Consolidated Revenue Grows 15% to $2.35 Billion and Consolidated Operating Profit Increases 33% to $784 Million Driving Operating Profit Margin up 460 Basis Points; TORONTO, Oct. 31 /PRNewswire-FirstCall/ -- Rogers Communications Inc. today announced its consolidated financial and operating results for the three and nine months ended September 30, 2006. Financial highlights (in thousands of dollars, except per share amounts) are as follows: ------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ----------------------------------------------------------- (In millions of dollars) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------------------------------------- Operating revenue $2,347.3 $2,047.1 14.7 $6,615.3 $5,362.0 23.4 Operating profit(1) 784.3 589.4 33.1 2,122.7 1,630.1 30.2 Net income 154.0 48.9 n/m 446.3 22.1 n/m Earnings per share - basic 0.49 0.17 188.2 1.41 0.08 n/m - diluted 0.48 0.16 200.0 1.39 0.08 n/m ------------------------------------------------------------------------- (1) Operating profit should not be considered as a substitute or alternative for operating income or net income, in each case determined in accordance with generally accepted accounting principles ("GAAP"). See the "Reconciliation of Operating Profit to Net Income for the Period" section for a reconciliation of operating profit to operating income and net income under GAAP and the "Key Performance Indicators and Non-GAAP Measures" section. Highlights of the third quarter of 2006 include the following: - Operating revenue increased 14.7% for the quarter, with all three of our operating units delivering solid double-digit growth, including 18.4% growth at Rogers Wireless ("Wireless"), 10.2% growth at Rogers Cable and Telecom ("Cable and Telecom") and 12.2% growth at Rogers Media ("Media"). - Consolidated quarterly operating profit grew 33.1% year-over-year, driven by growth at all three operating segments including 47.0% growth at Wireless, 9.5% growth at Cable and Telecom and 17.1% growth at Media. - Strong subscriber growth continued at Wireless, with quarterly net postpaid additions of 171,200 and net prepaid additions of 31,800. - Wireless postpaid subscriber monthly churn was 1.30% versus 1.50% in the third quarter of 2005, while postpaid monthly ARPU (average revenue per subscriber) increased 5.3% in the quarter to $70.37. The ARPU increase reflects a 47.9% lift in data revenues, which represented 10.5% of total wireless network revenue in the quarter, as well as continued growth in roaming and other optional voice services. - Cable and Telecom ended the quarter with more than 270,800 residential voice-over-cable telephony subscriber lines, with net additions of 106,100 cable telephony subscriber lines for the quarter (of which approximately 14,400 were migrations from the circuit-switched platform). The Rogers Home Phone ("RHP") cable telephony service is now available to approximately 90% of Rogers' cable homes passed. The combined number of local telephony lines on both the cable telephony and circuit-switched platforms from Rogers Home Phone and Rogers Business Solutions reached 823,100. - Cable and Internet reported basic cable subscriber gains of 12,600 versus an increase of approximately 900 in the third quarter of 2005 (after adjusting for the impact in 2005 of a change in our subscriber deactivation policy). Digital cable households increased by 62,200 in the quarter to reach a total of 1,064,400, while residential high-speed Internet subscribers grew by 51,800 in the quarter to a total of 1,250,000. Video-on-demand continues as a core differentiator for Rogers Cable, with quarterly pay-on-demand views increasing by 19.2% year-over-year to 1,721,000 from the third quarter of 2005. - We entered into a multi-year agreement with Maple Leaf Sports and Entertainment ("MLSE") that will see Rogers become a lead sponsor and the preferred supplier of all communications services to the Toronto Maple Leafs, Toronto Raptors and Air Canada Centre. - Subsequent to the end of the quarter, the Board of Directors announced a proposal which will have the effect of a two-for-one split of the Rogers Communications Inc. Class A Voting and Class B Non-Voting shares following a special shareholder meeting which has been called for December 15, 2006. It is expected that shareholders of record as of the close of business December 29, 2006 will receive one additional share of the relevant class for each share held upon distribution of the additional shares on or about January 5, 2007. - Subsequent to the end of the quarter, the Board of Directors also announced an increase in the annual dividend from C$0.15 to C$0.32 per Class A Voting and Class B Non-Voting share (on a pre split basis) effective immediately, and modified Rogers' dividend distribution policy to now make dividend distributions on a quarterly basis instead of semi-annually. At the same time, the Board declared the first quarterly dividend of C$0.08 cents per share (on a pre split basis) to be paid on January 2, 2007 to shareholders of record on December 20, 2006. "The strength of Rogers' brand and innovative product sets, combined with our focused and disciplined approach to our markets, produced another strong quarter of double-digit revenue and operating profit growth," said Ted Rogers, President and CEO of Rogers Communications Inc. "While we have much work and investment in front of us and competition continues to be intense, the solid operating results from our businesses are combining to drive increasing levels of cash flow and are positioning us increasingly well for continued success." MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 This management's discussion and analysis ("MD&A") should be read in conjunction with our 2005 Annual MD&A and our 2005 Annual Audited Consolidated Financial Statements and Notes thereto. The financial information presented herein has been prepared on the basis of Canadian generally accepted accounting principles ("GAAP") for interim financial statements and is expressed in Canadian dollars. Please refer to Note 23 to our 2005 Annual Audited Consolidated Financial Statements for a summary of the differences between Canadian GAAP and United States ("U.S.") GAAP for the year ended December 31, 2005. This MD&A is current as of October 30, 2006. In this MD&A, the terms "we", "us", "our", and "the Company" refer to Rogers Communications Inc. and our subsidiaries, which are reported in the following segments: - "Wireless", which refers to our wholly owned subsidiary Rogers Wireless Communications Inc. and its subsidiaries, including Rogers Wireless Inc. ("RWI") and its subsidiaries; - "Cable and Telecom", which refers to our wholly owned subsidiary Rogers Cable Inc. and its subsidiaries. RCI acquired Call-Net Enterprises Inc. on July 1, 2005 and subsequently changed its name to Rogers Telecom Holdings Inc. ("RTHI"). The results of RTHI and RTHI's operating subsidiaries ("Telecom") are consolidated effective as of the July 1, 2005 acquisition date. On January 9, 2006, RCI's ownership interest in Telecom was transferred to Rogers Cable Inc. from RTHI. Beginning with the first quarter of 2006, the Cable and Telecom operating unit reports its results according to the following segments: Cable and Internet; Rogers Home Phone (voice-over-cable telephony subscribers from Cable and residential circuit-switched telephony customers from Telecom); Rogers Business Solutions (business telephony and data subscribers primarily from Telecom); and Video store operations. Comparative figures have been reclassified to conform to this new segment reporting. - "Media", which refers to our wholly owned subsidiary Rogers Media Inc. and its subsidiaries including Rogers Broadcasting, which owns Rogers Sportsnet, the Radio stations, OMNI television and The Shopping Channel, Rogers Publishing and Rogers Sports Entertainment, which owns the Toronto Blue Jays and the Rogers Centre. In addition, Media holds ownership interests in entities involved in specialty TV content, TV production and broadcast sales. "RCI" refers to the legal entity Rogers Communications Inc. excluding our subsidiaries. Throughout this MD&A, percentage changes are calculated using numbers rounded to the decimal to which they appear. SUMMARY CONSOLIDATED FINANCIAL RESULTS ------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, ----------------------------------------------------------- (In millions of dollars, except per share amounts) 2006 2005(4) % Chg 2006 2005(4) % Chg ------------------------------------------------------------------------- Operating revenue Wireless $1,265.7 $1,068.9 18.4 $3,468.1 $2,908.1 19.3 Cable and Telecom Cable and Internet 488.5 436.0 12.0 1,439.5 1,282.8 12.2 Rogers Home Phone 90.8 74.7 21.6 257.0 74.7 n/m Rogers Business Solutions 148.5 139.0 6.8 441.0 141.2 n/m Video stores 72.8 77.1 (5.6) 226.0 235.5 (4.0) Corporate items and elimi- nations (1.1) (1.1) - (3.1) (3.1) - ----------------------------------------------------------- 799.5 725.7 10.2 2,360.4 1,731.1 36.4 Media 319.3 284.5 12.2 893.3 797.2 12.1 Corporate items and elimi- nations (37.2) (32.0) 16.3 (106.5) (74.4) 43.1 ----------------------------------------------------------- Total 2,347.3 2,047.1 14.7 6,615.3 5,362.0 23.4 Operating expenses, including integration and Video store closure expenses Wireless 705.0 687.4 2.6 2,015.5 1,863.5 8.2 Cable and Telecom Cable and Internet 279.4 258.2 8.2 824.8 756.2 9.1 Rogers Home Phone 93.7 70.9 32.2 250.4 70.9 n/m Rogers Business Solutions 142.1 127.4 11.5 404.4 136.0 197.4 Video stores 70.4 72.9 (3.4) 220.4 221.4 (0.5) Integration costs 1.4 2.3 (39.1) 5.8 2.3 152.2 Corporate items and elimi- nations (1.1) (1.1) - (3.1) (3.1) - ----------------------------------------------------------- 585.9 530.6 10.4 1,702.7 1,183.7 43.8 Media 280.3 251.2 11.6 789.2 708.4 11.4 Corporate items and elimi- nations (8.2) (11.5) (28.7) (14.8) (23.7) (37.6) ----------------------------------------------------------- Total 1,563.0 1,457.7 7.2 4,492.6 3,731.9 20.4 Operating profit, after integration and Video store closure expenses(1) Wireless 560.7 381.5 47.0 1,452.6 1,044.6 39.1 Cable and Telecom Cable and Internet 209.1 177.8 17.6 614.7 526.6 16.7 Rogers Home Phone (2.9) 3.8 n/m 6.6 3.8 73.7 Rogers Business Solutions 6.4 11.6 (44.8) 36.6 5.2 n/m Video stores 2.4 4.2 (42.9) 5.6 14.1 (60.3) Integration costs (1.4) (2.3) (39.1) (5.8) (2.3) 152.2 ----------------------------------------------------------- 213.6 195.1 9.5 657.7 547.4 20.1 Media 39.0 33.3 17.1 104.1 88.8 17.2 Corporate items and elimi- nations (29.0) (20.5) 41.5 (91.7) (50.7) 80.9 ----------------------------------------------------------- Total 784.3 589.4 33.1 2,122.7 1,630.1 30.2 ----------------------------------------------------------- Other income and expense, net(2) 630.3 540.5 16.6 1,676.4 1,608.0 4.3 ----------------------------------------------------------- Net income $ 154.0 $ 48.9 n/m $ 446.3 $ 22.1 n/m ----------------------------------------------------------- Earnings per share - basic $ 0.49 $ 0.17 188.2 $ 1.41 $ 0.08 n/m - diluted $ 0.48 0.16 200.0 $ 1.39 0.08 n/m Additions to PP&E(1) Wireless $ 170.2 $ 106.8 59.4 $ 492.1 $ 379.8 29.6 Cable and Telecom Cable and Internet 114.8 134.8 (14.8) 303.5 355.1 (14.5) Rogers Home Phone 62.6 29.7 110.8 121.7 94.3 29.1 Rogers Business Solutions 26.3 38.4 (31.5) 50.1 43.2 16.0 Video stores 3.0 2.9 3.4 5.4 10.7 (49.5) ----------------------------------------------------------- 206.7 205.8 0.4 480.7 503.3 (4.5) Media 7.1 5.6 26.8 32.5 28.0 16.1 Corporate(3) 39.9 0.4 n/m 161.3 12.7 n/m ----------------------------------------------------------- Total $ 423.9 $ 318.6 33.1 $1,166.6 $ 923.8 26.3 ----------------------------------------------------------- ------------------------------------------------------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" section. Operating profit includes integration costs and Video store closure expenses of $(0.4) million and $13.7 million for the three and nine months ended September 30, 2006, respectively. (2) See the "Reconciliation of Operating Profit to Net Income for the Period" section for details of these amounts. (3) Corporate additions to PP&E for the nine months ended September 30, 2006 includes $104.8 million for RCI's purchase of real estate in Brampton. In addition, during the three and nine months ended September 30, 2006, RCI's improvements related to the Brampton real estate totalled $9.4 million and $16.5 million, respectively. (4) Certain prior year amounts have been reclassified to conform to the current year presentation. For discussions of the results of operations of each of these segments, refer to the respective segment sections of this MD&A. Reconciliation of Operating Profit to Net Income for the Period The items listed below represent the consolidated income and expense amounts that are required to reconcile operating profit to the net income for the period as defined under Canadian GAAP. For details of these amounts on a segment-by-segment basis and for an understanding of intersegment eliminations on consolidation, the following section should be read in conjunction with Note 10 to the Interim Consolidated Financial Statements entitled "Segmented Information". ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------------- (In millions of dollars) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------------------------------------- Operating profit(1) $ 784.3 $ 589.4 33.1 $2,122.7 $1,630.1 30.2 Depreciation and amortization (408.2) (377.0) 8.3 (1,189.0) (1,077.4) 10.4 ----------------------------------------------------------- Operating income 376.1 212.4 77.1 933.7 552.7 68.9 Interest expense on long-term debt (152.8) (178.8) (14.5) (469.1) (543.9) (13.8) Foreign exchange gain (loss) (0.1) 63.3 n/m 40.9 39.1 4.6 Change in the fair value of derivative instruments 1.3 (42.3) n/m (28.4) (27.0) 5.2 Other income (expense), net 5.7 (3.1) n/m 12.3 11.1 10.8 Income tax expense (76.2) (2.6) n/m (43.1) (9.9) n/m ----------------------------------------------------------- Net income $ 154.0 $ 48.9 n/m $ 446.3 $ 22.1 n/m ----------------------------------------------------------- ------------------------------------------------------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" section. Depreciation and Amortization Expense The increases in depreciation and amortization expense for the three and nine months ended September 30, 2006 as compared to the corresponding periods in 2005 primarily reflect the additional depreciation and amortization recognized on property, plant and equipment expenditures and intangible assets arising from recent acquisitions. Operating Income The growth in our consolidated operating income for the three and nine months ended September 30, 2006 as compared to the corresponding periods in 2005 results from the higher operating profit across all of our operating units. See the section entitled "Operating Unit Review" for a detailed discussion of operating unit results. Interest on Long-Term Debt The reductions in interest expense for the three and nine months ended September 30, 2006 compared to the corresponding periods in 2005 are primarily due to the decrease in debt as at September 30, 2006, compared to September 30, 2005, of more than $1.1 billion, including the impact of cross-currency interest rate exchange agreements. This decrease in debt was largely the result of the conversions during 2005 into Class B Non-Voting shares of our 5.75% Convertible Debentures due 2005 and our 5.5% Convertible Preferred Securities due 2009, the repayment at maturity in February 2006 of RCI's $75.0 million 10.50% Senior Notes, the repayment in June 2006 of the 10.5% Wireless Senior Secured Notes in the aggregate principal amount outstanding of $160.0 million, and Wireless' repayment of a mortgage in the aggregate principal amount outstanding of $22.0 million. Foreign Exchange (Gain) Loss During the three months ended September 30, 2006, the Canadian dollar weakened by 0.03 cents versus the U.S. dollar. This resulted in a foreign exchange loss of $0.1 million during the three months ended September 30, 2006 related to U.S. dollar-denominated long-term debt not hedged for accounting purposes. The corresponding period of 2005 resulted in a foreign exchange gain of $63.3 million related to long-term debt not hedged for accounting purposes given a 6.26 cent increase in the Canadian dollar in the corresponding period of 2005. During the nine months ended September 30, 2006, the Canadian dollar strengthened by 4.74 cents compared to 4.1 cents in the corresponding period of 2005. This resulted in an increased foreign exchange gain on long-term debt not hedged for accounting purposes for the nine months ended September 30, 2006 relative to the corresponding period in 2005. Change in Fair Value of Derivative Instruments The changes in fair value of the derivative instruments in the three and nine months ended September 30, 2006 were primarily the result of the changes in the Canadian dollar relative to that of the U.S. dollar as described above and the resulting change in fair value of our cross-currency interest rate exchange agreements not accounted for as hedges. Other Income Other income for the three and nine months ended September 30, 2006 was primarily associated with investment income received from certain of our investments, while other income for the three and nine months ended September 30, 2005 was primarily associated with gains (losses) on the sale of various investments. Income Taxes Current income tax expense has historically consisted primarily of the Canadian Federal Large Corporations Tax ("LCT"). Due to the elimination of the LCT in 2006, the amount expensed for the three and nine month periods ended September 30, 2006 of $1.3 million and $1.8 million, respectively, is attributable only to income tax. We recorded net future income tax expense for the three and nine month periods ended September 30, 2006, of $74.9 million and $41.3 million, respectively. Future income tax expense resulted primarily from the utilization of non-capital loss carryforwards, the benefit of which had previously been recognized, net of a reduction of the valuation allowance. Based on management's assessment of the expected realization of future income tax assets, during the three month period ended June 30, 2006, we reduced the valuation allowance recorded against certain future income tax assets to reflect that it is more likely than not that the future income tax assets will be realized. For the nine months ended September 30, 2006, the cumulative reduction in the valuation allowance is $460.4 million. Approximately $300.2 million of the reduction in the valuation allowance related to future income tax assets arising on acquisitions. Accordingly, the benefit related to these assets has been reflected as a reduction of goodwill in the amount of $208.6 million and other intangible assets in the amount of $91.6 million. In 2000, we received a $241 million payment (the "Termination Payment") from Le Group Videotron Ltee ("Videotron") in respect of the termination of a merger agreement between us and Videotron. The Canada Revenue Agency ("CRA") disagreed with our tax filing position in respect of the Termination Payment and in May 2006, issued a Notice of Reassessment. We are negotiating a proposed settlement with the CRA which is expected to result in a $67 million reduction to the non-capital income tax losses carried forward by us. As a result, a corresponding future income tax charge of $24.6 million was recorded during the three months ended September 30, 2006. Net Income and Earnings Per Share As a result of the changes discussed above, we recorded net income of $154.0 million for the three months ended September 30, 2006 or basic earnings per share of $0.49 (diluted - $0.48), compared to a net income of $48.9 million or basic earnings per share of $0.17 (diluted - $0.16) in the corresponding period in 2005. For the nine months ended September 30, 2006, we recorded net income of $446.3 million or basic earnings per share of $1.41 (diluted - $1.39), compared to a net income of $22.1 million or basic earnings per share of $0.08 (diluted - $0.08) in the corresponding period in 2005. BASIS OF PRO FORMA INFORMATION Certain financial and operating data information in the MD&A has been prepared on a pro forma basis as if the acquisition of Telecom, as described in our 2005 Annual MD&A, had occurred on January 1, 2005. Such information is based on our historical financial statements, the historical financial statements of Telecom and the accounting for this business combination. Although we believe this presentation provides certain relevant contextual and comparative information for existing operations, the unaudited pro forma consolidated financial and operating data presented in this document is for illustrative purposes only and does not purport to represent what the results of operations actually would have been if the acquisition of Telecom had occurred on January 1, 2005, nor does it purport to project the results of operations for any future period. This pro forma information reflects, among other things, adjustments to Telecom's historically reported financial information to conform to our accounting policies and the impacts of purchase accounting. The pro forma adjustments are based upon certain estimates and assumptions that we believe are reasonable. Accounting policies used in the preparation of these statements are those disclosed in our 2005 Annual Audited Consolidated Financial Statements and Notes thereto. Certain tables in the "Cable and Telecom" section present selected unaudited pro forma information. OPERATING UNIT REVIEW WIRELESS -------- Wireless Financial Results ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------------- (In millions of dollars, except margin) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------------------------------------- Operating revenue Postpaid $1,080.1 $ 899.1 20.1 $2,989.4 $2,466.1 21.2 Prepaid 57.3 55.4 3.4 152.7 156.4 (2.4) One-way messaging 3.7 5.2 (28.8) 11.1 15.2 (27.0) ----------------------------------------------------------- Network revenue 1,141.1 959.7 18.9 3,153.2 2,637.7 19.5 Equipment sales 124.6 109.2 14.1 314.9 270.5 16.4 ----------------------------------------------------------- Total operating revenue 1,265.7 1,068.9 18.4 3,468.1 2,908.2 19.3 ----------------------------------------------------------- Operating expenses Cost of equipment sales $ 199.3 $ 209.1 (4.7) 583.6 530.0 10.1 Sales and marketing expenses 153.1 153.1 - 418.9 410.3 2.1 Operating, general and admini- strative expenses 354.4 312.4 13.4 1,010.3 894.9 12.9 Integration expenses (recov- ery)(1) (1.8) 12.8 n/m 2.7 28.4 (90.5) ----------------------------------------------------------- Total operating expenses 705.0 687.4 2.6 2,015.5 1,863.6 8.2 ----------------------------------------------------------- Operating profit(2)(3) $ 560.7 $ 381.5 47.0 1,452.6 1,044.6 39.1 ----------------------------------------------------------- Operating profit margin as % of network revenue(3) 49.1% 39.8% 46.1% 39.6% Additions to property, plant and equipment ("PP&E")(3) $ 170.2 $ 106.8 59.4 $ 492.1 $ 379.8 29.6 ------------------------------------------------------------------------- (1) Expenses incurred relate to the integration of the operations of Fido Solutions Inc. ("Fido"), an indirect wholly owned subsidiary of Rogers Wireless Inc. (2) Operating profit includes a loss of $9.8 million and $18.0 million related to the Inukshuk wireless broadband initiative for the three and nine months ended September 30, 2006, respectively. (3) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. ------------------------------------------------------------------------- Three Months Ended September 30, --------------------------------------- (Subscriber statistics in thousands, except ARPU, churn and usage) 2006 2005 Chg % Chg ------------------------------------------------------------------------- Postpaid Gross additions 368.9 394.9 (26.0) (6.6) Net additions 171.2 194.9 (23.7) (12.2) Total postpaid retail subscribers Average monthly revenue per user ("ARPU")(1) $ 70.37 $ 66.83 $ 3.53 5.3 Average monthly usage (minutes) 541 508 33 6.5 Monthly churn 1.30% 1.50% (0.20%) (13.3) Prepaid Gross additions 169.4 153.1 16.3 10.6 Net additions (losses)(2) 31.8 18.1 13.7 75.7 Total prepaid retail subscribers ARPU(1) $ 14.61 $ 13.91 $ 0.70 5.1 Monthly churn(2) 3.52% 3.40% 0.12% 3.5 Wholesale Total wholesale subscribers ------------------------------------------------------------------------- ------------------------------------------------------------------------- Nine Months Ended September 30, --------------------------------------- (Subscriber statistics in thousands, except ARPU, churn and usage) 2006 2005 Chg % Chg ------------------------------------------------------------------------- Postpaid Gross additions 990.8 1,031.3 (40.5) (3.9) Net additions 390.7 400.6 (9.9) (2.5) Total postpaid retail subscribers 5,208.9 4,615.7 593.2 12.9 Average monthly revenue per user ("ARPU")(1) $ 66.66 $ 63.02 $ 3.63 5.8 Average monthly usage (minutes) 541 491 50 10.2 Monthly churn 1.34% 1.62% (0.28%) (17.3) Prepaid Gross additions 434.3 416.2 18.1 4.3 Net additions (losses)(2) (24.9) 1.9 (26.8) - Total prepaid retail subscribers 1,324.9 1,336.0 (11.1) (0.8) ARPU(1) $ 12.93 $ 13.16 $ (0.23) (1.7) Monthly churn(2) 3.89% 3.49% 0.40% 11.5 Wholesale Total wholesale subscribers 132.0 88.2 43.8 49.7 ------------------------------------------------------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" section. As calculated in the "Supplementary Information" section. (2) Effective November 9, 2004, the deactivation of prepaid subscribers acquired from Fido is recognized after 180 days of no usage to conform to the Wireless prepaid churn definition. This had the impact of decreasing prepaid subscriber net losses by approximately 12,000 in the nine months ended September 30, 2005 and reducing prepaid churn by 0.13% for the nine months ended September 30, 2005. There was no impact in the three months ended September 30, 2005 or any period in 2006. Wireless Network Revenue The increases in network revenue for the three and nine months ended September 30, 2006 compared to the prior year periods were driven by the continued growth of Wireless' postpaid subscriber base and improvements in postpaid average monthly revenue per user ("ARPU"). The modest year-over-year decrease in postpaid subscriber gross and net additions compared to the prior year largely reflects the approximate 54% market share of postpaid net additions which Wireless attained in the corresponding period of the prior year and which represented a substantially higher than historical average incremental market share position. The modest increase in prepaid net subscriber additions in the quarter reflects the success of certain promotional offerings launched during the quarter designed to stem prepaid subscribers losses experienced earlier in the year. Overall, Wireless' strategic focus remains primarily on the postpaid segment of the market. Wireless ended the quarter with a total of 6,533,800 postpaid and prepaid retail wireless subscribers. Our success in the continued reduction in postpaid churn largely reflects proactive and targeted customer retention activities as well as the increased network density and coverage quality resulting from the completion of the integration of the Fido GSM network in mid-2005. We continue to have an opportunity for improvement in the area of prepaid churn which has increased marginally on a year-over-year basis. The slight prepaid churn increase was largely due to competitive prepaid offerings in the market and the general emergence of additional resellers of prepaid wireless services. (See the section entitled "Caution Regarding Forward-Looking Statements" below.) The year-over-year increases in postpaid ARPU for both the third quarter and year-to-date periods reflect the combination of higher data revenues, as well as continued growth in roaming and other optional voice services. During the three and nine months ended September 30, 2006, wireless data revenue increased by 47.9% and 60.2%, respectively, over the corresponding periods in 2005 and totalled $120.0 million and $329.2 million, respectively. These increases in data revenue reflect the continued rapid growth of text and multimedia messaging services, wireless Internet access, BlackBerry devices, downloadable ring tones, music and games, and other wireless data services and applications. For the third quarter of 2006, data revenue represented approximately 10.5% of total network revenue compared to 8.4% in the same period last year. Roaming revenues during the three and nine months ended September 30, 2006 increased 17.9% and 22.8%, respectively, over the corresponding periods in 2005. As Canada's only GSM/GPRS/EDGE provider, Wireless experienced increases in outbound roaming revenues from subscribers travelling outside of Canada as well as strong growth in inbound roaming revenues from travelers to Canada who utilized Wireless' network. Wireless Equipment Sales The year-over-year increases in revenue from equipment sales, including activation fees and net of equipment subsidies, reflects the increased volume of handset upgrades associated with subscriber retention programs combined with the generally higher prices of handsets and devices. Wireless Operating Expenses ------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------------- (In millions of dollars, except per subscriber statistics) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------------------------------------- Operating expenses Cost of equipment sales $ 199.3 $ 209.1 (4.7) $ 583.6 $ 530.0 10.1 Sales and marketing expenses 153.1 153.1 - 418.9 410.3 2.1 Operating, general and admini- strative expenses 354.4 312.4 13.4 1,010.3 894.9 12.9 Integration expenses(1) (1.8) 12.8 - 2.7 28.4 (90.5) ----------------------------------------------------------- Total operating expenses $ 705.0 $ 687.4 2.6 $2,015.5 $1,863.6 8.2 ----------------------------------------------------------- ----------------------------------------------------------- Average monthly operating expense per subscriber before sales and marketing expenses(2) $ 19.48 $ 20.96 (7.0) $ 19.69 $ 19.90 (1.0) Sales and marketing costs per gross subscriber addition(2) $ 363 $ 364 (0.3) $ 388 $ 372 4.3 ------------------------------------------------------------------------- (1) Expenses incurred related to the integration of the operations of Fido. (2) As defined. See the "Key Performance Indicator and Non-GAAP Measures" section. As calculated in the "Supplementary Information" section. The year-to-date increase in cost of equipment sales was directly the result of the increased volume of handset upgrades associated with subscriber retention programs, as discussed above. The modest decline in cost of equipment sales in the three months ended September 30, 2006 compared to the corresponding period of the prior year was primarily the result of increased retention efforts in the prior year relating to the Fido subscriber base accompanied with the reclassification of approximately $8.0 million of hardware upgrade commission expenses to operating, general and administration expenses. Sales and marketing expenses were essentially unchanged compared to the corresponding periods in 2005 as Wireless' marketing efforts continue to include targeted programs to acquire higher postpaid value customers on longer term contracts. The increased operating, general and administrative expenses were primarily due to the increases in retention spending, including the reclassification of approximately $8.0 million of hardware upgrade commission, and costs to support data and roaming services, partially offset by savings related to operating and scale efficiencies across various functions. Total retention spending, including subsidies on handset upgrades, was $72.1 million and $236.4 million for the three and nine months ended September 30, 2006, respectively, compared to $77.9 million and $213.8 million for the corresponding periods in 2005. Retention spending, which has increased in the nine months ended September 30, 2006 compared to the corresponding period of the prior year due to a larger subscriber base, was down slightly in the third quarter of 2006 compared to the corresponding period of 2005 due to changes made to the hardware upgrade program in the third quarter of 2006, and higher volumes of handset upgrades that occurred in the 2005 period associated with targeted retention efforts relating to the Fido subscriber base. Retention spending, on both an absolute and a per subscriber basis, is expected to grow as wireless market penetration in Canada deepens and wireless number portability ("WNP") becomes available in March 2007. (See the section entitled "Caution Regarding Forward-Looking Statements" below.) During the three months ended September 30, 2006, Wireless reviewed its accrued expenses related to the Fido integration. Since the integration is now complete, Wireless determined that it was necessary to reduce previous integration expense estimates resulting in a net reduction to the expense accruals of $1.8 million. During the nine months ended September 30, 2006, Wireless incurred net integration expenses of $2.7 million. During the three and nine months ended September 30, 2005, Wireless incurred integration expenses of $12.8 million and $28.4 million, respectively. The decrease in average monthly operating expense per subscriber, excluding sales and marketing expenses and including management fees and integration expenses, is primarily due to operating and scale efficiencies across various functions. Wireless Operating Profit The strong year-over-year growth in operating profit was largely the result of the growth in network revenue exceeding the growth in operating expenses. As a result, Wireless' operating profit margins increased for both the three and nine months ended September 30, 2006 compared to the corresponding periods in 2005. Operating profit margins increased to 49.1% and 46.1% for the three and nine months ended September 30, 2006, respectively, compared to 39.8% and 39.6% in the corresponding periods of the prior year. The operating loss related to Wireless' Inukshuk wireless broadband initiative is included in Wireless' operating profit. During the three and nine months ended September 30, 2006, the Inukshuk wireless broadband initiative recorded an operating loss of $9.8 million and $18.0 million, respectively, compared to an operating loss of $0.9 million and $3.8 million for the three and nine months ended September 30, 2005, respectively. Wireless Additions to Property, Plant and Equipment Wireless additions to property, plant and equipment ("PP&E") are classified into the following categories: ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- (In millions of dollars) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------- ----------------------------- Additions to PP&E Network - capacity $ 57.2 $ 41.6 37.5 $ 145.1 $ 203.6 (28.7) Network - other 14.4 21.8 (33.9) 45.7 63.1 (27.6) HSDPA 61.9 - n/m 182.3 - n/m Inukshuk 8.0 - n/m 57.7 - n/m Information technology and other 28.7 19.5 47.2 61.3 51.6 18.8 Integration of Fido - 23.9 n/m - 61.5 n/m ----------------------------- ----------------------------- Total additions to PP&E $ 170.2 $ 106.8 59.4 $ 492.1 $ 379.8 29.6 ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- The $170.2 million and $492.1 million of additions to PP&E for the three and nine months ended September 30, 2006, respectively, reflect spending on network capacity and technology enhancements. The year-over-year increase in additions to PP&E in the third quarter relates primarily to deployment of our next generation Universal Mobile Telecommunications System/High-Speed Downlink Packet Access ("UMTS/HSDPA"). On February 9, 2006, Wireless announced its intention to begin deploying a 3G network based upon the UMTS/HSDPA, the next-generation technology evolution for the global standard GSM platform, which provides broadband wireless data speeds that will enable new and faster data products such as video conferencing and mobile television as well as simultaneous voice and data usage. To date, $182.3 million has been incurred on the deployment of HSDPA. Other network-related additions to PP&E in the three and nine months ended September 30, 2006 primarily reflect capacity expansion of the GSM/GPRS network. The remaining network-related additions to PP&E relate mainly to technical upgrade projects, consisting primarily of new cell site build and operational support systems. Other additions to PP&E reflect information technology initiatives such as office system upgrades and other facilities and equipment. Additions to PP&E during the three and nine months ended September 30, 2006 also includes $8.0 million and $57.7 million, respectively, of expenditures related to the Inukshuk wireless broadband initiative. Recent Developments Effective March 31, 2006, Wireless contributed certain assets to Inukshuk Wireless Partnership, a joint venture between Bell Canada ("Bell") and ourselves to build and manage a Canada-wide wireless broadband network licenced by Industry Canada. Each venturer has a 50% ownership interest. The network footprint is expected to cover over 45 cities and approximately 100 unserved rural and remote communities across Canada by the end of 2008. The initial phase of the network covers over 5 million households and 40% of the Canadian population and is now available in 20 centres across Canada. This next generation Internet Protocol ("IP") wireless network based on pre- WiMAX standards enables portable megabit services, allowing subscribers to access the Internet and other applications such as voice-over Internet Protocol ("VoIP"), video streaming and a variety of data applications. The total investment in the partnership is expected to reach $200 million by 2008. Inukshuk also invests a minimum of $3 million per year to support content and connectivity initiatives. While this is a common network that Wireless shares with Bell, we each compete for customers and offer our own services, support and billing to these customers. The Inukshuk fixed wireless network leverages existing network sites of both Rogers and Bell, wirelessly connecting each of our respective customers to the Internet and providing secure data transmission over licenced spectrum. The new technology is also being deployed by companies in the U.S. and certain countries in Europe and Inukshuk expects Canadian users to have access to an extensive North American broadband footprint in the future. Our contribution to the partnership on March 31, 2006 included 2.5GHz spectrum with an estimated fair value of $55.0 million. As at September 30, 2006 and for the three and nine months ended September 30, 2006, we have proportionately consolidated 50% of Inukshuk's results. CABLE AND TELECOM ----------------- Reorganization of Cable and Telecom Group On January 9, 2006, we completed an internal reorganization whereby the ownership interest in Telecom was transferred from RTHI to our subsidiary Rogers Cable Inc. As a result of this transaction, beginning with the results for the three months ended March 31, 2006, we report on the "Cable and Telecom" operating unit which is comprised of the following segments: Cable and Internet, Rogers Home Phone, Rogers Business Solutions and Video stores. Comparative figures have been reclassified to reflect this new reporting. Cable and Telecom Financial Results --------------------------------------------------------------- Three Months Ended September 30, --------------------------------------------------------------- 2005 % Chg Actual Actual Reclas- Reclas- (In millions of dollars, 2006 sified sified except margin) Actual (4) (4) --------------------------------------------------------------- Operating revenue Cable $ 356.4 $ 326.1 9.3 Internet 132.1 109.9 20.2 Rogers Home Phone 90.8 74.7 21.6 Rogers Business Solutions 148.5 139.0 6.8 Video stores 72.8 77.1 (5.6) Intercompany eliminations (1.1) (1.1) - ----------------------------- Total operating revenue 799.5 725.7 10.2 ----------------------------- Operating expenses Cable and Internet 279.4 258.2 8.2 Rogers Home Phone 93.7 70.9 32.2 Rogers Business Solutions 142.1 127.4 11.5 Video stores(1) 70.4 72.9 (3.4) Integration costs(2) 1.4 2.3 (39.1) Intercompany eliminations (1.1) (1.1) - ----------------------------- Total operating expense 585.9 530.6 10.4 ----------------------------- Operating profit (loss)(3) Cable and Internet 209.1 177.8 17.6 Rogers Home Phone (2.9) 3.8 n/m Rogers Business Solutions 6.4 11.6 (44.8) Video stores(1) 2.4 4.2 (42.9) Integration costs(2) (1.4) (2.3) (39.1) ----------------------------- Total operating profit $ 213.6 $ 195.1 9.5 ----------------------------- Operating profit margin:(3) Cable and Internet 42.8% 40.8% Rogers Home Phone (3.2%) 5.1% Rogers Business Solutions 4.3% 8.3% Video stores 3.3% 5.4% Additions to property, plant and equipment ("PP&E")(3) Cable and Internet $ 114.8 $ 134.8 (14.8) Rogers Home Phone 62.6 29.7 110.8 Rogers Business Solutions 26.3 38.4 (31.5) Video stores 3.0 2.9 3.4 ----------------------------- Total additions to PP&E $ 206.7 $ 205.8 0.4 ----------------------------- --------------------------------------------------------------- ------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------------------------------------------------------- 2005 Actual 2005 % Chg Reclas- Pro Pro (In millions of dollars, 2006 sified Forma Forma except margin) Actual (4) (5) (5) ------------------------------------------------------------------------- Operating revenue Cable $1,054.2 $ 963.4 $ 962.9 9.5 Internet 385.3 319.4 324.4 18.8 Rogers Home Phone 257.0 74.7 225.6 13.9 Rogers Business Solutions 441.0 141.2 418.9 5.3 Video stores 226.0 235.5 235.5 (4.0) Intercompany eliminations (3.1) (3.1) (3.1) - --------------------------------------- Total operating revenue 2,360.4 1,731.1 2,164.2 9.1 --------------------------------------- Operating expenses Cable and Internet 824.8 756.2 758.7 8.7 Rogers Home Phone 250.4 70.9 189.6 32.1 Rogers Business Solutions 404.4 136.0 374.7 7.9 Video stores(1) 220.4 221.4 221.4 (0.5) Integration costs(2) 5.8 2.3 13.3 (56.4) Intercompany eliminations (3.1) (3.1) (3.1) - --------------------------------------- Total operating expense 1,702.7 1,183.7 1,554.6 9.5 Operating profit (loss)(3) Cable and Internet 614.7 526.6 528.6 16.3 Rogers Home Phone 6.6 3.8 36.0 (81.7) Rogers Business Solutions 36.6 5.2 44.2 (17.2) Video stores(1) 5.6 14.1 14.1 (60.3) Integration costs(2) (5.8) (2.3) (13.3) (56.4) --------------------------------------- Total operating profit $ 657.7 $ 547.4 $ 609.6 7.9 --------------------------------------- Operating profit margin:(3) Cable and Internet 42.7% 41.1% 41.1% Rogers Home Phone 2.6% 5.1% 16.0% Rogers Business Solutions 8.3% 3.7% 10.6% Video stores 2.5% 6.0% 6.0% Additions to property, plant and equipment ("PP&E")(3) Cable and Internet $ 303.5 $ 355.1 $ 355.1 (14.5) Rogers Home Phone 121.7 94.3 94.3 29.1 Rogers Business Solutions 50.1 43.2 58.7 (14.7) Video stores 5.4 10.7 10.7 (49.5) --------------------------------------- Total additions to PP&E $ 480.7 $ 503.3 $ 518.8 (7.3) --------------------------------------- ------------------------------------------------------------------------- (1) Video store operating expenses for the three and nine months ended September 30, 2006 include a charge of $nil and $5.2 million, respectively, related to the closure of 21 Video stores. (2) Integration costs incurred relate to the integration of the operations of Telecom. (3) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. (4) Certain prior year amounts have been reclassified to conform to the current year presentation. (5) See the "Basis of Pro Forma Information" section for a discussion of considerations in the preparation of this pro forma information. Total operating revenue for the three and nine months ended September 30, 2006 increased $73.8 million or 10.2% and $196.2 million or 9.1%, on a pro forma basis, respectively, from the corresponding periods in 2005, and total operating profit for the three and nine months ended September 30, 2006 increased $18.5 million, or 9.5%, to $213.6 million and $48.1 million, or 7.9%, to $657.7 million, on a pro forma basis, respectively, from the corresponding periods last year. See the following segment discussions for a detailed discussion of operating results. CABLE AND INTERNET Cable and Internet Financial and Operating Results ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 % Chg 2005 % Chg Actual Actual Actual Actual (In millions Reclas- Reclas- Reclas- Reclas- of dollars, 2006 sified sified 2006 sified sified except margin) Actual (2) (2) Actual (2) (2) ------------------------------------------- ----------------------------- Operating revenue Cable $ 356.4 $ 326.1 9.3 $1,054.2 $ 963.4 9.4 Internet 132.1 109.9 20.2 385.3 319.4 20.6 ----------------------------- ----------------------------- Total 488.5 436.0 12.0 1,439.5 1,282.8 12.2 Operating expenses Sales and marketing expenses 34.1 31.1 9.6 95.5 95.7 (0.2) Operating, general and admini- strative expenses 245.3 227.1 8.0 729.3 660.5 10.4 ----------------------------- ----------------------------- Total 279.4 258.2 8.2 824.8 756.2 9.1 Operating profit(1) $ 209.1 $ 177.8 17.6 $ 614.7 $ 526.6 16.7 ----------------------------- ----------------------------- Operating profit margin(1) 42.8% 40.8% 42.7% 41.1% ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. (2) Certain prior year amounts have been reclassified to conform with the current year presentation. ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- (Subscriber statistics in thousands, 2006 2005 2006 2005 except ARPU) Actual Actual Change Actual Actual Change ------------------------------------------- ----------------------------- Cable homes passed 3,458.7 3,355.2 103.5 Basic cable, net gain(3) 12.6 17.4 (4.8) 2.6 1.1 1.5 Basic cable subscribers 2,266.4 2,255.8 10.6 Core cable ARPU(1) $ 52.67 $ 48.46 $ 4.21 $ 51.89 $ 47.61 $ 4.28 Internet, net additions(3) 51.8 60.8 (9.0) 113.0 145.0 (32.0) Internet subscribers (residential) (2) 1,250.0 1,076.3 173.7 Internet ARPU(1)(2) $ 35.83 $ 34.52 $ 1.31 $ 36.09 $ 35.26 $ 0.83 Digital terminals, net additions 95.0 101.4 (6.4) 242.6 229.8 12.8 Digital terminals in service 1,382.2 1,025.5 356.7 Digital households, net additions(3) 62.2 71.0 (8.8) 151.1 164.7 (13.6) Digital households 1,064.4 840.1 224.3 ------------------------------------------- ----------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. (2) Prior year Internet subscribers and ARPU have been reclassified to include only residential subscribers. (3) Effective August 2005, voluntarily deactivating Cable and Internet subscribers are required to continue service for 30 days from the date termination is requested. This continued service period, which is consistent with the subscriber agreement terms and conditions, resulted in approximately 16,500 greater net basic cable additions, 8,000 greater high-speed Internet additions and 5,500 greater digital household net additions in both the three and nine months ended September 30, 2005. Cable Revenue The increases in Cable revenue for the three and nine months ended September 30, 2006 reflect price increases, the growth in basic subscribers and the growing penetration of our digital products. The price increases on service offerings effective March 2006 contributed to the cable revenue growth by $17.1 million and $56.6 million for the three and nine months ended September 30, 2006, respectively. The remaining increase in revenue of $13.2 million and $34.2 million for the three and nine months ended September 30, 2006, respectively, is related mainly to the impact of the growth in basic and digital subscribers. The basic subscriber base of nearly 2.3 million has increased by 12,600 and 2,600 for the three and nine months ended September 30, 2006, respectively. After considering the effect of adjusting for the one time impact of enforcing the 30 day billing for voluntary deactivating subscribers starting August 2005, net additions in the three months ended September 30, 2006 increased 11,700 from the corresponding period of the prior year. The digital subscriber base has grown by 26.7% between September 30, 2005 and September 30, 2006 to 1.1 million subscribers. This represents a 47.0% penetration of basic cable customers. The demand for our high definition and personal video recorder digital equipment combined with our Personal TV marketing campaign were contributors to the growth in our digital subscriber base of 62,200 and 151,100 households in the three and nine months ended September 30, 2006, respectively. Internet (Residential) Revenue The increases in Internet revenues for the three and nine months ended September 30, 2006 from the corresponding periods in 2005 reflect primarily the 16.1% year-over-year increase in the number of Internet subscribers and certain price increases for our Internet offerings. The price increases on Internet offerings, effective March 2006, contributed to the Internet revenue growth by $10.1 million and $23.0 million for the three and nine months ended September 30, 2006, respectively. The remaining increase in revenue of $12.1 million and $42.9 million for the three and nine months ended September 30, 2006, respectively, is related mainly to the impact from the growth in subscribers. As a result of the price increases, the average monthly revenue per Internet subscriber has increased in both the quarter and year-to- date period from the corresponding periods in 2005. After adjusting for the one time impact of enforcing the 30 day billing for voluntary deactivating subscribers starting August 2005, the Internet subscriber additions are only 1,000 lower in the three months ended September 30, 2006 versus the same period last year, reflecting efforts to generate long-term relationships through disciplined acquisition and retention offers and rational pricing models. With the Internet subscriber base now at approximately 1.3 million, Cable and Telecom has 55% Internet penetration of basic cable households, and 36% penetration as a percentage of all homes passed by its cable networks. Cable and Internet Operating Profit The increase in Cable and Internet sales and marketing expenses of $3.0 million for the three months ended September 30, 2006 reflects the timing of promotional activities. The year-to-date marketing expenses are at a level consistent with the corresponding period of the prior year. The increases in operating, general and administrative costs for the three and nine months ended September 30, 2006 compared to the corresponding periods of the prior year were driven by the substantial increase in digital cable and Internet penetration resulting in higher costs associated with programming content, customer care, technical service and administration associated with the support of the larger subscriber bases. The Cable and Internet operating profit and operating profit margins for both the three and nine months ended September 30, 2006 increased from the corresponding periods in 2005 reflecting the growth in revenue which outpaced the growth in operating expenses. ROGERS HOME PHONE Rogers Home Phone Financial and Operating Results ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 % Chg Actual Actual 2005 % Chg (In millions Reclas- Reclas- Pro Pro of dollars, 2006 sified sified 2006 Forma Forma except margin) Actual (3) (3) Actual (2) (2) ------------------------------------------- ----------------------------- Operating revenue $ 90.8 $ 74.7 21.6 $ 257.0 $ 225.6 13.9 Operating expenses Sales and marketing expenses 26.6 13.9 91.4 66.3 31.0 113.9 Operating, general and admini- strative expenses 67.1 57.0 17.7 184.1 158.6 16.1 ----------------------------- ----------------------------- Total operating expenses 93.7 70.9 32.2 250.4 189.6 32.1 ----------------------------- ----------------------------- Operating profit (loss)(1) $ (2.9) $ 3.8 n/m $ 6.6 $ 36.0 (81.7) ----------------------------- ----------------------------- Operating profit margin(1) (3.2%) 5.1% 2.6% 16.0% ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. (2) See the "Basis of Pro Forma Information" section for a discussion of considerations in the preparation of this pro forma information. (3) Certain prior year amounts have been reclassified to conform to the current year presentation. ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 Chg (Subscriber Pro Pro statistics in 2006 2005 Chg 2006 Forma Forma thousands) Actual Actual Actual Actual (2) (2) ------------------------------------------- ----------------------------- Cable telephony subscriber lines Net additions(1) 106.1 18.1 88.0 222.9 18.1 204.8 Total cable telephony subscriber lines 270.8 18.1 252.7 Circuit-switched subscriber lines Net additions (losses and migrations) (1) (24.1) 14.2 (38.3) (32.8) 53.8 (86.6) Total circuit- switched subscriber lines 357.9 364.7 (6.8) Total residential telephony subscriber lines 628.7 382.8 245.9 ------------------------------------------- ----------------------------- (1) Includes approximately 14,400 and 23,600 migrations from circuit- switched to cable telephony for the three and nine months ended September 30, 2006, respectively. (2) See the "Basis of Pro Forma Information" section for a discussion of considerations in the preparation of this pro forma information. We believe that the pro forma information for the nine months ended September 30, 2006 presented in this section presents a meaningful comparative analysis given that Telecom's results are consolidated effective as of the July 1, 2005 acquisition date. The following discussion on the Rogers Home Phone results includes pro forma comparisons for the nine months ended September 30, 2006. Rogers Home Phone Revenue The growth in Rogers Home Phone revenues for the three and nine months ended September 30, 2006 compared to the corresponding periods in 2005, is mainly a result of incremental revenues from Rogers Home Phone voice-over- cable telephony service of $19.3 million and $36.5 million, respectively. This service was launched in July 2005 and added 106,100 and 222,900 net new lines, respectively, in the three and nine month periods ended September 30, 2006. Partially offsetting this increase is a decline in the number of circuit- switched local lines of 24,100 and 32,800 for the three and nine months ended September 30, 2006. Approximately 14,400 and 23,600 of the decrease is due to the migration of those lines from circuit-switched lines to cable telephony lines within our cable territory in the three and nine months ended September 30, 2006, respectively. Despite the decline in circuit-switched lines, revenue increased by $2.5 million and $11.4 million in the three and nine months ended September 30, 2006, respectively, compared to the prior year due to a higher average number of lines this quarter over last year. The net growth in the Rogers Home Phone subscriber base contributed to incremental local service revenues of approximately $21.8 million and $47.9 million for the three and nine months ended September 30, 2006, respectively. Partially offsetting the growth of the Rogers Home Phone local service revenue was a decline of approximately $2.0 million and $6.0 million in long distance revenues for the three and nine months ended September 30, 2006, respectively, reflecting ongoing declines in long distance only customers, pricing and usage. In addition, the Rogers Home Phone revenues in 2005 included $3.6 million and $10.5 million associated with the resale of Wireless' products and services for the three and nine months ended September 30, 2005, respectively. These subscribers and related revenues were transferred to Wireless in September 2005. Rogers Home Phone Operating Profit The significant growth and expansion of both operations and sales and marketing associated with the launch of the cable telephony service and overall increase in subscribers drove the increases in operating expenses of $22.8 million and $60.8 million for the three and nine months ended September 30, 2006, respectively. The year-over-year decreases in both the Rogers Home Phone operating profit and operating profit margins for the three and nine months ended September 30, 2006 primarily reflect the additional costs associated with the scaling and rapid growth of our cable telephony service. Investment is being made in the awareness of the product, increased capacity to install and customer acquisition. ROGERS BUSINESS SOLUTIONS Rogers Business Solutions Financial Results ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 % Chg Actual Actual 2005 % Chg (In millions Reclas- Reclas- Pro Pro of dollars, 2006 sified sified 2006 Forma Forma except margin) Actual (3) (3) Actual (2) (2) ------------------------------------------- ----------------------------- Operating revenue $ 148.5 $ 139.0 6.8 $ 441.0 $ 418.9 5.3 Operating expenses Sales and marketing expenses 17.2 17.8 (3.4) 51.4 53.3 (3.6) Operating, general and admini- strative expenses 124.9 109.6 14.0 353.0 321.4 9.8 ----------------------------- ----------------------------- Total operating expenses 142.1 127.4 11.5 404.4 374.7 7.9 ----------------------------- ----------------------------- Operating profit(1) $ 6.4 $ 11.6 (44.8) $ 36.6 $ 44.2 (17.2) ----------------------------- ----------------------------- Operating profit margin(1) 4.3% 8.3% 8.3% 10.6% ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. (2) See "Basis of Pro Forma Information" section for discussion of considerations in the preparation of this pro forma information. (3) Certain prior year amounts have been reclassified to conform to the current year presentation. ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 Chg (Subscriber Pro Pro statistics in 2006 2005 Chg 2006 Forma Forma thousands) Actual Actual Actual Actual (1) (1) ------------------------------------------- ----------------------------- Local line equivalents(1) Net additions 6.6 3.3 3.3 22.8 14.1 8.7 Total local line equivalents 194.4 168.3 26.1 Broadband data circuits(2) Net additions 1.0 0.9 0.1 3.1 2.4 0.7 Total broadband data circuits 20.6 14.9 5.7 ------------------------------------------- ----------------------------- (1) Local line equivalents include individual voice lines plus Primary Rate Interfaces ("PRIs") at a factor of 23 voice lines each. (2) Broadband data circuits are those customer locations accessed by data networking technologies including DOCSIS, DSL-x, E10/100/1000, OC-n and DS-n. We believe that the pro forma information presented in this section for the nine months ended September 30, 2006 presents a meaningful comparative analysis given that Telecom's results are consolidated effective as of the July 1, 2005 acquisition date. The following discussion on the Rogers Business Solutions results includes pro forma comparisons for the nine months ended September 30, 2006. Rogers Business Solutions Revenue The increase in Rogers Business Solutions revenues reflects growth in each of data, local and long distance components of revenue. During the three and nine months ended September 30, 2006, data revenues grew by $1.6 million and $7.7 million, respectively, compared to the corresponding periods of 2005. Local services grew by $2.4 million and $7.2 million, respectively, and long distance grew by $5.5 million and $7.2 million, respectively, during the three and nine months ended September 30, 2006 compared to the corresponding periods of 2005. Rogers Business Solutions ended the quarter with 194,400 local line equivalents and 20,600 broadband data circuits in service at September 30, 2006, representing year-over-year growth rates of 15.5% and 38.3%, respectively. The increases in long distance revenue resulted from increases in volume of 18.8% and 11.7% for the three and nine months ended September 30, 2006, respectively. Approximately 60% of the increase in long distance volume relates to increases in the intercompany sale of long distance to Wireless. The volume increases were partially offset by the ongoing declines in average revenue per minute, which decreased 8.2% and 7.0%, for the three and nine months ended September 30, 2006, respectively. Rogers Business Solutions continues to focus on selling local and data products, especially IP-enabled solutions, thereby decreasing its reliance on long distance revenues. The combination of local and data revenue represented 54.9% and 56.1% of total revenue for the three and nine months ended September 30, 2006, respectively. Rogers Business Solutions Operating Profit Carrier charges, which are included in operating, general and administrative expenses, increased by $15.0 million and $31.5 million to $89.2 million and $249.7 million for the three and nine months ended September 30, 2006, respectively. Carrier charges represent approximately 60.0% and 56.6% of revenue in the three and nine months ended September 30, 2006, respectively, compared to 53.3% and 52.1% of revenue in the corresponding periods of 2005. The net increase in the quarter and year-to-date carrier charges is the result of higher volume, product mix changes, and the impact of regulatory relief recorded in the prior year from the Competitor Digital Network Services ("CDNS") decision. Other operating, general and administrative expenses remained consistent with the corresponding periods of 2005. Operating, general and administrative expenses for the nine months ended September 30, 2006 include a one-time reduction to costs of approximately $1.6 million related to a retroactive regulatory decision. Mainly due to the pricing pressures on long distance and the higher carrier costs and other general and administrative expenses, Rogers Business Solutions margins decreased to 4.3% and 8.3%, for the three and nine months ended September 30, 2006, respectively, compared to 8.3% and 10.6%, respectively, for the corresponding periods in 2005. VIDEO STORES Video Stores Financial Results ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- (In millions of dollars, except 2006 2005 2006 2005 margin) Actual Actual % Chg Actual Actual % Chg ------------------------------------------- ----------------------------- Operating revenue $ 72.8 $ 77.1 (5.6) $ 226.0 $ 235.5 (4.0) Operating expenses(1) 70.4 72.9 (3.4) 220.4 221.4 (0.5) ----------------------------- ----------------------------- Operating profit(2) $ 2.4 $ 4.2 (42.9) $ 5.6 $ 14.1 (60.3) ----------------------------- ----------------------------- Operating profit margin(2) 3.3% 5.4% 2.5% 6.0% ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- (1) Operating, general and administrative expenses for the nine months ended September 30, 2006 include $5.2 million of costs related to the closure of 21 Video stores. (2) As defined. See the "Key Performance Indicators and Non-GAAP Measures" and "Supplementary Information" sections. Video Stores Revenue The decline in revenues at the Rogers Video ("Video") stores was primarily due to lower video rental and sales revenues. Initiatives were introduced to increase customers' spending, which resulted in dollars per transaction increasing 14.8% and 14.4% in the three and nine months ended September 30, 2006 compared to the same periods last year, respectively; however, same store customer transactions decreased 11.6% and 14.5% compared to the corresponding periods in 2005 due to a decrease in total visits. Also, same store revenue declined 2.2% for the nine months ended September 30, 2006 compared to the corresponding period of the prior year. Video has recently taken additional steps with respect to its pricing and late-fee structures aimed at reversing the trend of lower same store customer transactions. Video Stores Operating Profit The year-over-year decline in Video stores operating profit relates primarily to the decline in revenues and charges of approximately $5.2 million in the nine months ended September 30, 2006 associated with the closing of 21 Video stores. CABLE AND TELECOM ADDITIONS TO PP&E The nature of the cable television business is such that the construction, rebuild and expansion of a cable system are highly capital- intensive. The Cable and Internet segment categorizes its additions to property, plant and equipment ("PP&E") according to a standardized set of reporting categories that were developed and agreed to by the U.S. cable television industry and which facilitate comparisons of additions to PP&E between different cable companies. Under these industry definitions, our Cable and Internet additions to PP&E are classified into the following five categories: - Customer premises equipment ("CPE"), which includes the equipment for digital set-top terminals, Internet modems and the associated installation costs; - Scaleable infrastructure, which includes non-CPE costs to meet business growth and to provide service enhancements, including many of the costs to-date of the cable telephony initiative; - Line extensions, which includes network costs to enter new service areas; - Upgrade and rebuild, which includes the costs to modify or replace existing coaxial cable, fibre-optic network electronics; and - Support capital, which includes the costs associated with the purchase, replacement or enhancement of non-network assets. ------------------------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2005 Actual % Chg 2005 % Chg Reclas- Actual Pro Pro (In millions 2006 sified Reclas- 2006 Forma Forma of dollars) Actual (1) sified Actual (2) (2) ------------------------------------------- ----------------------------- Cable and Internet PP&E additions Customer premise equipment $ 53.6 $ 72.0 (25.6) $ 150.7 $ 177.4 (15.1) Scaleable infra- structure 22.2 26.8 (17.2) 59.2 90.5 (34.6) Line extensions 15.9 13.1 21.4 42.3 37.1 14.0 Upgrade and rebuild 1.9 0.4 n/m 5.2 1.4 n/m Support capital 21.2 22.5 (5.8) 46.1 48.7 (5.3) ----------------------------- ----------------------------- 114.8 134.8 (14.8) 303.5 355.1 (14.5) Rogers Home Phone PP&E additions 62.6 29.7 110.8 121.7 94.3 29.1 Rogers Business Solutions PP&E additions 26.3 38.4 (31.5) 50.1 58.7 (14.7) Video stores PP&E additions 3.0 2.9 3.4 5.4 10.7 (49.5) ----------------------------- ----------------------------- $ 206.7 $ 205.8 0.4 $ 480.7 $ 518.8 (7.3) ----------------------------- ----------------------------- ------------------------------------------- ----------------------------- (1) Certain prior year amounts have been reclassified to conform with the current year presentation. (2) See "Basis of Pro Forma Information" section for a discussion of considerations in the preparation of this pro forma information. The declines in Cable and Internet PP&E additions are primarily attributable to lower spending on scaleable infrastructure related to deferred video-on-demand capacity increase and IP network capacity increases, delayed head-end expenditures, reduced transport network expenditures as well as lower spending on customer premise equipment related to digital terminals and cable modems, as well as the timing of expenditures relating to IP Networks. The increases in additions to Rogers Home Phone PP&E compared to the corresponding periods in 2005 are primarily due to additional spending on customer premises equipment as well as capacity on the cable network associated with the 88% year-over-year increase in quarterly subscriber additions. MEDIA ----- Media Operating and Financial Results ------------------------------------------- ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- (In millions of dollars) 2006 2005 % Chg 2006 2005 % Chg ------------------------------------------- ----------------------------- Operating revenue $ 319.3 $ 284.5 12.2 $ 893.3 $ 797.2 12.1 Operating expenses 280.3 251.2 11.6 789.2 708.4 11.4 ----------------------------- ----------------------------- Operating profit(1) $ 39.0 $ 33.3 17.1 $ 104.1 $ 88.8 17.2 ----------------------------- ----------------------------- Operating profit margin(1) 12.2% 11.7% 11.7% 11.1% Additions to property, plant and equipment(1) $ 7.1 $ 5.6 26.8 $ 32.5 $ 28.0 16.1 ------------------------------------------- ----------------------------- (1) As defined. See the "Key Performance Indicators and Non-GAAP Measures" section Media Revenue The increases in Media revenues for the three and nine months ended September 30, 2006 over the corresponding periods in 2005 reflect growth across all of Media's divisions. These increases include higher advertising revenue in Publishing and Radio, and at Sportsnet where the Toronto Blue Jays games and World Cup Soccer attracted large audiences and higher advertising. The Shopping Channel continued to generate strong consumer demand for products. Sports Entertainment revenue grew through higher baseball ticket sales. The addition of OMNI BC, the launch of OMNI Manitoba and consolidation of the Biography Channel and G4TechTV as a result of increased ownership in the second quarter of 2006 also contributed to the increase in revenue. Media Operating Expenses The increases in Media operating expenses for the three and nine months ended September 30, 2006 compared to the corresponding periods in 2005 are primarily due to higher baseball player payroll at Sports Entertainment, increased programming costs at Sportsnet associated with World Cup Soccer, as well as costs associated with Publishing's launch of the Canadian edition of Hello! and Chocolat magazines. The return of NHL hockey also increased programming costs at Sportsnet for the nine months ended September 30, 2006. Cost increases were partially offset by lower general and administrative costs across all divisions. Media Operating Profit The changes discussed above drove the year-over-year increases in Media's operating profit for both the three and nine months ended September 30, 2006 from the corresponding periods in 2005, as well as the corresponding increase in operating margins. Media Additions to PP&E The majority of Media's PP&E additions in the first nine months of both 2006 and 2005 reflect renovations and enhancements to the Rogers Centre sports and entertainment venue in Toronto. CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES Operations Three Months Ended September 30, 2006 For the three months ended September 30, 2006, cash generated from operations before changes in non-cash operating items, which is calculated by removing the effect of all non-cash items from net income, increased to $666.4 million from $437.0 million in the corresponding period of 2005. The $229.4 million increase is primarily the result of the increase in operating profit of $194.9 million in addition to a $26.0 million decrease in interest expense. Taking into account the changes in non-cash working capital items for the three months ended September 30, 2006, cash generated from operations was $730.1 million, compared to $444.7 million in the corresponding period of 2005. The cash flow generated from operations of $730.1 million, together with receipt of $23.3 million from the issuance of Class B Non-Voting shares under the exercise of employee stock options and $6.4 million from other investments, resulted in total net funds of approximately $759.8 million raised in the three months ended September 30, 2006. Net funds used during the three months ended September 30, 2006 totalled approximately $733.8 million, the details of which include funding: - Additions to PP&E of $394.8 million, net of $20.5 million of related changes in non-cash working capital; - An aggregate net repayment of $286.0 million of outstanding advances under our bank credit facilities; - The payment of dividends of $23.7 million on our Class A Voting and Class B Non-Voting shares; - An aggregate $23.0 million net repayment of mortgages and capital leases; and - Additions to program rights of $6.3 million. Taking into account the cash deficiency of $55.2 million at the beginning of the period and the fund uses described above, the cash deficiency at September 30, 2006 was $29.1 million. Nine Months Ended September 30, 2006 For the nine months ended September 30, 2006, cash generated from operations before changes in non-cash operating items, which is calculated by removing the effect of all non-cash items from net income, increased to $1,755.0 million from $1,171.6 million in the corresponding period of 2005. The $583.4 million increase is primarily the result of the increase in operating profit of $492.7 million in addition to a $74.8 million decrease in interest expense. Taking into account the changes in non-cash working capital items for the nine months ended September 30, 2006, cash generated from operations was $1,746.9 million, compared to $953.5 million in the corresponding period of 2005. The cash flow generated from operations of $1,741.9 million, together with receipt of $63.1 million from the issuance of Class B Non-Voting shares under the exercise of employee stock options, resulted in total net funds of approximately $1,810.0 million raised in the nine months ended September 30, 2006. Net funds used during the nine months ended September 30, 2006 totalled approximately $1,735.2 million, the details of which include funding: