Rogers Communications Inc. (NYSE:RCI) Q3 2023 Earnings Call Transcript
Rogers Communications Inc. (NYSE:RCI) Q3 2023 Earnings Call Transcript November 9, 2023
Rogers Communications Inc. beats earnings expectations. Reported EPS is $1.27, expectations were $0.79.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Rogers Communications Inc. Third Quarter 2023 Results Conference Call. As a remainder, all participants are in a listen-only mode. And the conference is being recorded. [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, Mr. Carpino.
Paul Carpino: Great. Thank you, Ariel, and good morning, everyone, and thank you for joining us. Today, I am here with 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 the 2022 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Tony to begin.
Tony Staffieri: Thank you, Paul, and good morning, everyone. I'm very pleased to report that we delivered industry-leading results in the third quarter, our seventh consecutive quarter of growth and momentum. We also made substantive progress on integration and we are now tracking six months ahead of our synergy targets and deleveraging plans. Our team is clearly firing on all cylinders, executing with discipline, and delivering on our commitments. Turning to results, we grew total service revenue by 40% and adjusted EBITDA by 52% in the third quarter. Our consolidated adjusted margin performance of more than 47% is 340 basis points higher than our competitor BCE, and almost a thousand basis points higher than TELUS. We are clearly delivering through a consistent strategy that focuses on the quality of our assets, operational efficiency, and discipline execution.
In wireless, we delivered industry leading financial and operating results. We attracted 261,000 mobile phone net editions of 40,000 from a year ago. This reflects the best combined postpaid and prepaid loading in our company's history. This phone only loading represents 94,000 more than BCE and over a hundred thousand more than TELUS. We did this while growing ARPU. Simply put, we continue to out execute our peers and have done so consistently for the last two years. We also delivered impressive financial results in the quarter. Wireless service revenue was up 15%. Adjusted EBITDA was up 18% and wireless blended ARPU up 4%. It's clear, Canadians are choosing Rogers more than any of our competitors. In cable, we saw market share gains accelerate across the east and the west.
These gains are driven by our new bundled offers, our network investments, and our 5G leadership. In the quarter, we added 18,000 internet customers. While we need to grow revenue, we've turned the corner on subscriber trends. Looking ahead, Alberta and British Columbia represent our fastest growing revenue markets and we see good growth opportunity ahead. It's clear we're creating more competition in the west and Canadians are responding. We also delivered cable margins of 54%. This represents a margin expansion of 650 basis points compared to last year, and clearly demonstrates our focus on driving profitable growth despite a highly competitive market. Let now turn to the Shaw integration. We just passed the six-month milestone and I'm very pleased with our momentum.
Impressively, at the six-month mark, we are tracking six months ahead of our synergy targets and de-leveraging plans. By year end, we now expect to realize $600 million in synergies and reach a debt leverage ratio of 4.8 times. As you will recall, we had planned to reduce our leverage by 1.6 times in 36 months after close. In just six months, we've already reduced our leverage by 0.5 times well ahead of plan. Operationally, we've achieved some key milestones. We introduced Roger's internet and TV services along with bundled offers. We consolidated our retail footprint, rebranded our corporate retail stores, and started selling both wireless and residential services in our retail channels. Importantly, we have largely integrated the two teams and we are executing with one clear focus and plan.
Overall, we've made significant progress in a short period of time. In the third quarter, we also led the industry with new technology and more affordable services. In Q3, we were awarded the best and most reliable 5G network in the country, for the fifth year in a row. We launched 5G in the busiest sections of Toronto subway system and we're now upgrading the rest of the legacy network to 5G. Working around the clock, our teams will expand the network to the remaining 75% of the tunnels where no wireless network exists today. We introduced new technology to help detect and prevent forest fires. Partnering with SpaceX, satellite connected sensors can better predict wildfires in remote areas without wireless networks. We're also deploying AI cameras on cell towers to detect smoke up to 20 kilometers away.
We expanded connected for success, our low-cost internet program to Western Canada, and we just introduced connected for Success Wireless across the country, available to 2.5 million low income Canadians. The program builds on our commitment to make our services more affordable and accessible. We also introduced 48-month device financing with 0% interest and no mobile contract only on a Rogers credit card. This Rogers owned bank credit card platform reduces the monthly phone payments for our customers by 50%. Beyond that, the card offers a host of additional meaningful value add for our customers, including free roaming and starting this holiday season up to 3% cash back. The most valuable credit card aimed at rewarding, keeping, and attracting customers to Rogers Wireless and cable services.
With today's inflationary pressures, we're working hard to bring down prices and present more value for Canadians. According to the stats can consumer price index wireless prices have declined over 30% over the past three years. Looking ahead, we will harness the power of Canada's largest and most reliable 5G network to bring Canadians even more. This along with our 10G and DOCSIS 4.0 internet roadmap will ensure we deliver the next generation of world-leading services for Canadians. Future isn't just about more speed, it's about the convergence of products and services across networks. 10G will bring multi-gigabit speeds along with reliability and low latency to deliver a seamless customer experience in and out of the home. There's a national cable operator that covers the majority of Canadian homes.
We have a unique advantage. We don't have to rip out and replace our existing network or dig up neighborhoods with 10G, we'll easily and economically upgrade our network with little to no disruption for the customer. Before I turn it over to Glenn, let me make a couple of closing comments. Overall, it was a record quarter reflecting a clear focus and consistent execution. We delivered industry-leading results, exceeded Shaw integration targets, and delivered industry-leading innovations to Canadians. We have momentum and we are winning in the market. Could not have done this on a consistent and sustained basis without the commitment, tenacity, and ingenuity of our Rogers team. And for that, a big thank you to the most talented group I've ever worked with.
Well done team. With that, I'll turn it over to Glenn.
Glenn Brandt : Thanks Tony, and good morning, everyone. Thank you for joining us today. Roger's third quarter results reflect strong, disciplined execution, driving growth, and accelerated delivering of the balance sheet. Six months into coming together with Shaw, we are doing what we said we would do. We have grown consolidated EBITDA by 52%, roughly six months ahead of schedule. In wireless, our third quarter service revenue was up 15% reflecting strong execution and healthy underlying organic growth. Excluding the $91 million customer credits from last year, wireless service revenue growth was up 9%. Postpaid mobile phone customer net ads in the quarter were 225,000. Our strongest postpaid mobile phone loading on record and an impressive 37% increase year-over-year.
Coupled with our positive prepaid loading, total mobile phone net adds this quarter was 261,000, up 40,000 year-over-year and the strongest loading ever by a Canadian wireless company. We have welcomed approximately 0.5 million new postpaid mobile subscribers to our network year-to-date, reflecting 64% more subscribers than our next closest rival, all while delivering growing EBITDA and ARPU. Our leadership in wireless is clear. We have consistently led our peers in wireless loading for two years now with Canadians choosing Rogers Wireless more than any other carrier. Wireless ARPU for the quarter was $58.83, which is up 4% year-over-year. The 4% increase reflects the prior year's $91 million in customer credits, which in turn was partially offset by the absorption of the Shaw mobile customers in this period.
After adjusting for the integration of the Shaw mobile customers, combined with removing the prior year's $91 million customer credits change, ARPU was once more up slightly year-over-year. And we expect this momentum to continue. Postpaid mobile churn in the quarter was 1.08%, up slightly year-over-year, reflecting a competitive market. Wireless adjusted EBITDA was up 18%, and our adjusted EBITDA margin of 64% was up 180 basis points year-over-year. Excluding the credits from last year, underlying wireless adjusted EBITDA growth was up an impressive 9% year-over-year. We are gaining subscribers in all segments of the market and in all regions of the country, driving sector-leading financial and operating performance on the back of disciplined execution in healthy growing market.
Importantly, sector competition remains vibrant and strong as ever, largely centered around value, service quality and multi service bundling discounts. We are encouraged by our sustained wireless performance and we will look to continue that momentum in the quarters to come, by delivering exceptional value and service quality to Canadians. Moving to our Internet and Cable business. We delivered strong profitability despite intense competition and promotional pricing from our national peers. Our integration of Shaw and driving cost synergy targets are both well ahead of plan. We have largely completed our integration of Shaw's departments and employees into our combined end state, driving significant cost synergy savings, and we are seeing strong revenue synergies with our Cable and Wireless growth in the West.
Cable revenue for Q3 was up 104% and Cable adjusted EBITDA was up 132%, reflecting the addition of Shaw's operations, as well as the prior year's $59 million in customer credits. Excluding the impact of the customer credits, total revenue was up 93% and adjusted EBITDA was up 106%. Impressively, our work on driving efficiency across our national cable footprint has delivered EBITDA margins of over 54%, or a 650-basis point improvement from last year. Organic revenue and adjusted EBITDA growth across the combined operations was negative 3% and plus 8%, respectively. Cable is growing customers in every region. Internet loading was 18,000 up from 6000 last year and video net editions grew by 23,000 compared to an increase of 7,000 in the prior year.
The wire line market remains very competitive in the east and west, and we continue to balance subscriber growth with disciplined financials. Six months into coming together with Shaw, we are very excited by the Shaw opportunity. It is reinvigorating growth across our national cable footprint. And finally, our sports and media business has also seen continued growth and improvement in our financial performance. Sports and media revenue is up 11% this quarter as a result of higher sports-related revenue, primarily driven by the Toronto Blue Jays and Rogers Sports Net, and we delivered adjusted EBITDA of $107 million up a very strong 41% year over year. On a consolidated basis, Q3 revenue was up 36%, while service revenue grew 40% to over $4.5 billion.
Consolidated adjusted EBITDA was $2.4 billion in the quarter, up a very strong 52% versus prior year, growing our adjusted EBITDA margin by 500 basis points to 47.3%. Excluding the impact from customer credits last year, total revenue was up 31% and adjusted EBITDA was up 39%, reflecting strong disciplined execution on driving the Shaw cost synergies and competing for leading market share. Q3 adjusted net income increased by 56% to $679 million, reflecting the flow-through of higher adjusted EBITDA. Net loss for the quarter was $99 million, which included a one-time non-cash $422 million loss recorded on a future obligation to purchase at fair value, the non-controlling interest in one of our joint venture investments. The Q3 net loss also reflects higher depreciation and amortization, finance and restructuring, acquisition and other costs primarily related to our Shaw acquisition.
Capital expenditures in the quarter were up 17% year over year to approximately $1.0 billion with roughly half of that invested in cable. Notwithstanding this increase average capital intensity declined in the quarter by 330 basis points to 20% predominantly split across cable and wireless. Despite the increased investment, we were able to more than double our free cash flow in the quarter, delivering an after-tax free cash flow of $745 million. And finally, we returned $264 million in dividends to shareholders this quarter. Starting with our October dividend payment, we have amended our dividend reinvestment program or DRIP to introduce a small discount on the DRIP share price and to allow for the issuance of treasury shares to settle the DRIP dividends.
With that change on October 3rd, 2023, we issued 1.5 million Class B non-voting shares, or $74 million worth as partial settlement of the dividend payable on that date under the terms of our DRIP. Reflecting a participation rate in the DRIP program of 28% on an annualized basis that translates to a dividend cash payout ratio of approximately 30% of after-tax free cash flow. Turning to the balance sheet, in September, 2023, we issued $3 billion of Canadian bonds across three-year, five-year, seven year, and 10-year maturities. As a result, at September 30th, we had over $7 billion of available liquidity, including $2.5 billion in cash and cash equivalents and a combined $4.8 billion available under our bank credit and other facilities. Our weighted average interest rate on all borrowings is 4.9%, and our average term to maturity is 10 years.
Our adjusted debt leverage ratio at quarter end is 4.9 times, and by year-end, we will have taken a half turn off our leverage roughly six months ahead of schedule. We anticipate leverage will continue to sustainably decline by approximately 0.1 times to 0.2 times each quarter going forward. Early on, after coming together with Shaw, we had targeted reducing leverage by approximately 1.5 times over 36 months. We are well on our way and pacing ahead of schedule to achieve this target. For our 2023 guidance targets, we anticipate free cash flow coming in at the middle to upper range of our guidance of $2.2 billion to $2.5 billion. As well, we are reaffirming our 2023 guidance ranges for service revenue growth of 26% to 30%, adjusted EBITDA growth of 33% to 37%, and reaffirming that capital expenditures will be at the upper end of our guidance range of $3.7 billion to $3.9 billion.
And finally, our integration with Shaw is running smoothly and ahead of plan. Our Q3 results reflect approximately $140 million of cost synergies realized in quarter, building on the $48 million realized in Q2. This brings the year-to-date total to $188 million realized year-to-date, well ahead of our previously stated $200 million in synergies realized by year-end. We now expect over $360 million in synergies to be realized in calendar 2023, which is 80% higher than previously guided, and we expect to be at our $600 million annualized synergy run rate by the end of 2023. Again, roughly three to six months ahead of schedule. I will close by saying that our third quarter results reflect disciplined market leadership, operational excellence, and strong financial results across all business lines.
Our Shaw integration is proceeding extremely well and our investment thesis becomes stronger with each quarter. We have never been more excited about our future and we are encouraged for what lies ahead. Thank you for your interest and attention this morning. And with that, Ariel, can you please commence with the questions and answers? Thank you.
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