Rogers Communications Inc. (NYSE:RCI) Q1 2024 Earnings Call Transcript

Rogers Communications Inc. (NYSE:RCI) Q1 2024 Earnings Call Transcript April 24, 2024

Rogers Communications Inc. misses on earnings expectations. Reported EPS is $0.723 EPS, expectations were $0.86. RCI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications Inc. First Quarter 2024 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Paul Carpino, Vice President of Investor Relations with Rogers Communications. Please go ahead.

Paul Carpino: Thank you, Ariel, and good morning, everyone, and thank you for joining us. Today, I’m here with our President and Chief Executive Officer, Tony Staffieri; and our Chief Financial Officer, Glenn Brandt. Today’s discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today’s earnings report and in our 2023 Annual Report regarding the various factors, assumptions and risks that could cause our actual results to differ. As a reminder, we will be holding our annual meeting this morning at 11 a.m., and we will be concluding this call at approximately 8:50. We’d ask that you keep your questions limited to one question and a brief follow-up, if necessary, so we can get as many questions as possible. To view the webcast of our AGM, a link can be accessed through the Investor Relations portion of our website. With that, let me turn it to Tony to begin.

Anthony Staffieri: Thank you, Paul, and good morning, everyone. I’m pleased to report that Rogers delivered another strong quarter of growth in the first quarter of 2024. This reflects the ninth straight quarter of momentum for the company. Looking at the first quarter, we executed our game plan with discipline and focus. We delivered industry-leading results and made record investments to drive growth, improve efficiencies and lead the industry. In Q1, we grew total service revenue by 31% and adjusted EBITDA by 34%. We reaffirmed our industry-leading financial guidance for the year, and we invested $1.1 billion in capital across our Cable and Wireless networks. All in all, a very productive first quarter. In Wireless, service revenue and adjusted EBITDA were both up 9%.

Cable service revenue was up 94%, and adjusted EBITDA was up 97% due to the Shaw acquisition from 1 year ago. From a subscriber perspective, we continue to attract the most customers, adding 124,000 postpaid mobile phone and retail Internet net additions. This is the highest number of net additions in our industry. In Wireless, we led the market with 98,000 postpaid mobile phone net additions, up 3,000 from last year. And we continue to see a healthy mix from the new-to-Canada market. The competitive intensity from the fourth quarter carried into Q1, and the team executed their game plan with discipline. In retail Internet, we delivered 26,000 net additions, up 12,000 from 1 year ago. We introduced Rogers 5G Home Internet in the quarter, offering home Internet to customers in places we historically could not.

It’s early days, but we’re seeing good consumer interest in the product. Overall, we remain focused on returning to organic revenue growth in Cable by year-end. In Media, top and bottom line were down as a result of a onetime gain in prior year’s results and front-loaded programming and payroll costs in the quarter. We will see things even out as the year progresses to deliver profitable growth here on a full year basis. Our Media brands continue to be critical to our company and our customers as demand for sports and entertainment grow. Q1 was the most-watched first quarter in Sportsnet’s history, entrenching Sportsnet as Canada’s number 1 sports network. Moving on to the merger. April marks the one-year anniversary of the Shaw merger. I have to say I continue to be impressed with the Shaw assets and the power of our combined scale.

We have integrated the two companies and delivered on the key commitments we set for ourselves in the first year. We delivered on our $1 billion synergy targets one year ahead of schedule, and we remain focused on selling noncore assets to reduce our debt leverage ratio. Overall, we are well ahead of schedule, and I could not be prouder of our team. I’m also proud of our efforts to continue to drive innovation in the quarter. In January, we completed the first nationwide live test of 5G network slicing technology in Canada. This technology will use our 5G network to create multiple lanes of wireless traffic. Each slice or lane can provide tailored features, from low latency to faster speeds to more capacity. To start, we’ll use the technology to offer a dedicated lane for first responders to have priority on the network.

Over time, it will be a meaningful solution for our business customers. Network slicing will also help accelerate the expansion of Rogers 5G Home Internet. To get ahead of wildfire season, we installed AI cameras in the Okanagan Valley to help first responders monitor, detect and prevent wildfires. This important trial will help us understand how to use 5G technology and, soon, satellite technology to mitigate the devastating impact of climate change. We also announced a strategic partnership with CableLabs, a global tech organization, to launch CableLabs North at the Rogers Campus in Calgary. CableLabs has been a crucial source of technological breakthroughs for the broadband industry, including DOCSIS 4 technology that has brought together industry leaders like Comcast and Charter to develop scalable tech.

Rogers technologists will work with global industry partners to develop converged 5G and 10G solutions that ensure seamless connections for customers in and out of the home. As we look ahead to the launch of our 10G and DOCSIS 4 Internet road map, CableLabs North will be front and center. Taking a step back, I’m pleased with our consistent, sustained momentum. We have delivered strong results for 9 straight quarters, and we have exceeded our Shaw merger targets. At the 1-year anniversary of the merger, I remain confident in our plan and proud of our team. I would like to thank our entire team for their continued commitment to driving growth and innovation. Let me now turn the call over to Glenn.

Glenn Brandt: Thanks, Tony, and good morning, everyone. Thank you for your time and attention this morning. Rogers’ first quarter results reflect another strong quarter of industry-leading growth and execution. Notably, it also marks the 1-year anniversary of closing our Shaw transaction, and I am very pleased to report that we have very substantially outpaced our initial time line for our cost synergy, deleveraging and overall integration targets. We continue to execute well, including identifying opportunities to further improve operating performance, network and customer service reliability and innovation. In Wireless, against the backdrop of a highly competitive environment, we continue to lead with very strong year-over-year growth across subscriber net adds, service revenue, adjusted EBITDA and ARPU.

Our continued emphasis on our premium 5G services and the Rogers brand and the value these plans generate for our customers is reflected in our sustained growth and financial performance. We have led on Wireless operating and financial performance for 9 consecutive quarters now and not by accident. Wireless service revenue in the quarter grew 9%, and postpaid mobile phone customer net additions were 98,000, up 3,000 year-over-year on what was also a very strong prior year comparative. Importantly and deliberately, the vast majority of our new customers were welcomed on our premium Rogers brand, which is fundamental to our operating strategy. Overall, mobile phone ARPU as reported, was up more than 1% year-over-year. More striking, on an organic basis, adjusting for the impact of our Shaw Mobile customers, ARPU is up almost 3% year-over-year.

Once again, our disciplined focus on the Rogers brand is delivering leading market share and strong financial performance. Postpaid mobile phone churn in the quarter was 1.1%, up 31 basis points year-over-year. While churn remains elevated, it is down from the prior quarter, both in absolute terms and in the amount of increase from the prior year comparative. These results reflect our continued discipline, balancing subscriber growth and financial performance. And as a result, our Wireless adjusted EBITDA is up 9%. And our adjusted EBITDA margin grew by 10 basis points year-over-year to 64%. Moving to our Cable business. We continue to build momentum on subscriber loading, both East and West, and in and out of our wireline territory as we pursue growth in the 40% of Canadian homes not covered by our wireline footprint.

Leveraging our national capabilities from coast to coast, we are targeting to return our Cable business back to organic revenue growth in the fourth quarter of this year. Cable revenue was up 93% year-over-year, roughly doubled in scale as a result of the Shaw transaction. Organically, across the combined operations, underlying revenue is down 3% year-over-year, reflecting sustained promotional competition carrying over at least in part from the 2023 holiday period through the first quarter. Adjusted EBITDA also reflects the scale benefits of the Shaw acquisition, growing 97% year-over-year. On an organic basis, Cable’s adjusted EBITDA was up 7% year-over-year against an already strong prior year comparative, largely reflecting our substantial success driving cost synergies, which I will come back to shortly.

We are encouraged by our performance on retail Internet net additions, which is starting to reflect the benefits of our growth strategy. Retail Internet net additions were 26,000 in the first quarter, almost doubled from 14,000 in the prior year. In a very competitive environment, we are seeing growth driven by our diverse product capabilities and starting to grow customer additions in markets where Rogers has not previously operated. Offsetting the impact of competitive promotional pressure on revenue growth, I am very happy to report that we have completed our cost synergy plan a full 1 year ahead of schedule. We exited the first quarter having achieved our full $1 billion cost synergy target run rate within 12 months from acquisition rather than the original 24-month target.

Moreover, through the first full year of the Shaw acquisition, we have realized approximately $600 million of cost synergies in our reported results, more than double our original 1-year target. These savings will continue to flow through our results in the coming quarters, providing further support for our industry-leading 56% Cable margins, which are up 140 basis points against the prior year. Finally, in our Sports & Media business, Media revenue was down 5%, and adjusted EBITDA was down $65 million year-over-year. Most notably, the year-over-year change reflects a very strong prior year comparative affecting Media content revenue and cost as well as higher payroll expenses at the Toronto Blue Jays this year. At a consolidated level, Q1 total service revenue increased 31%, and adjusted EBITDA was up by 34%, driving our consolidated EBITDA margin up by 210 basis points year-over-year to 45%.

Capital expenditures were up 19% year-over-year to just over $1 billion, most predominantly reflecting continued investment in our Wireless and Cable networks to support our growth priorities. We also saw an increase in our Sports & Media capital spend as we completed the majority of the second and final year of renovations at the Rogers Centre. Early feedback from fans and players has been exceptional. While capital expenditures did grow, capital intensity declined by approximately 170 basis points versus the prior year to approximately 21.6%, and after-tax free cash flow grew 58% year-over-year to $586 million. Turning to the balance sheet. At March 31, we had $4.6 billion of available liquidity, including $800 million in cash and short-term deposits and $3.8 billion available under our bank credit facilities.

Our weighted average interest rate on all borrowings is below 4.8%, which is down from 4.9% at December 31, 2023, and our weighted average term to maturity is 11 years, both measures favorably impacted by our very successful bond financing completed in February. Our 4.7x debt leverage ratio at quarter end was flat to year-end 2023, notwithstanding seasonal working capital and spectrum investments made in the first quarter. Our target is to reduce leverage by roughly half a turn each year on average, supported by a combination of earnings growth, available free cash flow and proceeds from asset sales. We have processes currently underway to sell targeted noncore assets, predominantly real estate assets, which are at various stages of progress and/or consideration, and we do anticipate completing sales in 2024.

While taking longer than originally anticipated as a result of softness in the current real estate market ahead of anticipated interest rate reductions, we remain committed to this initiative, and we are being diligent to ensure we maximize proceeds. In the meantime, the combined effect of our December 2023 sale of our Cogeco holdings and our February 2024 U.S. dollar bond issue, both of which were used together with other available funding to repay a combined $5 billion of our Shaw-related bank term loans, has lowered our 2023 annual interest costs by approximately $100 million, in turn helping free cash flow. Finally, we are reaffirming all of our 2024 guidance range targets. This includes service revenue growth of 8% to 10%, adjusted EBITDA growth of 12% to 15%, capital expenditures of $3.8 billion to $4.0 billion and free cash flow in the range of $2.9 billion to $3.1 billion.

Our industry-best outlook reflects our confidence in continued strong execution and world-class assets. Let me conclude by joining Tony in thanking our entire team here at Rogers from coast to coast. Our employees remain focused and committed to serving our customers with a collective passion to grow and innovate for the benefit of all Canadians. Thank you for your time this morning. And with that, Ariel, can we please commence with the Q&A? Thank you.

See also 21 Largest Real Estate Companies in the World and 30 Countries with Carbon Tax in the World.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Sebastiano Petti of JPMorgan.

Sebastiano Petti: Solid Internet results in the first quarter. I was wondering if perhaps you can give us a little bit of color around the — I guess the way to describe it, in-footprint or incumbent growth in the market within the 60% of homes that you do have versus that remaining 40% that you’re kind of pushing into with perhaps FWA, maybe TPIA, et cetera. So if you could maybe unpack what you saw within the first quarter, the benefit in either, I guess, cohort. And then maybe how you’re thinking about the progression of Internet net adds over the course of the year in those 2 different buckets, if you will. And then the other question that I did have was more in regards to just the competitive environment. Obviously, the ARPU growth was pretty strong on the Wireless side.

How are you thinking about Rogers’ go-to-market strategy and the ability to continue to drive ARPU growth given the backdrop? Obviously, you have had the nice tailwind from converting over the Shaw subs to the Rogers brand, but any other levers that we should perhaps be thinking about as well on the Wireless ARPU side?

Anthony Staffieri: Sebastiano, thank you for the question. On the first one, in terms of the Internet net adds, it came from a number of different initiatives, both, as you described it, in-footprint or on-net for our wireline business as well as some from the launch of our fixed wireless access product. The — we’re not disclosing the split on those, but let me say our strategy on this has been clear, and what you’re seeing in the first quarter are continuation of the green shoots. Clearly, in our wireline cable footprint, the intent was always really twofold: in the West, focus on gross adds. And you see that coming through a number of different initiatives. And early days, but we like what we see in that market. In the East, it’s been about churn reduction.

And early initiatives are giving us solid results on that. And so we like what we see there. As you know, our wireline footprint covers about 2/3 of Canadian households. For the other 1/3, we have a 2-pronged strategy. One was the launch of fixed wireless access. And the launch of that product has been quite terrific. It — and it really speaks to the quality of the product itself in terms of how it performs for home Internet, including video streaming. But secondarily, the ease of buying and setting up of the product is something that’s really resonating with consumers. And so as we focus on that 1/3 territory, it’s been extremely helpful. And there are certain use cases where it’s also been helpful. New to Canada, for example, as folks get here and are looking to get set up, certainly, they’re looking to a SIM card and a smartphone, but home Internet is top of mind, and this is something that we’ve been able to add to our suite of offerings to make it easy for that segment of the market.

We’ve also started, although Q1 was very, very early, the wholesaling of Internet to bundle it with our national wireless offering in the 1/3 territory where we don’t have wireline assets. Early days on that. And as you would have seen in the fourth quarter, we purchased Comwave to facilitate that strategy. And that is ramping up nicely as well. Second part of your question relates to the competitive intensity and ARPU. I continue — as we look to some of the offers and the — that are in marketplace that were in Q4 continued into Q1, I continue to reemphasize that some of those offers are focused on a certain segment of the market. And we’re playing a balanced portfolio game. We’ll compete aggressively with some of those offers and what I would call the flanker segment of the market.

But we continue to stay focused so that the vast, vast majority of our net adds are on the Rogers premium brand. And what we’re seeing work nicely is customers wanting to move from 4G to 5G with our $50 entry price points. That’s been a real catalyst for ARPU growth overall in our portfolio. So as we look to the rest of the year, we’ll continue with that strategy. And as consumers look to upgrade their phones and want to get on the best 5G network, that’s what we’ll continue to execute on. It’s as simple as that.

Operator: Our next question comes from Vince Valentini of TD Cowen.

Vince Valentini: Maybe I can start with a clarification first. Glenn, you said interest costs, $100 million lower in 2023. I think that’s what you said. I’m not sure that’s what you meant.

Glenn Brandt: Lower than they otherwise would be in ’24 from those initiatives, Vince. So if I said ’23, I misspoke it. This year’s interest cost will be down by $100 million as a result of the interest savings from the Cogeco proceeds received in December. That’s money we don’t have to borrow. And then also the CAD 3.4 billion we raised in February, we raised that at about 4.9%, and it’s paying back floating rate term loans that we put on for the acquisition of Shaw that were about sitting just over 6.5%. And so the interest savings on that for the calendar year, we did this in February, is another $50 million on top of the roughly $50 million we save from the Cogeco proceeds. So 2024 interest expense is down.

Vince Valentini: Yes, down versus what it would have been otherwise. Your full year ’24 interest costs are going to be higher than full year ’23, they have to be.

Glenn Brandt: Well, absolutely. Right. But those initiatives have lowered what otherwise would have gone into our results and what would be part of which will be reflected in guidance. We knew about Cogeco. We had not baked in the lower borrowings in February from the bond deal.