Rogers Communications Inc (RCI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rogers Communications Inc. second-quarter 2011 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 today, Tuesday, July 26, 2011, at 8.30 a.m. Eastern time.

I would now like to turn the conference over to Mr. Bruce Mann of the Rogers Communications management team. Please go ahead.

Thanks very much and good morning, everyone. Thank you for joining us for the Rogers Communications Q2 2011 investment community teleconference.

Joining me on the line this morning -- almost all of them are here with us in Toronto -- are Nadir Mohammed, our President and Chief Executive Officer; Bill Linton, our Chief Financial Officer; Rob Bruce, who is the President of our Communications division, which includes both Rogers Wireless and Rogers Cable; Keith Pelley, who is President of Rogers Media; and Bob Berner, our Chief Technology Officer; as well as a couple other members of their respective teams including Ken Engelhart of our Regulatory group.

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

Today's remarks and discussion will undoubtedly touch on estimates and other forward-looking types of information from which our actual results could ultimately be very different. You should review the cautionary language to that effect in the -- not just our earnings filing today, but our full year 2010 MD&A. Those include the factors, assumptions, risks, etc., with respect to how things could differ and those cautions apply equally to the dialogue today.

So if you don't already have copies of the full Q2 MD&A or our 2010 annual report, they are both on the Rogers.com website, they are SEDAR, they are on Edgar, or you can get off hold of any of us at Investor Relations and we will get it to you post haste. So with that let me turn it over to Nadir Mohammed and then Bill Linton for some brief introductory remarks and then the management team will take your questions. So over to you, sir.

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

We continue to gain traction on the customer retention front, maintaining strong margins and generating significant free cash flow despite the planned increase in our capital spend as we continue to invest in maintaining our leading network position. Stepping back and looking at the quarter, the most notable observations I would point out are that we had strong customer growth in Wireless with the sales up 17%. And we had very good traction on both Wireless and Cable churn, despite the continuation of what is clearly an intensely competitive environment in both of those businesses.

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

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

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

The smartphone metrics, ARPU, churn, and upgrade rate remained healthy, and at the same time we are both attracting and retaining our highest lifetime value customers. So accordingly, the most significant driver of top-line growth was the continued strong growth in our Wireless data revenue.

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

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

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

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

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

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

On the flip side, you should note that the growth rate in the quarter's revenue also reflect, amongst other things, the timing of pricing changes made in March 2011 this year versus July 2010 last year so I would expect we will see the growth rate moderate in Q3 as a result.

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

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

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

On the Wireless side, we continued spending associated with the deployment of LTE where we are again leading the industry in Canada on wireless networks. In fact, just days after the end of the quarter we have flicked the switch to launch the first commercial LTE network deployment ever in Canada. Speeds with LTE are three to four times higher than HSPA+ with significantly lower latency, which is key for interactive applications like gaming, and also much more efficient use of capacity.

As we said earlier at the time of launch in Ottawa, we expect to have four major markets up and live before the end of the year with 25 markets covered during 2012. We also began a sizable investment program to significantly increase 4G wireless coverage across the Maritimes.

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

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

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

Thanks, Nadir. I will provide a little bit of additional detail on the financial results and metrics for the quarter. On the top line, our consolidated revenue growth was 3% for the quarter, which reflects revenue growth of 3% at Wireless, 5% at Cable operations, and 13% at Media.

On the adjusted operating profit line you see a sequential acceleration to 4% year over year, up from 0% in Q1. Overall, margins expanded sequentially by 30 basis points from Q2 last year with solid cost management more than offsetting the incremental device subsidies from the much higher wireless sales volumes and the pressure from the decline in voice ARPU.

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

As you can see, in terms of our Wireless results overall, the 1% increase in network revenue is a bit of a deceleration from what we have seen in the past couple of quarters. It continues to reflect double-digit softness on the voice ARPU line consistent with Q4 of 2010 and the first quarter of this year and with the level of competitive intensity we continue to see in the wireless market.

On the prepaid side, we improved year-over-year on both the gross and net lines, reflecting a combination of continued additions under our Chatr brand as well as continued activations of the iPad tablet. In terms of Wireless network margins, I think it's significant to note that continued strong 47% level in Q2. This, despite the largest ever number of smartphone sales to new subscribers, which Nadir mentioned, the second-highest number of total smartphone activations ever, and the continued competitive pressure on voice ARPU.

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

Turning to Cable Operations, the revenue growth rate reflects the impact of the circuit-switched telephone business, which we are essentially at the tail end of divesting, which was dilutive to the rest of the Cable Operations business, not just in terms of margins but in terms of top-line growth as well. Normalizing for the year-over-year decline in that part of the business, top-line growth at Cable operations would have been 7% or 180 basis points higher. However, keep in mind that the sequential acceleration in the Cable Operations revenue growth rate also reflects the timing of price changes that last year occurred in the summer timeframe and this year occurred in March.

What is a highlight of Cable Operations for the quarter is the excellent cost controls there, which combined with OpEx benefits of lower activity base costs help drive EBITDA up 17% with margin expansion to almost 48%.

Solid margin expansion at Rogers Business Solutions as well with very strong operating profit growth. The results here reflect a couple of things. First, being the integration of the Atria and Blink acquisitions of last year and a significant culling of portions of the lower margin legacy off-net businesses we were engaged in. Together these drove the drop off in revenue, but significant increases in operating profit and margins.

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

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

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

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

From a cash perspective, during the second quarter we generated almost CAD560 million of free cash flow, one of the four or five highest quarters of free cash flow generation ever at Rogers, and on a per-share basis was up 3% year over year, in part reflecting the accretion from our share buyback program. With this free cash flow, among other things, we have paid out CAD195 million in dividends and paid down all the draws on our credit facility.

There weren't any share repurchases under our buyback authorization during Q2, in part due to uncertainty around recent changes that have been proposed in the 2011 federal budget that would impact the tax treatment of certain structured share repurchase transactions that we were planning to otherwise have executed similar to the 9 million shares we repurchased in Q1. Our operating assumption at this point is that these issuer bid exemption transactions aren't going to be available to us going forward and that activity under the buyback program will all be normal course market purchases.

Don't read anything into the lack of activity in Q2, as management's current intention is to continue to be active under the buyback program in the latter parts of the year.

I will finish by saying overall on a consolidated basis we put up a solid quarter in Q2, despite an intensely competitive environment, giving us a good first half of 2011. We continue to be in a very strong position financially with an exceptionally solid balance sheet, CAD2.4 billion of liquidity available under our fully committed multi-year bank facilities, and no near-term maturities.

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

Thank you. Operator, we will be ready to take questions from the participants in just a couple of seconds, but quickly before we begin we will request that everybody -- as we do on each of these calls, that those participants asking questions would be courteous to all the other participants and limit the questions to one topic so that as many people as possible have a chance to participate. Then, to the extent we have time, we will circle back and take additional questions or we will get them answered for you separately after the call.

So with that, operator, if you would explain to everyone how you would like to organize the Q&A polling process, we would be ready to get going. Thanks.

(Operator Instructions) Bob Bek, CIBC World Markets.

Good morning. Just a question I guess for Nadir or Rob on the voice ARPU decline acceleration. Can you give us a bit more color on the pressures? Obviously, competitive pressure you talked about; I am sure roaming is still a component of that.

I know you have also won some government contracts of late; is there any effect on one bringing down ARPU that comes from that? Related to this, you talked in your MD&A at about the initiatives aimed at slowing this decline. If you can give us any sort of broad strokes at what you can do so we can sort of market -- sorry, model out this decline going forward. Thanks.

Sure, Bob. It's Rob. There is obviously a number of things driving the voice ARPU decline -- retention efforts to keep our most valuable customers, customers right-sizing their plans down to lower MSMs. Some of those driven by the decreases in price that we have seen in the greater marketplace. And, frankly, as we get deeper into penetration, a higher mix of lower-value customers being acquired just in general, albeit our focus, as Nadir pointed out in his opening remarks, is very strongly focused on the top end of the market.

When you break it down into the way we look at revenue, which is MSF airtime, LDM roaming, are some of the key areas where we are seeing the voice ARPU pressure driven by things like discounts and adjustments, conversion credits. Your comment about price plan changes, specifically there was an item on -- as we moved the Government of Canada business there were some price plan changes downward that drove some minor movement there as well.

Air time, as buckets get bigger people go out of buckets less often resulting in lower volume of out-of-bucket airtime. And we continue to feel pressure on roaming, interestingly enough. The roaming pressure is international, both inbound and outbound, and we see some outbound -- some pressure on the outbound numbers into the US as well. So seems like the roaming market really has not bounced back nearly as well as we would expect.

In terms of expectations going forward, I think it's important to set those appropriately. We expect -- listen, over time voice ARPU is going to continue to be under pressure. Clearly, as we reach the end of 2011, however, we will be lapping some of the declines and many of our most price-sensitive customers will have made plan adjustments.

Further, we have doubled our effort on protecting and improving voice ARPU. And net-net we expect to see some modest improvements in the rate of decline by year-end, assuming of course that we don't see any more significant price movements in market.

Thanks very much.

Glen Campbell, Merrill Lynch.

Thanks very much. Again on the ARPU question, Rob, could you talk a little bit about where ARPU is on your high-end customers? And in the wake of the new pricing from Telus on the Koodo brand, which sort of gives you all-you-can-eat for about CAD80, can you give us your forward view on where you think ARPU might settle out for those high-end customers?

Yes, Glen, in terms of high-value customers I think go to smartphone customers right away. Again we continue to like the ARPU and churn profile of the smartphone customers and we continue to be successful acquiring and upgrading our customers to smartphone. Their ARPUs are still running 1.9 times normal voice ARPU customers with churn significantly lower, so the economics of smartphone customers continue to be highly attractive and favorable.

In terms of Koodo, we definitely saw the move. We are in -- I think in a great position. We have Fido with a great value proposition that well aligns with the needs of our target market. And our three-brand structure overall I think puts us in a great position to be flexible in terms of how we respond to the changing pricing dynamics in the market.

So again speculating on the long term of where prices will settle out, in terms of the high end of the market for smartphones, they seem to be relatively resilient right now. We will just have to watch and see how it unfolds over time.

Thank you.

Tim Casey, BMO.

I am wondering -- I am going to try and sneak in a two partner. Could you talk a little bit about your LTE spending to date and your appetite for any potential partnerships with other cable companies or whatnot on LTE?

And second, Media was very strong. Could you talk a little bit about why margins were up so much and how sustainable those trends are? Thank you.

Tim, let me start with LTE and, by the way, thank you because Keith has been dying to talk on these calls. So we finally have a media question that he can respond to and one that I am sure he is going to be happy to do. So I will put it over to you Keith in a sec.

But just on LTE, I think if you will look at what we have said so far in terms of the guidance for capital this year, the guidance, as you know, was modestly up year over year. We attributed that very much to the LTE spend this year, so think of it as about CAD200 million for this year. As you will recall from what I said at the start, that will include having four cities up and running. Beyond that we haven't given any specific guidance for LTE or generally in terms of 2012.

But I think, just to be helpful, one of the things I look back on, and you guys were all around when we did the deployment of HSPA, it was really a three-year program to get to the core markets -- obviously we are still rolling it out -- and it costs about CAD0.5 billion. It gets very tricky to think about costing because what is capacity versus the new LTE is a challenge. But I think fair to say that if you think of the envelope in similar terms, you are probably looking at about a couple hundred million this year and next year and a CAD500 million envelope to hit what I would consider to be the core part of the network deployment.

Obviously it's speculating out because one of the things that we are really looking to is the spectrum auction for 700. 700 is going to be absolutely key with respect to any rural kind of deployment, and so that again is a condition around some of these numbers. But hopefully that gives you at least a framework to work with.

And on that note, why don't I pass it on to Keith?

Thank you, Tim. I will try to be incredibly brief and not take the rest of the call. We are obviously very pleased and encouraged by our results. Q2 had a very high operating margin of almost 20% and all our verticals continue to see revenue growth over last year and costs are highly controlled.

Some of the key factors contributing to the quarter's growth this time is we had outstanding conventional and specialty revenue growth. Q2 will be the strongest quarter for Sportsnet ONE because the highly priced NHL games are not in this quarter.

Our digital portfolio continues to grow. Our ad network now sees us represent more than 1,000 websites and sales were very, very strong this year. And Tim, you will appreciate this, Blue Jay ticket sales and attendance are up 17% compared to last year.

In terms of sustainability, our business foundation, our organizational chart has been established and this will allow the Media portfolio to continue to evolve. It really is positioned for additional growth.

Nadir mentioned some of the recently growth initiatives; the magazine will launch in September, the 24-hour CityNews Channel will launch this fall as well. The acquisition of Setanta Sports with a rebranding to Sportsnet World will happen in October and a critical digital initiative, which will be announced shortly and provide fantastic growth opportunities for the future. So all-in-all a very optimistic time at Rogers Media.

Tim, I think to do justice I think you had a two-parter within the first part of your question. I didn't answer the second part which is, I believe, with respect to network sharing.

I think again you go back to what we have done in-market. I think we have, as you know, within the past done deals with MTS, TBayTel in terms of network arrangement. Different in the sense that it's not really LTE specific, but this was a case where you are looking at building out in areas that we didn't have network.

So going forward and looking out I suspect that the kind of things you are looking at, the challenge becomes when you have a network and you are looking to do an arrangement with the party that doesn't there is a lot of factors that go into it. We certainly have been open to discussion, as we always are, but I think fair to say that in the circumstances that you are referring to it is much more challenging because you have got to look at it, not just from a cost point of view but also what happens in-market and so on.

So there is different options. I will say not impossible but certainly difficult to think of scenarios that would be win-win, but we are certainly open to any discussions.

Thanks for that.

Phillip Huang, UBS.

Morning, thanks for taking my question, guys. My question is on the data side of the Wireless ARPU. I was wondering if you guys could maybe comment on how you see Wireless data pricing trending in the year ahead.

Do you see any pressure of it coming down at all? Frankly, I was a bit surprised to see some of these price changes. For example, Koodo recently introduced a more attractive data plan, CAD25 for 2 gigabits per month and it used to be, I think, for only 500 megabits. So I am just wondering if you guys are seeing any evidence of smartphone subscribers, perhaps, rationalizing their plans or going to a lower tier. Thanks.

Yes, Phillip, data pricing continues to be strong. As you will know, we launched LTE pricing which we recognize customers are going to need larger buckets, so for sure we are making the buckets larger. And as buckets get larger and the price per gig moves down.

We see lots of stability on data pricing right now. Certainly no evidence of customers cutting back in terms of their spending or their usage on data; usages across all devices continue to be robust. So I think data looks like a strong and growing part of the portfolio.

We are executing really strongly on the Wireless data strategy, as evidenced by the smartphone numbers. Data revenue growth year over year of 31% now making up a full 35% of our revenue, so we are going to continue to be enthusiastic.

The other thing that is going to continue to propel that data portfolio and we think is one of the next S curves is the machine to machine business. We are very active in that space and we look for great things in the future there as well.

Yes, thanks for that. Glad that you mentioned the machine to machine. I was just going to say to what extent did similar subscribers or just even data-only subscribers, like data sticks, contribute to the postpaid ARPU decline in the quarter?

Yes, the impact of data-only customers actually puts about CAD2 of pressure on the voice ARPU. And that is factored into the numbers that you see in front of you.

Great, thanks very much.

Jeff Fan, Scotia Capital.

Good morning, everyone. I want to ask a question on the Cable side of the business. Growth has been very good on the operating profit and I am just wondering whether there is growth that you generated in the first half, about 15% is sustainable.

And just on that point, with respect to growth on the cable side, one of your peers out west has made some pretty meaningful moves on their broadband products with respect to speed and cap to differentiate the service versus their telco competitor. I am wondering what your thoughts are on there from a strategic standpoint.

Let me start with the second part, Jeff. We continue to be quite successful in our market and recognize that all of these markets across the country are different markets and people try different things. We are constantly readjusting the things that we are doing with our pricing to better meet the needs of our customers and we are more than satisfied with the results that we are getting.

In terms of the sustainability of our growth, we were really pleased this quarter with revenue. I think as Bill highlighted on the call, core cable revenue growth for the quarter was actually 7 if you remove the switch business, which most of you know that we are exiting. It's healthy growth; it's growth that comes from both TSU growth and growth from some of the rate hikes that Bill touched on.

We have had great success with churn dropping on our cable portfolio. Again, something that really propels the sustainability of EBITDA; converting lots of satellite customers.

On Internet we have made some significant adjustments that I think are very favorable for customers. We have launched speed boost, which customers really like, and download speeds are now 8 times faster than our competitors.

We continue to emphasize our value message on home phone and really getting terrific traction in terms of business. Revenue growth in the small business part of the portfolio up 21% and great numbers, both on Internet, home phone, [IBLC] in the [sub-bay], so I think we are poised to continue to progress strongly. Nobody should misunderstand, cable is really a mature portfolio and it is not the place to go crazy in terms of aggressively chasing growth, but lots of sustainable pockets that we can mine in an intelligent fashion.

Greg MacDonald, Macquarie Capital.

Thanks, good morning, guys. Just a quick clarification question first on the government impact. Was that a reprice of existing government customers or was that a new government contract that was added?

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

Okay. Is it possible to give us some indication of the magnitude of subs that government represents?

The total account or in quarter?

I'm sorry, what was that?

So are we asking about the incremental size of winning the entire account or the in-quarter impact?

No, what is the magnitude of total government subs you now have on, just so I can make an assumption of what future government ARPU is?

It would be -- we had about 40 on. I think we've added about another -- in the range of about 45 we have added on. We will probably have another -- yes, for the two quarters. That's for the two quarters, not in one quarter. So I'm thinking this quarter in the mid-20s in terms of ads coming from government.

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

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

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

Yes. Okay, thanks. The major question I wanted to ask is it looks like the metrics of smartphone continue to look pretty good. You have record -- second most number of record ads on gross, 40% of which is new; that is a nice stat. Can you give us some indication of the profile, the subs that are being added? Are these high-end smartphones; are these iPhones and Android phones?

Some other carriers had a nice iPhone quarter. Maybe you can give us some context there. Or are we starting to see more of the lower end smartphones in this mix where we can assume naturally that the ARPU is going to be declining? Because it is nice to see 1.9 times voice, but the voice is declining. So we need to get some sense of the magnitude of smartphone ARPU clients.

It's a great question. If you just sort of said -- you thought about the world of high-end smartphones and you thought about our mix -- iPhone, Blackberry, and the high-end android -- that makes up about 62% of the mix. There is a few other smartphones in there, but I would say that the people that we are adding resemble, in terms of their commitment to ARPU and commitment to expensive and significant devices, they are the same as what we have in the base. They are not dramatically different. So we are not seeing any huge, different trend in terms of the folks that we are adding.

Again, we continue to see nice creeping improvements on churn amongst those customers. Again, sort of improving the lifetime value economics. And we are working hard to drive those subsidies prices down at the same time.

Greg, if I may -- it's Nadir. I just want to add one thing, just to make the connection because, to your point, we are obviously very excited about the performance on smartphones and in particular your reference to 40% new. If you look at the smartphone new customers that we added, we added about 235,000 in quarter, so it's really remarkable.

That is where the things aren't necessarily obvious, but if you look at the impact of margin, the fact that we can deliver 47% even including the effect of adding these customers I think speaks to the strength of the franchise. Obviously you can make the adjustment; if you were to level it off in terms of year over year, the margins would have been even higher.

Dvai Ghose, Canaccord Genuity.

Thanks very much, good morning. Question for Bill, if I may, regarding the return of capital to shareholders. Totally understand your comment not to look in too much into the fact there was no share buybacks in this quarter.

But having said that, given the elimination of the tax arbitrage, the fact that your debt to EBITDA sort of crept up to about 2.3 times, you have a spectrum auction as well as LTE upgrades largely still ahead of you, and cash taxes, do you think that your return on capital has to slow down both in terms of NCIBs going forward as well as dividend growth? Or can you maintain the pace we have seen over the last couple of years?

Thanks for the question; I mean those are the decisions that we go through every year. None of those things that you mentioned are actually new to us when we were doing our planning for this year. So we -- as I said in the comments, you shouldn't read too much into the buyback in Q2. We fully expect that we are going to continue on for the balance of the year with normal course buybacks.

Next year we will again look at all of those factors and we will make an appropriate decision. Once that is made we will inform everyone through the regulatory filings that we have to do.

Ric Prentiss, Raymond James.

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

Just a little louder, Rick.

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

Well, Rick, there are a bunch of fairly operational things. They would be things like managing price plan downward migration in call centers; when people call in to get their plan adjusted doing an intelligent job of putting them on the right plan and not taking them down to the lowest possible plan that may on the surface look attractive that may not perfectly meet their needs. That is probably one of the biggest single things that gets done in that space.

In this business, as you know, there is lots of credits and adjustments and other things that go through lots of operational controls around those things. And of course, looking for opportunities where there is untapped services, opportunities to bundle and protect revenue -- all of those things are things that we are focused on.

Rob Goff, Northern (sic) Capital Partners.

Thank you very much and good morning. My question would be on the SME side. Can you address whether or not the 21% growth in the quarter is sustainable, expandable, and then delve a little bit into the product set and the distribution for the SME?

I assume your focus is Cable.

Yes.

So listen, to be honest with you, we are gaining momentum from a business side in terms of Cable. The places where we are getting the best traction are the ones that I highlighted in my earlier comment -- Internet and the home phone product and the IBLC version, the more business-oriented version of it, are the areas that we are getting significant traction. And I see us continuing to build momentum in that place so I think it's more than sustainable going forward.

Of course, Bill referenced it, the acquisition of Atria and Blink will only help us to move more quickly along with this market segment, given the connectivity and other things that they provide. So we are optimistic going forward and we are pushing hard to get more out of the SME segment.

Okay, thank you very much.

Matt Niknam, Goldman Sachs.

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

Matthew, you are probably a little bit new to our history on guidance. We tend to be relatively conservative. Our position is that we like to overachieve our guidance, which I think we have done in the last couple of years, so you will find that we, maybe like some other companies, don't do a lot of fiddling with guidance during the year.

Our expectation is for a continued, very competitive marketplace, but our expectation is, as we have done in the first two quarters of this year, to operate very well in that marketplace and continue to put up numbers that exceed the expectations that we have set for ourselves.

Maher Yaghi, Desjardins Securities.

Thank you for taking my question. Nadir, I just wanted to hit on the machine to machine opportunity you guys have been working on. We have seen some pretty decent announcements on that front.

Can you maybe talk about when we should start to see a real impact on revenues and profitability from these new opportunities you are looking into? And maybe if you can give us some sizing of the opportunities that would be very helpful.

When I look at the success we are having and made reference to tangible, whether it's Quebec hydro, BC (inaudible), those kind of applications are around smart metering through to a point-of-sale application, telematics. You can see vertical markets really embracing this solution set.

One of the things, and it's difficult because it's not a metric that people really speak to on calls, but one way to frame it is we have got over 0.5 million connected devices. Now these are devices that -- think of them as being sub-CAD10 ARPUs but pretty good margin; you don't have the subsidy associated with these sales and most of that revenue flows through the margin.

So you are starting to see it as tangible. I think when we get to 2012 and beyond these numbers become ones that we can speak to that add significance from a revenue profile. I would say 2011 for me would be a building year in terms of setting up the sales and getting the customers onboard, which we are happy to say is progressing nicely.

So can't give you more specific guidance than that, but I think these are real numbers. It really reminds me of about five, six years ago when we started on Wireless data and we described the next opportunity as being Wireless data, a lot of questions at that time -- is it meaningful and so on. And it has obviously turned out to be a huge business for us.

If I was to predict, I would see the same thing happening with machine to machine. For me what is very, very encouraging is the breath of adoption by real customers, real applications at the moment, real revenues. But I will hope to frame it better for you as we go forward in 2012.

Simon Flannery, Morgan Stanley.

Thanks very much. We have talked a lot today about voice ARPU; we have talked about data ARPU. Can you talk a little bit about text messaging SMS? Been a lot of concerns in Europe about pressure on that revenue stream.

What are you seeing, both in terms of usage for SMS and revenues, and the extent to which people are on bucket plans versus pay by their use? Thanks.

Thanks, Simon; it's Rob again. We are in kind of a unique position, in a very different position than the Europeans in that an awful lot of our SMS is in buckets. And it's in buckets that are buckets that have other things, like calling line ID and everything that people buy in clusters.

So in many ways we are relatively well insulated from the changing usage in SMS. That said, SMS continues to chug along quite strongly and at this point we are seeing no major trends towards deterioration in SMS.

Thank you.

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

Well, thanks, everybody, for participating this morning. We appreciate your interest and support.

If you have questions that weren't answered on the call, please give myself or Dan Coombes a call. Both of our contact info is on today's earnings release.

This concludes our call. Thank you very much.

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