Rogers Communications Inc., a leading diversified Canadian communications and media company, today announced its unaudited consolidated financial and operating results for the first quarter ended March 31, 2015.
"We continued to see steady revenue growth this quarter along with strong growth in Wireless ARPA," said Guy Laurence, President and Chief Executive Officer of Rogers. "We made planned strategic investments to retain high-value customers ahead of the conclusion of the industry-wide shift to two-year contracts this summer - our underlying adjusted operating profit growth was otherwise solid. At the same time, we moved full steam ahead with our Rogers 3.0 program by delivering a number of initiatives that are popular with our customers. Our plan is gaining traction and we expect continued improvements in our key financial and operating results as the year progresses."
Key Financial Highlights
Higher operating revenue
Consolidated revenue increased 5% this quarter, reflecting revenue growth of 4% in Wireless, 1% in Cable, and 26% in Media, with stable revenue in Business Solutions. Wireless revenue increased as a result of both higher network revenue from the continued movement of our base to LTE, the adoption of higher ARPU and ARPA-generating Share Everything plans, as well as greater smartphone sales. Cable revenue was relatively stable as continued Internet revenue growth was offset by decreased revenue in Television and Phone. Media revenue increased as a result of the NHL licensing agreement and growth at Sportsnet, Radio, and Next Issue Canada partially offset by continued softness in conventional broadcast TV and print advertising.
The implementation of a CRTC decision mandating that telecommunications providers could no longer require customers to provide a minimum of 30 days' notice to cancel services resulted in a decrease of $3 million in Cable revenue this quarter and an increase in Cable total service unit losses of approximately 40,000 (which includes combined Internet, Television, and Phone subscribers).
Activated 700,000 wireless smartphones this quarter, of which 32% were new subscribers, with higher-value smartphone customers representing 83% of Wireless postpaid subscribers as at March 31, 2015.
Lower adjusted operating profit impacted by planned customer investments
The 3% decrease in consolidated adjusted operating profit this quarter reflects decreases in Wireless of 3%, in Cable of 2%, and in Media of 33% ($8 million), while adjusted operating profit in Business Solutions was stable. Wireless experienced higher costs associated with the increased volume of subsidized smartphones sold primarily as a result of proactively early-upgrading targeted subscribers in advance of the conclusion of the industry-wide shift to two-year contracts this summer, partially offset by higher network revenues. Cable results were impacted by investments in programming, customer value enhancements, and the CRTC cancellation notification policy change. Media's results, during what is traditionally its softest quarter, were impacted by the timing of programming and productions costs, a large portion of which were seasonal in nature and related to hockey.
Consolidated adjusted operating profit margin decreased by 300 basis points to 35.4% this quarter with margins of 45.8% in Wireless and 46.2% in Cable.
The reductions of 19% in adjusted net income and 17% in net income were mainly as a result of an 8% increase in depreciation and amortization in addition to the 3% decrease in consolidated adjusted operating profit.
Cash flow and available liquidity
Generated $266 million of consolidated free cash flow this quarter, representing a decrease of 25%, primarily as a result of a timing-related increase in cash income taxes paid and the lower adjusted operating profit. Cash provided by operating activities was $227 million this quarter.
Maintained approximately $2.4 billion of liquidity available under our bank credit facilities as at March 31, 2015.
Returned $235 million of cash to shareholders through the payment of our quarterly cash dividend which the Rogers Board of Directors increased by 5% to 48 cents per share earlier this quarter.
Overhaul the customer experience
Reduced the number of customer complaints by more than 20% over the six months ended January 31, 2015 based on data collected for the Commissioner for Complaints for Telecommunications Services' (CCTS) mid-year report released in April 2015. This reduction is on top of the more than 30% reduction over the preceding 12-month period ended July 31, 2014 published in CCTS's November 2014 annual report. As part of our Rogers 3.0 plan, we are committed to putting our customers first, and while our work is far from over, this report shows our focus on customers is paying off and we're heading in the right direction.
Expanded Roam Like Home to over 35 European countries, further simplifying how Wireless consumers use the Internet, make calls, and send texts and emails with their Rogers Share Everything plan. Customers access their identical Canadian plan features while in Europe, all at a relatively low cost.
Introduced a new Wireless Hardware Upgrade Program where customers now have the option to upgrade their wireless device online.
Released Rogers' 2014 Transparency Report, our second annual report on how we share customer information in response to requests from legal authorities.
Unveiled a new look and feel, improved search and navigation capabilities, and accelerated response times for our online Community Forums. More customers want self-serve and our Community Forums are one of many ways our customers will be able to get the information they need quickly and easily.
Put customers first in an agreement with the Competition Bureau to issue credits or refunds to customers who were charged for unwanted third-party premium text messaging services.
Deliver compelling content everywhere
Introduced 'Fido Pulse' Wireless plans delivering more value with a 24-month subscription to Spotify Premium, one of the world's most innovative music streaming services, and original exclusive DAILY VICE, an edgy, ground-breaking news app.
Acquired exclusive Canadian English-language multimedia rights for Sportsnet to the 2016 World Cup of Hockey including television, online, and mobile rights for every game of the highly-anticipated tournament.
Reached an average audience of 2.64 million viewers for City's televised presentation of the 57th Annual GRAMMY Awards, setting a record as the most-watched program in the network's history.
Added more titles and exclusive content to shomi including agreements with DHX Media and Corus Entertainment. shomi added popular kids' shows such as iCarly, Yo Gabba Gabba, and SpongeBob SquarePants, as well as exclusive content through a deal with Sony Pictures Television for the Golden Globe-winning show Transparent and acclaimed series Outlander.
Focus on innovation and network leadership
Launched new Rogers IGNITE broadband Internet-based bundled offerings with new usage options and value-added content, including Rogers NHL GameCentre LIVE and shomi.
Released independent testing research from SamKnows dated February 2015 confirming that Rogers' broadband Internet customers continue to enjoy fast and reliable upload and download service, delivered at 100 percent or more on average of advertised speeds, even during peak network hours.
Rogers was the first in Canada to launch Voice over LTE (VoLTE) technology giving customers across the country access to higher-quality HD voice and video calls and faster call setup and connection times and the ability to simultaneously place calls, browse the web or stream video at considerably greater LTE speeds.
Extended wireless network coverage in even more rural markets across Canada allowing customers to stay connected in additional places, at no extra charge and with no sign-up or opt-in requirements.
Rogers' wireless network was the first in Canada to be Category 6 enabled, allowing customers in select communities across Ontario and British Columbia to enjoy faster download speeds and a higher quality video experience on Category 6-enabled smartphones and tablets.
Extended Rogers Smart Home Monitoring services to residents in Vancouver and the Lower Mainland, British Columbia allowing them to connect, protect, and manage what's happening at home using their mobile devices or computers.
Drive growth in the business market
Deployed the GSMA Embedded SIM Specification of the M2M World Alliance, a global partnership of telecommunications providers. This standard allows for remote wireless provisioning of machine-to-machine (M2M) devices, significantly reducing the cost and time for enabling globally connected devices.
Invest in and develop our people
Selected as one of Canada's Best Diversity Employers for 2015 in a report released by Mediacorp Inc. in March 2015 for recognition of our efforts to promote diversity and inclusion in the workplace.
Be a strong Canadian growth company
Appointed Dirk Woessner as President, Consumer Business Unit effective April 6, 2015. Mr. Woessner was previously at Deutsche Telekom where he held a number of senior leadership positions in both wireless and broadband within the United Kingdom and Germany.
Announced the internal appointment of Jamie Williams as our Chief Information Officer effective May 4, 2015. Mr. Williams brings a 20-year track record of transforming IT systems in complex and challenging North American telecommunications environments.
About non-GAAP measures
This earnings release contains non-GAAP measures such as adjusted operating profit, adjusted operating profit margin, adjusted net income, free cash flow, adjusted net debt, adjusted net debt to adjusted operating profit, and adjusted basic and diluted earnings per share. These are non-GAAP measures and should not be considered as a substitute or alternative for GAAP measures. They are not defined terms under International Financial Reporting Standards (IFRS), and do not have standard meanings, so may not be a reliable way to compare us to other companies. See "Non-GAAP Measures" for information about these measures, including how we calculate them.
This earnings release contains important information about our business and our performance in the first quarter of 2015 as well as forward-looking information about future periods.
This earnings release should be read in conjunction with our First Quarter 2015 MD&A, our First Quarter 2015 Interim Condensed Consolidated Financial Statements and Notes, which have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB), our 2014 Annual MD&A, our 2014 Audited Consolidated Financial Statements and Notes thereto, which have been prepared in accordance with IFRS as issued by the IASB, and our other recent filings with Canadian and US securities regulatory authorities, which are available on SEDAR at sedar.com or EDGAR at sec.gov, respectively.
For more information about Rogers, including product and service offerings, competitive market and industry trends, and our overarching strategy, see "Understanding Our Business", "Our Strategy", and "Capability to Deliver Results" in our 2014 Annual MD&A. For our key performance drivers and objectives, see "Key Performance Drivers and Highlights" in our 2014 Annual MD&A and the section "Key Highlights" in this earnings release for our first quarter 2015 key achievements.
All dollar amounts are in Canadian dollars unless otherwise stated. All percentage changes are calculated using the rounded numbers as they appear in the tables. This earnings release is current as at April 20, 2015 and was approved by the Audit Committee of our Board of Directors on that date. This earnings release includes forward-looking statements and assumptions. See "About Forward-Looking Information" for more information.
We, us, our, Rogers, Rogers Communications, and the Company refer to Rogers Communications Inc. and its subsidiaries. RCI refers to the legal entity Rogers Communications Inc., not including its subsidiaries. RCI also holds interests in various investments and ventures.
We are publicly traded on the Toronto Stock Exchange (TSX: RCI.A and RCI.B) and on the New York Stock Exchange (NYSE: RCI).
In this earnings release, this quarter refers to the three months ended March 31, 2015. All results commentary is compared to the equivalent periods in 2014 or as at December 31, 2014, as applicable, unless otherwise indicated.
KEY CHANGES IN FINANCIAL RESULTS THIS QUARTER COMPARED TO 2014
Wireless network revenue increased this quarter compared to the same period last year primarily as a result of the continued adoption of higher ARPU-generating simplified pricing plans, the continued growth in usage of wireless data, and the ongoing transition from three-year to two-year contracts, partially offset by the continued decline in roaming revenue as a result of lower-priced roaming plans.
Cable operating revenue increased this quarter compared to the same period last year as a result of Internet revenue growth and the impact and timing of pricing changes across all product types, partially offset by TV subscriber losses over the past year. The implementation of a CRTC decision mandating that telecommunications providers could no longer require customers to provide a minimum of 30 days' notice to cancel services resulted in a decrease of $3 million in Cable revenue this quarter and an increase in Cable total service unit losses of approximately 40,000.
Business Solutions operating revenue was stable this quarter compared to the same period last year as the continued growth in on-net and next generation services, including our data centre businesses, was offset by the continued planned reduction in lower-margin, off-net legacy revenue.
Media operating revenue increased this quarter compared to the same period last year as a result of revenue generated by our National Hockey League (NHL) licensing agreement and growth at Sportsnet, Radio, and Next Issue Canada, partially offset by continued softness in conventional broadcast TV and print advertising.
Adjusted operating profit
Wireless adjusted operating profit decreased this quarter compared to the same period last year as a result of the higher volumes of subsidized smartphones sold as a result of our initiative to proactively early upgrade existing customers in the first half of 2015, prior to the final expiration of three-year contracts, partially offset by the network revenue growth described above and cost reductions.
Cable adjusted operating profit decreased this quarter compared to the same period last year as a result of investments in programming and customer value enhancements, partially offset by the revenue changes discussed above.
Business Solutions adjusted operating profit was stable this quarter as a result of the continued growth in on-net and near-net next generation businesses and productivity improvements, offset by the continued decline in the off-net legacy business.
Media adjusted operating loss increased this quarter compared to the same period last year as a result of higher programming and production costs, a large portion of which were seasonal in nature and related to hockey. See "Media Financial Results" for more information on seasonality and the impact of programming and production costs.
The 2% increase in network revenue this quarter was a result of:
continued adoption of the customer-friendly Rogers Share Everything plans, which generate higher ARPU and ARPA and bundle in certain calling features and long distance, grant the ability to pool data usage with other devices on the same account, and entice customers with access to our other products, such as Roam Like Home and Rogers NHL GameCentre LIVE; partially offset by
approximately 18% lower roaming revenue as a result of lower-priced US and international roaming plans introduced for customers in 2014, which simplify the customer experience and should increase roaming usage.
A 4% increase in network revenue and postpaid ARPU and a 6% increase in ARPA would have been realized this quarter if roaming revenue was excluded from our calculation.
The 2% increase in postpaid ARPU was a result of increased network revenue and wireless data usage. Commencing in 2015, we are disclosing ARPA as one of our key performance indicators. See "Key Performance Indicators" for more information. The 4% increase in postpaid ARPA was a result of the continued adoption of Share Everything plans relative to the number of subscriber accounts as customers are increasingly utilizing the advantages of accessing their shareable plans with multiple devices on the same account.
The increases in postpaid subscriber churn and net losses and lower gross additions to our postpaid subscriber base compared to the prior year were expected in the short-term as a result of:
our strategic focus on optimizing subscriber value;
a focus on migrating existing customers to current pricing plans; and
adjustments to the required rate plans for subsidized premium device eligibility.
We had fewer net subscriber losses this quarter compared to the fourth quarter of 2014. The 4 basis point increase in postpaid subscriber churn compared to the first quarter last year improved from the 12 basis point increase in the fourth quarter of 2014 compared to the fourth quarter of 2013.
We activated and upgraded approximately 700,000 smartphones for new and existing subscribers this quarter, a 21% increase compared to approximately 579,000 in the same period last year. This increase in smartphone activations was a result of:
a greater number of hardware upgrades by existing subscribers; partially offset by
the reduction in postpaid gross additions.
The percentage of subscribers with smartphones was 83% of our total postpaid subscriber base as at March 31, 2015. In our experience, smartphone subscribers typically:
generate significantly higher ARPU; and
are less likely to churn than customers on less advanced devices.
The 34% increase in revenue from equipment sales this quarter primarily reflects:
the impact of more device upgrades by existing subscribers;
a shift in the sales mix to smartphones which included a higher proportion of iPhone devices; and
increased equipment sales prices; partially offset by
fewer gross activations.
The 32% increase in the cost of equipment sales this quarter was primarily as a result of:
a shift in the product mix towards higher-cost smartphones; and
increased equipment sales volumes as we proactively early upgraded targeted subscribers in advance of the industry's "double cohort" resulting in an increase of 18% more upgrades this quarter, the majority of which were higher-cost smartphones including 44% more iPhones.
The "double cohort" refers to the greater than usual number of subscriber contracts coming to an end as both three-year and two-year contracts expire near the same time. The final expiration of remaining three-year contracts for consumers will occur this summer.
Total customer retention spending (primarily consisting of subsidies on handset upgrades) was 32% higher this quarter with 18% more existing subscribers upgrading their hardware combined with the shift in product mix described above.
Other operating expenses (excluding retention spending) decreased this quarter as a result of improvements in cost management and efficiency gains.
Adjusted operating profit
The 3% decrease in adjusted operating profit this quarter was a result of the revenue and expense changes discussed above.
The 1% increase in overall Cable revenue this quarter was primarily a result of:
a higher subscriber base for our Internet products combined with the movement of customers to higher speed and usage tiers;
the impact and timing of pricing changes implemented over the past year; partially offset by
Television and Phone subscriber losses over the past year; and
Phone promotional discounting.
The implementation of a CRTC decision mandating that, effective January 23, 2015, telecommunications providers could no longer require customers to provide a minimum of 30 days' notice to cancel services had the effect of increasing the amount of Cable product subscriber deactivations reported this quarter. The policy change effectively resulted in an extra month of customer deactivations being counted this quarter and a corresponding increase in the number of subscriber losses of approximately 17,000 Television subscribers, 15,000 high-speed Internet subscribers, and 8,000 Phone subscribers. This decreased Cable revenue by $3 million for the quarter.
The 6% increase in Internet revenue this quarter was a result of:
general movement by customers to higher speed and usage tiers;
the impact and timing of changes in Internet service pricing;
a larger Internet subscriber base; partially offset by
the effect of the CRTC cancellation notification policy change.
The realization of Internet net losses in the short-term was a result of our strategic focus towards optimizing subscriber value versus subscriber volume as we migrate existing customers to current price plans. There was also heightened competition where cross-bundling of various wireline products impacted our Internet subscribers. We believe that our new IGNITE broadband Internet-based bundled offerings we introduced late in the quarter will help our revenue metrics as these offerings give the consumer better choice on usage and incorporate value-added content.
The slight decrease in Television revenue this quarter was a result of:
the decline in Television subscribers over the past year mainly associated with heightened pay TV competition;
the effect of the CRTC cancellation notification policy change; partially offset by
the impact and timing of pricing changes implemented over the past year.
The digital cable subscriber base represented 89% of our total Television subscriber base as at the end of the quarter, compared to 85% in the same period last year. We expect to complete our ongoing analog-to-digital network transition to digital by the end of 2015.
The 2% decrease in Phone revenue this quarter was a result of:
decreased subscriber volume; and
increased promotional discounting activity;
the effect the CRTC cancellation notification policy change; partially offset by
the impact and timing of pricing changes implemented over the past year.
The 4% increase in operating expenses this quarter was a result of:
higher investments in programming and customer value enhancements; partially offset by
various cost efficiency and productivity initiatives.
Adjusted operating profit
The 2% decrease in adjusted operating profit this quarter was a result of the revenue and expense changes discussed above.
Business Solutions continues to focus primarily on next generation IP-based services, leveraging higher-margin on-net and near-net service revenue opportunities, and using existing network facilities to expand offerings to the small, medium, and large-sized enterprise, public sector, and carrier wholesale markets. Business Solutions is also focused on data centre colocation, hosting, cloud, and disaster recovery services.
Next generation services, which include our data centre operations, represented 75% (2014 - 69%) of total service revenue in the quarter. Revenue from the lower-margin off-net legacy business, which continues to decline as planned, generally includes circuit-switched local and long-distance voice services and legacy data services, which often use facilities that are leased from other carriers rather than owned.
Service revenue was stable this quarter as a result of:
continuing execution of our plan to grow higher-margin on-net and near-net next generation IP-based services revenue; and
higher revenue from data centre operations; offset by
the continuing planned decline in the legacy off-net voice and data business, a trend we expect to continue as we focus the business on on-net and near-net opportunities and customers move to more advanced and cost-effective IP-based services and solutions.
Operating expenses were stable this quarter as a result of:
lower legacy service costs related to planned lower volumes and customer levels; and
ongoing initiatives to reduce costs and increase productivity; offset by
higher on-net and next generation service costs associated with higher volumes.
Adjusted operating profit
Adjusted operating profit was stable this quarter as a result of the continued growth in on-net and near-net next generation business and productivity improvements offset by the continued decline in off-net legacy business.
National NHL licensing agreement
The national NHL licensing agreement commenced in the fourth quarter of 2014. The first quarter of the calendar year is when the greatest volume of regular season games are played, followed by the second quarter which includes fewer games but includes the league playoffs. Playoff games are expected to command a premium in advertising revenues. NHL-related programming and production costs are expensed based on the proportion of games played without differentiation between regular season and playoff games.
The 26% increase in operating revenue this quarter was a result of:
approximately $106 million of revenue generated by the national NHL licensing agreement;
higher subscription revenue generated by our Sportsnet properties; and
higher Radio and Next Issue Canada revenue; partially offset by
continued softness in conventional broadcast TV and print advertising.
The 27% increase in operating expenses this quarter was a result of:
higher programming and production costs of approximately $120 million as a result of the increase in the number of NHL hockey games associated with the national and regional NHL licensing agreements. There were more regional NHL games relative to last year partially as a result of schedule changes due to the 2014 Winter Olympic Games in the prior year; partially offset by
lower conventional broadcast TV programming costs;
lower publishing costs related to lower printing, postage, shipping, and circulation costs; and
decreased operating costs in Radio.
Adjusted operating loss
The $8 million increase in adjusted operating loss this quarter reflects the revenue and expense changes described above. The NHL games contributed an expected adjusted operating loss of approximately $14 million this quarter as a result of the seasonal peak period of games, as discussed above. We anticipate this seasonal loss will be offset in the second quarter of 2015 with the higher-value playoff season expected to generate greater advertising revenue, while at the same time there are fewer games produced and over which rights are amortized.
Compared to the fourth quarter of 2014, the lower revenue and adjusted operating profit trends primarily reflect the seasonality of Media's business. In addition to the NHL impacts described above, this is a result of higher conventional advertising revenue occurring in the fourth quarter of 2014 due to fall season premieres in broadcasting and higher retail sales at The Shopping Channel due to holiday shopping.
The relatively stable additions to property, plant and equipment at Wireless this quarter are primarily related to LTE capacity investments and site build activity to further enhance network coverage and quality and the continued deployment of our 700 MHz spectrum. Deployment of the LTE network has reached approximately 87% of Canada's population as at March 31, 2015.
The decrease in additions to property, plant and equipment at Cable this quarter was a result of lower customer equipment investment in our next generation NextBox digital set-top boxes compared to the same quarter last year. We also made investments this quarter to improve the capacity of our Internet platform, further improve the reliability and quality of the network, and continue the development of our next generation IP-based video service.
The increase in Business Solutions property, plant and equipment additions this quarter was a result of data centre investments and network expansion to reach additional customers and sites.
The decrease in Media property, plant and equipment additions this quarter was a result of greater prior year investments made to our digital, IT infrastructure, and broadcast facilities.
The increase in Corporate property, plant and equipment additions this quarter was a result of higher spending on premise improvements at our various offices.
Capital intensity decreased this quarter as a result of a decline in additions to property, plant and equipment combined with the increase in operating revenue.
We have no changes to the 2015 annual consolidated guidance ranges for adjusted operating profit, additions to property, plant and equipment, or free cash flow that we provided on January 29, 2015. See "About Forward-Looking Information" in this earnings release and in our 2014 Annual MD&A.
Key Performance Indicators
We measure the success of our strategy using a number of key performance indicators that are defined and discussed in our 2014 Annual MD&A and this earnings release. We believe these key performance indicators allow us to appropriately measure our performance against our operating strategy as well as against the results of our peers and competitors. The following key performance indicators are not measurements in accordance with IFRS and should not be considered as an alternative to net income or any other measure of performance under IFRS. They include:
Average revenue per user (ARPU);
Average revenue per account (ARPA); and
Commencing this quarter, we are disclosing ARPA as one of our key performance indicators, which is described below:
Average revenue per account - Wireless
Average revenue per account (ARPA) helps us identify trends and measure our success in attracting and retaining multiple-device accounts. A single Wireless postpaid account typically provides subscribers with the advantage of allowing for the pooling of plan attributes across multiple devices and on a single bill. Each Wireless postpaid account is represented by an identifiable billing account number. A single Wireless postpaid account may include more than one identifiable telephone number and receive monthly Wireless services for a variety of connected devices including smartphones, basic phones, tablets, and other devices. Wireless postpaid accounts under our various brand names are considered separate accounts. We calculate Wireless ARPA by dividing total Wireless postpaid network revenue (monthly) by the average number of Wireless postpaid accounts for the same time period.
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