Rogers Communications(RCI) - 2022 Q2 - Quarterly Report

Operating Environment and Strategic Highlights The company navigates a recovering Canadian economy with inflation risks, while focusing on the Shaw acquisition, network investments, and strong financial performance Operating Environment The Canadian economy shows modest recovery with increased travel, but faces inflation and recession risks, compounded by a $150 million network outage refund - Economic recovery from COVID-19 has led to increased travel volumes and higher roaming revenue, with sporting events returning to full capacity[13] - A major network outage on July 8, 2022, will result in an estimated $150 million in customer refunds, which will be recognized in Q3 2022[15] - Rising inflation and the Bank of Canada's response have led to forecasts of a potential moderate recession within the next six to twelve months[14] Strategic Highlights Strategic priorities include the Shaw acquisition, network infrastructure investment, and customer experience enhancement, yielding strong Q2 financial growth in service revenue and adjusted EBITDA - Progress on the Shaw acquisition includes the introduction of an Advisory Council for the new technology center in Calgary[17] - Network investments include successful trials of 8 Gbps speeds and being the first Canadian provider to deploy 3500 MHz spectrum to enhance 5G services[21] Q2 2022 Financial Performance Highlights | Metric | Value | Change | | :--- | :--- | :--- | | Total Service Revenue | $3,443 million | +10% | | Adjusted EBITDA | $1,592 million | +16% | | Net Income | $409 million | +35% | | Postpaid Mobile Phone Net Additions | 122,000 | Up from 60,000 YoY | | Free Cash Flow | $344 million | +14% | Quarterly Financial Highlights Q2 2022 saw robust financial growth with total revenue up 8% and adjusted EBITDA up 16%, driven by strong Wireless and Media performance - Total revenue grew 8% and service revenue grew 10%, primarily driven by Wireless and Media[22] - Wireless service revenue increased 11% due to higher roaming revenue from increased travel and a larger subscriber base[23] - Media revenue surged 21% due to the return of Toronto Blue Jays games to Rogers Centre and higher advertising revenue[25] - Consolidated adjusted EBITDA increased 16%, and net income rose 35% to $409 million[26][28] - Cash flow from operating activities increased 30% to $1,319 million, and free cash flow grew 14% to $344 million[29] Shaw Transaction The $26 billion Shaw acquisition faces regulatory hurdles from the Competition Bureau, necessitating the sale of Freedom Mobile, despite CRTC approval for broadcasting elements - The transaction to acquire Shaw is valued at approximately $26 billion, with an extended outside date to December 31, 2022[32][33] - Financing for the transaction is secured, with $13.1 billion from senior note issuances held as 'restricted cash and cash equivalents'[34] - The Competition Bureau has filed applications to oppose the transaction. To mitigate these concerns, Rogers and Shaw have agreed to sell Freedom Mobile to Quebecor for $2.85 billion[37][38][39] - The Canadian Radio-television and Telecommunications Commission (CRTC) approved the acquisition of Shaw's broadcasting services on March 24, 2022[36] Summary of Consolidated Financial Results This section presents a detailed consolidated financial summary for Q2 2022, showcasing growth across revenue, adjusted EBITDA, net income, and EPS by segment Consolidated Financial Results (Three Months Ended June 30) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Revenue | 3,868 | 3,582 | 8 | | Wireless | 2,212 | 2,064 | 7 | | Cable | 1,041 | 1,013 | 3 | | Media | 659 | 546 | 21 | | Adjusted EBITDA | 1,592 | 1,374 | 16 | | Net income | 409 | 302 | 35 | | Diluted earnings per share | $0.76 | $0.60 | 27 | | Free cash flow | 344 | 302 | 14 | Results of our Reportable Segments Segment performance highlights strong Wireless growth, steady Cable expansion, and Media's return to profitability, supported by increased capital expenditures for network upgrades Wireless The Wireless segment achieved strong Q2 results with 7% revenue growth and 11% adjusted EBITDA increase, driven by higher roaming revenue and significant postpaid subscriber additions Wireless Financial Results (Q2 2022 vs Q2 2021) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Service revenue | 1,791 | 1,616 | 11 | | Equipment revenue | 421 | 448 | (6) | | Revenue | 2,212 | 2,064 | 7 | | Adjusted EBITDA | 1,118 | 1,008 | 11 | Wireless Subscriber Results (Q2 2022 vs Q2 2021) | (In thousands, except churn/ARPU) | 2022 | 2021 | Chg | | :--- | :--- | :--- | :--- | | Postpaid mobile phone net additions | 122 | 60 | 62 | | Postpaid churn (monthly) | 0.68 % | 0.76 % | (0.08 pts) | | Mobile phone ARPU (monthly) | $58.83 | $55.67 | $3.16 | - The 11% increase in service revenue was primarily a result of higher roaming revenue due to increased travel and a larger mobile phone subscriber base[45][46] Cable The Cable segment reported a 3% revenue increase and 6% adjusted EBITDA growth in Q2 2022, fueled by service pricing adjustments and retail Internet and Video subscriber gains Cable Financial Results (Q2 2022 vs Q2 2021) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Service revenue | 1,037 | 1,010 | 3 | | Revenue | 1,041 | 1,013 | 3 | | Adjusted EBITDA | 520 | 492 | 6 | Cable Subscriber Net Additions (Q2 2022 vs Q2 2021) | (In thousands) | 2022 | 2021 | Chg | | :--- | :--- | :--- | :--- | | Retail Internet | 26 | 14 | 12 | | Video | 21 | (4) | 25 | | Home Phone | (18) | (22) | 4 | - Service revenue increased due to pricing changes made in the first quarter and growth in the retail Internet and Video subscriber bases[53] Media The Media segment experienced a strong Q2 recovery with 21% revenue growth and a return to profitability, primarily due to increased Toronto Blue Jays and advertising revenue Media Financial Results (Q2 2022 vs Q2 2021) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Revenue | 659 | 546 | 21 | | Adjusted EBITDA | 2 | (75) | n/m | - The 21% revenue increase was driven by higher Toronto Blue Jays revenue due to the return of home games to Rogers Centre and higher advertising revenue[57][59] - Operating expenses increased by 6% due to higher costs associated with the Toronto Blue Jays (player payroll, game day costs) and increased production costs as COVID-19 restrictions were removed[58][59] Capital Expenditures Total capital expenditures rose 8% in Q2 2022, primarily for Wireless 5G deployment and Cable fibre expansion, with future investments planned for network resilience Capital Expenditures by Segment (Q2 2022 vs Q2 2021) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Wireless | 457 | 424 | 8 | | Cable | 269 | 227 | 19 | | Media | 19 | 36 | (47) | | Total | 778 | 719 | 8 | - Wireless capital expenditures increased due to investments in upgrading the wireless network, including the deployment of 3500 MHz spectrum for 5G[62] - Cable capital expenditures increased to support network infrastructure, including fibre deployments to increase FTTH distribution[63] Review of Consolidated Performance Q2 2022 net income increased 35% to $409 million, driven by higher adjusted EBITDA, though partially offset by a 73% surge in finance costs related to Shaw acquisition debt Reconciliation of Adjusted EBITDA to Net Income (Q2 2022) | (In millions of dollars) | 2022 | 2021 | % Chg | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | 1,592 | 1,374 | 16 | | Depreciation and amortization | (638) | (647) | (1) | | Restructuring, acquisition and other | (71) | (115) | (38) | | Finance costs | (357) | (206) | 73 | | Other income | 18 | 7 | 157 | | Income tax expense | (135) | (111) | 22 | | Net income | 409 | 302 | 35 | - Finance costs increased significantly by 73% in the quarter, primarily due to interest on new debt issued to finance the Shaw Transaction, including the Shaw senior note financing[71][72] - Adjusted net income increased 20% to $463 million, and adjusted diluted EPS increased 13% to $0.86[74] Managing our Liquidity and Financial Resources Cash from operations increased 30% to $1,319 million in Q2 2022, with significant long-term debt issued for the Shaw Transaction, resulting in $13.1 billion restricted cash Summary of Cash Flow Activities (Q2 2022 vs Q2 2021) | (In millions of dollars) | 2022 | 2021 | | :--- | :--- | :--- | | Cash provided by operating activities | 1,319 | 1,016 | | Cash used in investing activities | (663) | (560) | | Cash (used in) provided by financing activities | (800) | (352) | - Year-to-date, the company issued a net $12.7 billion in long-term debt, primarily to finance the Shaw Transaction[78][86] - The receivables securitization program was upsized to a maximum of $2 billion[82] - Free cash flow increased 14% to $344 million in Q2, or 49% to $451 million when excluding the financing impacts of the Shaw Transaction[98] Overview of Financial Position Total assets increased to $54.8 billion and liabilities to $44.0 billion as of June 30, 2022, primarily due to restricted cash and debt for the Shaw Transaction Consolidated Balance Sheet Highlights | (In millions of dollars) | As at June 30, 2022 | As at Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | 18,711 | 5,829 | | Restricted cash and cash equivalents | 13,131 | — | | Total assets | 54,769 | 41,963 | | Total current liabilities | 7,529 | 8,619 | | Long-term debt | 30,812 | 17,137 | | Total liabilities | 43,952 | 31,431 | | Shareholders' equity | 10,817 | 10,532 | Financial Condition As of June 30, 2022, available liquidity was $3.8 billion, the debt leverage ratio improved to 3.2x, and credit ratings remain investment grade but are under negative review due to the Shaw Transaction - Available liquidity as of June 30, 2022 was $3.8 billion, comprised of $0.7 billion in cash and $3.1 billion in available credit facilities[101][102] - The debt leverage ratio was 3.2x, based on $19.96 billion of adjusted net debt and $6.25 billion of trailing 12-month adjusted EBITDA[108] - Credit ratings from S&P, Moody's, Fitch, and DBRS are investment grade but are under review with negative implications due to the pending Shaw Transaction[106] Financial Risk Management Rogers manages financial risks using derivatives, with 91.6% of debt at fixed rates and all US dollar-denominated debt hedged against foreign exchange fluctuations - The company uses derivative instruments to manage financial risks, with 91.6% of its outstanding debt at a fixed interest rate as of June 30, 2022[110] - All foreign exchange risk associated with US$16.1 billion in US dollar-denominated senior notes, debentures, and subordinated notes has been economically hedged using debt derivatives[117] - In connection with new debt issuances in Q1 2022, the company terminated various interest rate derivatives, resulting in significant cash settlements, including a net receipt of $80 million and a payment of US$129 million[122][123] Regulatory Developments Post-outage government and CRTC actions focus on network resilience, while the Competition Bureau challenges the Shaw Transaction, and ISED outlines 3800 MHz spectrum auction rules - Following the July 8, 2022 network outage, the government directed major telecommunications companies to improve network resilience, and the CRTC has requested a detailed explanation from Rogers[140][141] - The Competition Bureau is challenging the Shaw Transaction, alleging it would significantly decrease competition in the wireless market. A Tribunal hearing is expected in November and December 2022[145][146] - ISED Canada released the policy framework for the 3800 MHz spectrum auction, which includes a 100 MHz spectrum cap for large national providers and a 150 MHz set-aside for smaller competitors[143][144] Updates to Risks and Uncertainties Key risks include the Shaw Transaction's regulatory approval and financing, alongside potential material financial liabilities from class action lawsuits following the July 2022 network outage - The closing of the Shaw Transaction is at risk due to the Competition Bureau's challenge and the requirement to obtain ISED Canada approval for spectrum licence transfers[153][154] - A significant financing risk exists as $13.3 billion of senior notes must be redeemed at a premium if the Shaw Transaction is not completed by December 31, 2022, potentially requiring replacement financing on uncertain terms[156] - Three class action lawsuits have been filed in Quebec following the July 8, 2022 network outage, claiming various damages. The company cannot currently assess the likelihood of success or magnitude of potential liability[157][158] Other Key Sections This section covers critical accounting policies, key performance indicators, non-GAAP financial measures, and other supplementary financial information Critical Accounting Policies and Estimates Recent accounting amendments, including IFRS 3 and IAS 16 updates, had no material impact on the company's financial results - New accounting pronouncements adopted in 2022 did not have a material impact on the company's financial results[160] Key Performance Indicators Effective January 1, 2022, the company revised its Wireless and Cable subscriber reporting metrics to align with industry practices - As of January 1, 2022, the company changed its reporting of subscriber metrics in both Wireless and Cable segments[3][171] - Wireless metrics now focus on postpaid and prepaid 'mobile phone' subscribers. Cable metrics now separately report retail Internet, Video, Smart Home Monitoring, and Home Phone subscribers[171][172] Non-GAAP and Other Financial Measures This section defines and reconciles non-GAAP financial measures like Adjusted EBITDA, Adjusted Net Income, and Free Cash Flow to comparable IFRS metrics - The report uses non-GAAP measures like Adjusted EBITDA, Adjusted Net Income, and Free Cash Flow to assess performance[176] - Reconciliations are provided for key non-GAAP measures, such as Adjusted EBITDA to Net Income and Adjusted Net Income to Net Income[180][181] Other Information This section provides a summary of consolidated financial results for the past eight quarters and financial information for Rogers Communications Canada Inc. (RCCI) - A summary table of consolidated results for the past eight quarters is provided[183][184] - Consolidating summary financial information is provided for RCI, the guarantor (RCCI), and non-guarantor subsidiaries[185][186]