4 being rolled out which will be very useful for high-definition, there is the ability to generate discretion we need for advanced services and more high-definition. I think it is important to, just on the digital strategy, the digital is a strategy to keep reduced overall customer churn in a platform for revenues growth, which would lead over time to the ability to repatriate some analog spectrum, but that is not the driving strategies. There's a number of ways to do that, as I mentioned. So I just wanted to clarify for that.

And then some of these things as you know it's not Rogers driving them. They are industry things and we will look at what is there and adapt and adopt as it's rolled out.

It is perfectly appropriate in Canada to have switched digital because we are delivering maybe 100 French language services or 200 services to all the homes that we serve, whether they take it or not, and a small percentage actually take it. So if that was on the switch, that would be really helpful -- to have that programming on the switch. So we would probably have a higher need for it than would Time Warner.

That's a good point. Thank you very much.

Dvai Ghose, CIBC World Markets.

Congratulations to the wireless team for another exceptional quarter. My question is regarding ARPU growth sustainability. Rob, you talked about some of the pricing competition especially from Bell Mobility in the quarter. Unfortunately I see yesterday that they relaunched solo a plan which both on the prepaid and postpaid side seems to essentially give away SMS as well as web browsing for no incremental revenue. And also heavily discount prices on the prepaid side evenings and weekends. I'm wondering to what extent you believe that your ARPU growth trajectory could be negatively impacted by such a move by Bell and particularly given the fact that wireless data seems to be a huge component of the ARPU growth over the last few quarters.

Obviously I think it is disturbing any time we see stuff being given away. We know that SMS has an incredible value. We have proven it. Our SMS growth on a pro forma basis is over 120% year-over-year Q2. So when I saw that I was puzzled. But clearly we continue to be very focused on playing our game on prepaid, which we continue to be happy winning a fairly large share and growing the higher value customers within the prepaid game. Clearly others have different approaches to that and we continue to be very committed to postpaid and building our service offerings and innovating around things that add value to our customers from a postpaid perspective. And we think that that is where the gold is and we will continue to play the game that way.

Maybe if I could just follow up and ask specifically -- I know it is very early days but do you think that Bell Mobility's move will force you to reassess your SMS and indeed your web browsing prices?

We constantly take a look at things. Like you, Dvai, I saw that stuff come across the wire first thing this morning and I had a quick glance at it. To tell you that I have really done justice to it or that my team has had a chance to look at it in any kind of depth, I would be misleading you. We will take a look at it. We remain committed to making sure that we are fully competitive in the marketplace and we do the things the drive profitable growth and we will continue to do that. I can't really comment beyond that.

Ted here. Just an obvious comment. A lot of the early adopters who use digital who use this service are people who travel and if you travel and you have a BlackBerry for example from Bell, it don't work over in Europe. It don't work in South America. It don't work in many parts in Asia. It just don't work. And whereas the Rogers one works almost everywhere and I think that will be a very limiting function for the sale of data.

That is a great point, Ted, and we will continue to highlight the value of having our phones and devices working everywhere on a global basis going forward.

Thank you very much.

Greg MacDonald, National Bank Financial.

Questions again on wireless subscriber trends and one of the things that we saw in the quarter at least judging from the consensus number was a pretty good reversal on the prepaid erosion. I wonder if you could talk a little bit about what is happening there right now? Is that just an issue of Rogers being more successful in focusing on those Microcell customers or as there a larger industry trend there?

And if you could also follow up because I have noticed based on the gross numbers that prepaid continues to be important as much as you want to focus on post. Could you comment a little bit more in detail there in particular your marginal prepaid customer adds? Are they more like the higher usage Microcell customers? And on the churn side you are doing a nice job of decreasing prepaid churn. I wonder if you might comment a little bit there on potential targets and even if you don't, can we assume at some point that monthly churn will have a two instead of a three?

We don't give guidance on prepaid churn or subscribers, as you know. But let me make a couple comments that may be helpful. A while ago we made a fairly deliberate decision and that was to go to thirty-day card expiring and we kind of drew a line in the sand and we said we are not basic; we're going to take less than $10.00 for a prepaid user. If other people want to serve those markets and clearly some of them are actively serving them, some new entrants in the market are actively serving them, then that is okay. We are willing to forego the $3.00 customer. So that is number one.

That spawned a bunch of churn because people voted with their feet and said if we can't get a $3.00 price, we're not going to stay with Rogers and that has continued to be catalytic in terms of driving the churn. Frankly one of the other things that we are fairly active in working on as I said earlier in the call, with the analog and TDMA mix in our prepaid base is actually fairly high. We started to particularly for our higher value prepaid subs start to give them the opportunity to handset upgrade particularly when they are north of $30 they become fairly attractive and look an awful lot like a postpaid subscriber.

As we start to get those analog and TDMA numbers down, I expect we will start to see some abating in the churn. John, I don't know whether you wanted to add anything?

Sure, Greg (ph). I think it is important to point out when you look at prepaid as a percentage of either our network revenue -- or if you can help your models if you change the churn up or down even by 150 basis points. It's really not a big driver for the wireless business --so as much as we would like the churn to start with a two -- we will work hard. It is difficult to invest a lot of money in retention for those customers and quite frankly we think a lot of them are actually moving to our postpaid. It is hard to measure that because they like to come in and pick up a new handset when they do that. So while it is important, it is not by far the number one focus (inaudible).

Exactly and the thing -- I don't know whether you took away but some months ago I guess probably about 1.5 years ago, we said we were not going to subsidize prepaid phones so when these people are churning, they are churning away. They are not shedding Rogers dollars that we have invested in acquiring them. They are shedding their own dollars. So we've got no investment in them of any significant nature and so the consequences of losing them are somewhat less than on postpaid. While we don't like losing any customers, there are some that are less important to lose than others.

Could you just comment on that sort of question I asked on ARPU though? Are the main marginal customers that you are adding on prepaid? Are they more like the Microcell customers?

Let me take it (multiple speakers) away from brand into ARPU characteristics and the answer is yes.

Okay, that's helpful. Thank you very much.

Tim Casey, BMO Nesbitt Burns.

A question on the financial side. Can you just talk about your appetite for Microsoft converts to where the share price is trading now? You are going to have an opportunity to redeem them. Just interested in your thoughts on that. Thanks.

I think that -- to look at that in the context of the terms of the price as you -- the terms are they have to trade over at least $45 for 25 consecutive trading days. So we are a ways away from that. So at that time, we will clearly look at that quotation and look at the matter.

Alan, would your natural inclination be though if the share price was to trade at that level -- that it is something that you would like to redeem?

I think it is to say, again, we would have to look at it in the context even after the 25 days of the 30-day notice. So we just have to look at it in that overall context and say clearly it is generally in the interest of the issuer of a convertible security to have that security convert.

Ted here. I'd just like to say that Microsoft (ph) have been and are our friends and we would consult with them on this matter as we go forward.

Simon Flannery, Morgan Stanley.

I wanted to turn to Microcell again. Great margin performance in wireless this quarter and you have raised your guidance for the year. To what extent have we still got another sort of shoe to drop here in terms of the full Microcell integration, store closings, and the headcount roll off? If you could give us a little sense of what the next couple, three quarters might hold for us in terms of further benefits from that acquisition? Thank you.

Simon, its Rob Bruce. In terms of Microcell, I think we have probably said, but if we haven't the progress that we've made to date we have converted over the financial systems. I think Ted made reference to it on the call. And as well, we have migrated over the prepaid system. I think the big work to come is in the fall and that's when we move over to -- Bob points out rightly that we have actually converted 87% of the network integration which also is huge work. But the big piece to come for sure is the work around cutting over the postpaid systems and that is slated for the fall. We have been preparing diligently for that for some time and the teams continue to work away. So that is what is on the horizon.

In terms of severances and other things we have been pretty clear that it's included in all the references we've made on the guidance and we don't plan it in any detail.

Okay, thank you.

Philip Olsen, UBS.

Just had couple questions with respect to financial flexibility, specifically what are your priorities right now from a free cash flow perspective or if you have specific leverage targets that you would like to achieve over the course of either this year or into 2006? And from a financing perspective, either at the cable or wireless level, what do you envision as the remaining capital markets transactions that you would look to finish during the second half of this year?

That's a lot of questions. I think obviously in terms of financial flexibility is something that is important to us and we are getting that financial flexibility allowed us to move the way we did last year in terms of the AT&T block and also the Microcell opportunity. So we understand that that obviously is from a strategic perspective. I think we have indicated that we are and we are currently just under 5-to-1 (ph) and I think we would say that we want to trend down from there and get down under natural circumstances to below a four times.

I think in terms of the capital markets said activity for sales (ph) will be likely no real requirements for any capital raising within the group so that they we're comfortable with where we are. In the last quarter we just renegotiated with our cable bank facility to extend the maturity of that as we set out in the press release. So I think from that perspective and in terms of the liquidity we are in pretty good shape. As you also know, we put out the call notice on the OID convert at RCI which will hopefully convert by the middle of next week.

I would just like to add that our target originally was to get the debt to EBITDA down from just under 5 to 4.5 at the end of this year and I believe 4 again the next year. And we hope to seriously augment that and improve on that.

Great, thanks a lot.

Philip Armstrong, CIBC World Markets.

Just to follow up on that last point, does the Call-Net acquisition in any way impede or potentially slow down your ability to pay down your debt? Specifically is there potentially more CapEx coming there down the road given the fact that maybe Call-Net had been under spending in CapEx for the last few years?

We don't see it have any impact in terms of our plans on debt reduction.

No. Okay, and what Ted just said there in terms of maintaining your targets for leverage ratios basically is that what you're saying?

I think the Call-Net acquisition actually was slightly positive in terms of overall debt to EBITDA.

Okay. Great. Thank you.

Richard Zigrovic, Genuity Capital Markets.

Thank you for taking my call. Another wireless question if I may. Could you spend some time in giving me the description of what is going on in consumer data? If it is still a 60/40 split with business in terms of the major buckets, where consumers are spending their data money? And the appetite for consumer e-mail, I know you've also launched a non-BlackBerry solution and any color on how that is going? Thank you.

Its Rob Bruce, Richard. As I think highlighted a little bit of it on the call really the way I think about it is we break into kind of four buckets, SMS, wireless Internet, and downloadable ring tones and all those things I would included that bucket and images and the whole nine yards. Then BlackBerry and wireless e-mail, more for business than for consumer, and then lastly what we call vertical applications. And last time we talked about it being 60/40 consumer, it continues to grow robustly on both sides of the business. So still in kind of the 60/40 range. Again I haven't checked the numbers scrupulously to make sure it is exactly 60 but it is in that range.

What is of interest is I think SMS continues to grow the most robustly of the portfolio again which makes the announcement by Delta give-it-away a fairly disturbing announcement. As well, we continue to see very, very strong growth on our BlackBerry business and as well on our Treo business supported by the new service that you identified which is called MyMail. And MyMail while it supports the capability of large enterprise users to put Treos and other devices, non BlackBerry devices, on an exchange server, there is also a consumer level application which allows them to connect via the Internet very inexpensively. And we are very excited about that because we think that is going to be critical to letting occasional e-mail users who want a handful of e-mails delivered to a wireless handset for that to be done going forward.

So for us we think that is a pretty interesting development and it should start to develop that low end of the e-mail market. That would be a couple of the highlights. We continue to have success on our vertical applications building unique and ultimately we think applications that will be able to be rolled out across a number of customers. We continue to have success there but again, it is a much smaller business compared to the scale of the first three; that is the SMS, the BlackBerry and business e-mail solution and the wireless Internet. So I don't know.

Thank you. I know it is still early but have we seen any uptick in the MMS between the carriers?

Do you know what, I honestly haven't had a look since the launch. It was only launched as you know on July 1. I can have a look and if you want we can do a quick two-minute follow-up call.

Great, thank you.

Vince Valentini, TD Newcrest.

Thanks very much. A question for Nadir. When I look at the lightspeed Internet service at cable and I contrast that with what your strategy had been at wireless for a few years, it seems quite different. The lightspeed is in good subscriber growth but ARPUs are dropping 4 or 5% year-over-year. At wireless your clear focus on getting high value, high revenue generating subscribers as opposed to just subscribers themselves. Can you give me any thoughts on how you view that lightspeed business and whether you view it as a success and whether you think there is any changes needed over time?

Thank you for the question. It is probably way to early for me to comment on a specific around light but I can tell you that my commitment very much is on profitable growth, as Ted mentioned. That's our game plan and I think of the changes we have made already that we referred to was on the Better Choice Bundles and taking off the discounts onto a much more segmented basis. I think that is an indication of some of the things we can do to improve going forward. But maybe Edward can talk specifically about the light question.

Thank you. Vince, I think -- I mean, definitely want as many high tier data customers as possible. The reality of it is that every family can afford $45 and up for Internet services. The majority of the growth or pretty well all of the net growth today comes from dial-up customers. And so it is that mix of trying to get as many of the Internet customers onto Rogers as possible while moving them up to higher speeds.

Just the data point is the revenue variance between a prepaid and a postpaid sub I think is about 1-to-6 and it is about 1-to2 on high-speed to Ultra-Lite so it is not -- or just over 1-to-2, so it is not quite the same thing. What I think the message is we do try to keep our mix of the higher speed customers, but we're going to continue to get as many customers as we can.

Okay. Can I just clarify one thing? Were there any operating costs? I know there's lots of CapEx and you have said that but operating costs in the second quarter related to the launch of telephony on July 1 or was it all capitalized up till launch?

Vince, this is Don. It was all deferred up until July 1.

Okay, thanks.

Mr. Mann, there are no further questions at this time. Please continue.

First of all on behalf of the entire management team across the Rogers group, we wanted to thank you for joining us and tell you that we appreciate your coverage and your ownership of the shares. So thank you for that. If you joined the call late, there is a rebroadcast that is on the rogers.com website. It will be there for a couple weeks. If you have questions that were not answered on the call, please feel free to give my colleague Eric or myself a call. Both of our numbers are on the release of this morning and we hope that you enjoy the rest of your day. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.