Rogers Reports Strong Third Quarter 2007 Financial and Operating Results
Consolidated Revenue Grows 13% to $2.6 Billion, Operating Profit (as adjusted) Increases 23% to $984 Million, and Net Income Increases 75% to $269 Million;
Wireless Subscribers Surpass 7 Million with Net Additions up 20% Year- Over-Year, While Wireless Postpaid ARPU Grows 7% and Postpaid Churn Falls to 1.12%;
Cable and Telecom Maintains Strong Net Additions of Basic Cable, Digital Cable, High-Speed Internet and Cable Telephony Subscribers;
Subsequent to the End of the Quarter, Media Closes the Acquisition of the Five Citytv Television Stations
TORONTO, Nov. 1 -- Rogers Communications Inc. today announced its consolidated financial and operating results for the three and nine months ended September 30, 2007.
Financial highlights are as follows:
-------------------------------------------------------------------------
(In millions of Three months ended Nine months ended
dollars, except September 30, September 30,
per share -------------------------------------------------------
amounts) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating
revenue(1) $ 2,611 $ 2,305 13 $ 7,436 $ 6,468 15
Operating
profit(2) 986 785 26 2,215 2,123 4
Net income 269 154 75 383 446 (14)
Net income
per share:
Basic $ 0.42 $ 0.25 68 $ 0.60 $ 0.71 (15)
Diluted 0.42 0.24 75 0.60 0.69 (13)
As adjusted:(3)
Operating
profit $ 984 $ 800 23 $ 2,728 $ 2,174 25
Net income 268 169 59 753 492 53
Net income
per share:
Basic $ 0.42 $ 0.27 56 $ 1.18 $ 0.78 51
Diluted 0.42 0.26 62 1.17 0.77 52
-------------------------------------------------------------------------
(1) Certain prior year amounts related to Wireless equipment sales and
cost of equipment sales have been reclassified. Refer to the section
entitled "Reclassification of Wireless Equipment Sales and Cost of
Sales" in our 2006 Annual MD&A for further details.
(2) Operating profit should not be considered as a substitute or
alternative for operating income or net income, in each case
determined in accordance with Canadian 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 Canadian GAAP and
the "Key Performance Indicators and Non-GAAP Measures" section. The
introduction of a cash settlement feature for stock options resulted
in a one-time non-cash charge upon adoption of $452 million on
May 28, 2007, which is included in operating profit for the nine
months ended September 30, 2007. See the section entitled "Stock-
based Compensation Expense".
(3) For details on the determination of the 'as adjusted' amounts, which
are non-GAAP measures, see the "Supplementary Information" and the
"Key Performance Indicators and Non-GAAP Measures" sections. The 'as
adjusted' amounts presented above are reviewed regularly by
management and our Board of Directors in assessing our performance
and in making decisions regarding the ongoing operations of the
business and the ability to generate cash flows. The 'as adjusted'
amounts exclude (i) the impact of a one-time non-cash charge related
to the introduction of a cash settlement feature for employee stock
options; (ii) stock-based compensation expense; (iii) integration
and restructuring expense; (iv) an adjustment of The Canadian Radio-
Television Commission ("CRTC") Part II fees related to prior periods
as a result of a recent notice from the CRTC that the Part II fees
due in November 2007 will not be collected by the CRTC; and (v) in
respect of net income and net income per share, the loss on
repayment of long-term debt. Adjusted net income and net income per
share also exclude the related income tax impact of the above
amounts.
Highlights of the third quarter of 2007 include the following:
- Generated continued strong double-digit growth in quarterly revenue
and operating profit (as adjusted) of 13% and 23%, respectively. Free
cash flow, defined as operating profit (as adjusted) less integration
and restructuring expense, additions to property, plant and equipment
and interest expense, increased 91% to $442 million. In addition, net
income increased 75% to $269 million.
- Wireless subscriber postpaid net additions were 195,100 compared to
171,200 in the third quarter of 2006. Postpaid subscriber monthly
churn fell to 1.12% versus 1.30% in the third quarter of 2006.
Wireless postpaid monthly ARPU (average revenue per user) increased
7% year-over-year to $75.15 driven in part by the 53% growth in data
revenue to $183 million. Data revenue now represents 13.6% of network
revenue with monthly data ARPU in the quarter exceeding $10 for the
first time.
- Cable and Telecom ended the quarter with 590,500 residential voice-
over-cable telephony subscriber lines. Net additions were 81,200
subscriber lines for the quarter, of which approximately 7,800 were
migrations from the circuit-switched platform.
- Internet subscribers grew by 55,000 to a total of 1,418,500, while
basic cable subscribers increased by 9,100 to a total of 2,275,400
and digital cable households increased by 54,800 to reach a total of
1,291,800.
- Cable launched three new 'triple play' packages that combine digital
cable, high-speed Internet and Rogers Home Phone services in discrete
packages and with easy to understand price points. These packages
range from a basic starter package to a VIP Plus package, with the
selection allowing our customers to choose the television, high-speed
Internet and Home Phone plan that best meets their needs.
- The CRTC approved the agreement under which Rogers Media acquired
five Citytv television stations on October 31, 2007. This acquisition
gives Media a significantly enhanced broadcast television presence in
the largest Canadian markets outside Quebec and is a natural
complement to Media's existing television, radio and specialty
channel assets.
- Successfully completed the amalgamation of RCI with its wholly owned
Cable and Wireless holding company subsidiaries on July 1, 2007, with
RCI assuming all the rights and obligations under the outstanding
Cable and Wireless public debt indentures and swaps. As part of the
amalgamation process, RCI entered into a new unsecured $2.4 billion
bank credit facility. This amalgamation was effected principally to
simplify the Company's corporate structure to enable the streamlining
of reporting and compliance obligations. This intracompany
amalgamation did not impact the consolidated financial position or
results previously reported by the Company.
"The company's continued healthy growth in subscribers and cash flow reflect our intense focus on delivering innovative products, great customer service and profitable growth," said Ted Rogers, President and CEO of Rogers Communications Inc. "While our brand, franchises and markets are all strong, we have much work to do to maintain our leadership position."
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007
This management's discussion and analysis ("MD&A") should be read in conjunction with our 2006 Annual MD&A and our 2006 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 26 to our 2006 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, 2006. This MD&A is current as of October 31, 2007.
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 wireless communications operations,
including Rogers Wireless Partnership ("RWP") and Fido Inc.;
- "Cable and Telecom", which refers to our wholly-owned cable and
telecom subsidiaries, including Rogers Cable Communications Inc.
("RCCI"). In January 2007, we completed a previously announced
internal reorganization whereby the Cable and Internet and Rogers
Home Phone segments were combined into one segment known as Cable
Operations. As a result, beginning in 2007, the Cable and Telecom
operating segment is comprised of the following segments: Cable
Operations, Rogers Business Solutions and Rogers Retail. Comparative
figures have been reclassified to reflect this new segmented
reporting;
- "Media", which refers to our wholly-owned subsidiary Rogers Media
Inc. and its subsidiaries, including: Rogers Broadcasting, which owns
Rogers Sportsnet, Radio stations, OMNI television, The Biography
Channel Canada, G4TechTV Canada, 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.
On October 31, 2007 Media completed its previously announced acquisition of five Citytv television stations. The acquisition will be accounted for using the purchase method with the results of the Citytv stations consolidated with those of Media effective October 31, 2007.
"RCI" refers to the legal entity Rogers Communications Inc. excluding our subsidiaries.
Throughout this MD&A, percentage changes are calculated using numbers rounded to which they appear.
SUMMARIZED CONSOLIDATED FINANCIAL RESULTS
-------------------------------------------------------------------------
(In millions of Three months ended Nine months ended
dollars, except September 30, September 30,
per share -------------------------------------------------------
amounts) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating revenue
Wireless(1) $ 1,442 $ 1,224 18 $ 4,037 $ 3,323 21
Cable and
Telecom
Cable
Operations 657 580 13 1,923 1,695 13
Rogers Business
Solutions 140 148 (5) 431 441 (2)
Rogers Retail 104 73 42 288 226 27
Corporate
items and
eliminations (2) (1) 100 (7) (3) n/m
-------------------------------------------------------
899 800 12 2,635 2,359 12
Media 339 319 6 953 893 7
Corporate items
and eliminations (69) (38) 82 (189) (107) 77
-------------------------------------------------------
Total 2,611 2,305 13 7,436 6,468 15
-------------------------------------------------------
-------------------------------------------------------
Operating profit
(loss)
(as adjusted)(2)
Wireless 686 564 22 1,931 1,466 32
Cable and Telecom
Cable Operations 256 210 22 733 630 16
Rogers Business
Solutions 7 6 17 4 37 (89)
Rogers Retail 2 3 (33) (1) 11 n/m
-------------------------------------------------------
265 219 21 736 678 9
Media 46 41 12 110 108 2
Corporate items
and eliminations (13) (24) (46) (49) (78) (37)
-------------------------------------------------------
-------------------------------------------------------
Operating profit
(as adjusted)(2) 984 800 23 2,728 2,174 25
Stock option plan
amendment(3) - - n/m (452) - n/m
Stock-based
compensation
expense(3) (11) (14) (21) (58) (37) 57
Integration and
restructuring
expense(4) (5) (1) n/m (21) (14) 50
Adjustment for
CRTC Part II
fees decision(5) 18 - n/m 18 - n/m
-------------------------------------------------------
Operating profit(2) 986 785 26 2,215 2,123 4
Other income and
expense, net(6) 717 631 14 1,832 1,677 9
-------------------------------------------------------
Net income $ 269 $ 154 75 $ 383 $ 446 (14)
-------------------------------------------------------
-------------------------------------------------------
Net income
per share:(7)
Basic $ 0.42 $ 0.25 68 $ 0.60 $ 0.71 (15)
Diluted 0.42 0.24 75 0.60 0.69 (13)
As adjusted:(2)
Net income $ 268 $ 169 59 $ 753 $ 492 53
Net income
per share:
Basic $ 0.42 $ 0.27 56 $ 1.18 $ 0.78 51
Diluted 0.42 0.26 62 1.17 0.77 52
Additions to
property, plant
and equipment
("PP&E")(2)
Wireless $ 164 $ 161 2 $ 570 $ 483 18
Cable and
Telecom
Cable Operations 176 178 (1) 464 426 9
Rogers Business
Solutions 18 26 (31) 58 50 16
Rogers Retail 5 3 67 12 5 140
-------------------------------------------------------
199 207 (4) 534 481 11
Media 27 8 n/m 45 33 36
Corporate(8) 7 39 (82) 23 161 (86)
-------------------------------------------------------
Total $ 397 $ 415 (4) $ 1,172 $ 1,158 1
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(1) Certain prior year amounts related to Wireless equipment sales and
cost of equipment sales have been reclassified. Refer to the section
entitled "Reclassification of Wireless Equipment Sales and Cost of
Sales" in our 2006 Annual MD&A for further details.
(2) As defined. See the "Supplementary Information" and the "Key
Performance Indicators and Non-GAAP Measures" sections.
(3) See the section entitled "Stock-based Compensation Expense".
(4) Costs incurred relate to the integration of Fido Solutions Inc.
("Fido") and Call-Net Enterprises Inc. ("Call-Net"), the
restructuring of Rogers Business Solutions and the closure of 21
retail stores in the first quarter of 2006.
(5) Relates to an adjustment of CRTC Part II fees related to prior
periods as a result of a recent notice from the CRTC that the
Part II fees due in November 2007 will not be collected by the CRTC.
See the "Government Regulation and Regulatory Developments" section.
(6) See the "Reconciliation of Net Income to Operating Profit and
Operating Profit (as adjusted) for the Period" section for details
of these amounts.
(7) Prior period per share amounts have been retroactively adjusted to
reflect a two-for-one split of the Company's Class A Voting and
Class B Non-Voting shares on December 29, 2006.
(8) Corporate additions to PP&E for the nine months ended September 30,
2006 includes $105 million for RCI's purchase of real estate in
Brampton, Ontario.
n/m: not meaningful.
For discussions of the results of operations of each of these segments, refer to the respective segment sections of this MD&A.
Stock-based Compensation Expense
On May 28, 2007, our stock option plans were amended to attach cash settled share appreciation rights ("SARs") to all new and previously granted options. The SAR feature allows the option holder to elect to receive in cash an amount equal to the intrinsic value, being the excess market price of the Class B Non-Voting share over the exercise price of the option, instead of exercising the option and acquiring Class B Non-Voting shares. All outstanding stock options are now classified as liabilities and are carried at their intrinsic value, as adjusted for vesting, measured as the difference between the current stock price and the option exercise price. The intrinsic value of the liability is marked to market each period and is amortized to expense over the period in which the related services are rendered, which is usually the graded vesting period, or, as applicable, over the period to the date an employee is eligible to retire, whichever is shorter. As a result of this amendment, we recorded a liability of $502 million, a one-time non-cash charge upon adoption of $452 million to revalue the outstanding options at May 28, 2007 and a $50 million decrease in contributed surplus. In addition, a future income tax recovery of $160 million was recorded as a result of the amendment.
Previously, all stock options were classified as equity and were measured at the estimated fair value established by the Black-Scholes or binomial models on the date of grant. Under this method, the estimated fair value was amortized to expense over the period in which the related services were rendered, which was generally the vesting period or, as applicable, over the period to the date an employee was eligible to retire, whichever was shorter. Subsequent to May 28, 2007, the liability for stock-based compensation expense is recorded based on the intrinsic value of the options, as described above, and the expense is impacted by the change in the price of our Class B Non-Voting shares during the life of the option. At September 30, 2007, we have a liability of $545 million related to stock-based compensation recorded at its intrinsic value, including stock options, restricted share units and deferred share units. In the three and nine months ended September 30, 2007, $13 million and $30 million, respectively, was paid to option holders upon exercise of options using the SAR feature.
A summary of stock-based compensation expense is as follows:
--------------------------------------------------
Stock-based Compensation Expense
Included in Operating, General and
One-time Administrative Expenses
---------------------- Non-cash ---------------------------------------
Charge Three months ended Nine months ended
Upon September 30, September 30,
(In millions Adoption ---------------------------------------
of dollars) in Q207 2007 2006 2007 2006
-------------------------------------------------------------------------
Wireless $ 46 $ 2 $ 4 $ 9 $ 11
Cable and Telecom 113 3 3 13 8
Media 84 3 2 9 4
Corporate 209 3 5 27 14
--------------------------------------------------
$ 452 $ 11 $ 14 $ 58 $ 37
--------------------------------------------------
Reconciliation of Net Income to Operating Profit and Operating Profit
(as adjusted) for the Period
The items listed below represent the consolidated income and expense amounts that are required to reconcile net income as defined under Canadian GAAP to the non-GAAP measures operating profit and operating profit (as adjusted) for the period. See the "Supplementary Information" section for a full reconciliation to operating profit (as adjusted), net income (as adjusted), and net income per share (as adjusted). 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 2 to the Interim Consolidated Financial Statements entitled "Segmented Information".
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In millions -------------------------------------------------------
of dollars) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Net income $ 269 $ 154 75 $ 383 $ 446 (14)
Income tax expense 166 76 118 165 43 n/m
Other expense
(income) 10 (4) n/m 6 (11) n/m
Change in the
fair value of
derivative
instruments 5 (2) n/m 31 28 11
Loss on repayment
of long-term debt - - n/m 47 - n/m
Foreign exchange
gain (1) - n/m (53) (41) 29
Interest expense
on long-term debt 140 153 (8) 441 469 (6)
-------------------------------------------------------
Operating income 589 377 56 1,020 934 9
Depreciation and
amortization 397 408 (3) 1,195 1,189 1
-------------------------------------------------------
Operating profit 986 785 26 2,215 2,123 4
Stock option plan
amendment - - n/m 452 - n/m
Stock-based
compensation
expense 11 14 (21) 58 37 57
Integration and
restructuring
expense 5 1 n/m 21 14 50
Adjustment for
CRTC Part II
fees decision (18) - n/m (18) - n/m
-------------------------------------------------------
Operating profit
(as adjusted) $ 984 $ 800 23 $ 2,728 $ 2,174 25
-------------------------------------------------------------------------
Net Income and Net Income Per Share
As a result of the changes discussed below, we recorded net income of $269 million for the three months ended September 30, 2007, or basic and diluted earnings per share of $0.42, compared to net income of $154 million or basic earnings per share of $0.25 (diluted - $0.24) in the corresponding period in 2006. For the nine months ended September 30, 2007, we recorded net income of $383 million or basic and diluted earnings per share of $0.60, compared to net income of $446 million or basic earnings per share of $0.71 (diluted - $0.69) in the corresponding period of 2006.
Income Taxes
Due to our non-capital loss carryforwards, our income tax expense for the three and nine month periods ended September 30, 2007 substantially represents non-cash income taxes. As illustrated in the table below, our effective income tax rate for the three and nine month periods ended September 30, 2007 was 38.2% and 30.1%, respectively. The effective income tax rate for the three months ended September 30, 2007 differed from the 2007 statutory income tax rate of 35.2% primarily due to a future income tax charge recorded for a reduction in our future tax assets to reflect a decrease in the estimated income tax rate that will apply on the utilization of our income tax losses. The effective income tax rate for the nine month period ended September 30, 2007 differed from the 2007 statutory income tax rate of 35.2% due primarily to the $25 million future income tax recovery recorded with respect to the Videotron termination payment to reverse a charge recorded by us in 2006 (see Note 11 of our Unaudited Interim Consolidated Financial Statements). In addition, we recorded a future income tax recovery associated with the reclassification of contributed surplus upon the introduction of a cash settlement feature for employee stock options (see the section entitled "Stock-based Compensation Expense"). The 2006 effective income tax rate was less than the 2006 statutory rate of 35.8% due primarily to a decrease in the valuation allowance recorded in respect of non-capital losses.
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------------------------
(In millions of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Statutory income tax rate 35.2% 35.8% 35.2% 35.8%
-------------------------------------------------------------------------
Income before income taxes $ 435 $ 230 $ 548 $ 489
Income tax expense at statutory
income tax rate on income
before income taxes $ 153 $ 82 $ 193 $ 175
Increase (decrease) in income
taxes resulting from:
Stock-based compensation - 4 (19) 11
Videotron termination payment - 25 (25) 25
Change in the valuation allowance
for future income taxes - (31) - (160)
Other items 13 (4) 16 (8)
---------------------------------------
Income tax expense $ 166 $ 76 $ 165 $ 43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Effective income tax rate 38.2% 33.0% 30.1% 8.8%
-------------------------------------------------------------------------
Change in Fair Value of Derivative Instruments
The changes in fair value of the derivative instruments in the nine months ended September 30, 2007 were primarily the result of the changes in the Canadian dollar relative to that of the U.S. dollar as described below. For the three months ended September 30, 2007, the change in fair value of the derivative instruments was primarily the result of the change in measurement of hedge ineffectiveness.
Loss on Repayment of Long-Term Debt
During the nine months ended September 30, 2007, we redeemed Wireless' US$155 million 9.75% Senior Debentures due 2016 and Wireless' US$550 million 9.75% Senior Notes due 2010. These redemptions resulted in a loss on repayment of long-term debt of $47 million for the nine months ended September 30, 2007, including aggregate redemption premiums of $59 million offset by a write-off of the fair value increment arising from purchase accounting of $12 million.
Foreign Exchange Gain
During the three months ended September 30, 2007, the Canadian dollar strengthened by 6.71 cents versus the U.S. dollar. This resulted in a foreign exchange gain of $1 million during the three months ended September 30, 2007. During the corresponding period of 2006, there was no gain or loss related to foreign exchange on long-term debt not hedged for accounting purposes given a nominal 0.03 cent decrease in the Canadian dollar in this period. During the nine months ended September 30, 2007, the Canadian dollar strengthened by 16.9 cents compared to 5.06 cents in the corresponding period of 2006, resulting in foreign exchange gains of $53 million and $41 million, respectively.
Interest on Long-Term Debt
Interest expense decreased by $13 million and $28 million, respectively, for the three and nine months ended September 30, 2007 compared to the corresponding periods in 2006. The decrease in interest expense is primarily due to the $687 million decrease in long-term debt as at September 30, 2007 compared to September 30, 2006, including the impact of cross-currency interest rate exchange agreements.
This decrease in debt was largely the result of the February 2007 repayment at maturity of Cable and Telecom's $450 million 7.60% Senior Notes due 2007, the May 2007 redemption of Wireless' US$550 million Floating Rate Senior Notes due 2010 and the June 2007 redemption of Wireless' US$155 million 9.75% Senior Debentures due 2016. These repayments were partially offset by the $595 million net increase in bank debt as at September 30, 2007 compared to September 30, 2006.
Operating Income
The 56% increase in our operating income to $589 million from $377 million for the three months ended September 30, 2007 compared to the corresponding period of the prior year is primarily due to the growth in revenue of $306 million exceeding the growth in operating expenses of $105 million. For the nine months ended September 30, 2007, operating income increased by only 9% to $1,020 million primarily due to a $452 million one-time non-cash charge related to the introduction of a cash settlement feature for stock options adopted in the second quarter of 2007.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three and nine months ended September 30, 2007 remained consistent with the corresponding periods of the prior year.
Operating Profit (as adjusted)
Operating profit (as adjusted) increased to $984 million and $2,728 million for the three and nine months ended September 30, 2007, respectively, from $800 million and $2,174 million in the corresponding periods of the prior year. Operating profit (as adjusted) excludes: (i) the impact of a $452 million one-time non-cash charge related to the introduction of a cash settlement feature for stock options for the nine months ended September 30, 2007; (ii) stock-based compensation expense of $11 million and $14 million for the three months ended September 30, 2007 and 2006, respectively, and $58 million and $37 million for the nine months ended September 30, 2007 and 2006, respectively; (iii) integration and restructuring expenses of $5 million and $1 million for the three months ended September 30, 2007 and 2006, respectively, and $21 million and $14 million, for the nine months ended September 30, 2007 and 2006, respectively; and (iv) an adjustment to Part II CRTC fees related to prior periods of $18 million for the three and nine months ended September 30, 2007.
For details on the determination of operating profit (as adjusted), which is a non-GAAP measure, see the "Supplementary Information" and the "Key Performance Indicators and Non-GAAP Measures" sections.
OPERATING UNIT REVIEW
WIRELESS
--------
Summarized Wireless Financial Results
-------------------------------------------------------------------------
Three months ended Nine months ended
(In millions September 30, September 30,
of dollars, -------------------------------------------------------
except margin) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating revenue
Postpaid $ 1,274 $ 1,080 18 $ 3,585 $ 2,989 20
Prepaid 75 57 32 203 153 33
One-way messaging 3 4 (25) 10 11 (9)
-------------------------------------------------------
Network revenue 1,352 1,141 18 3,798 3,153 20
Equipment sales(1) 90 83 8 239 170 41
-------------------------------------------------------
Total operating
revenue 1,442 1,224 18 4,037 3,323 21
-------------------------------------------------------
Operating expenses
before the
undernoted
Cost of equipment
sales(1) 178 158 13 495 439 13
Sales and
marketing
expenses 181 152 19 467 418 12
Operating,
general and
administrative
expenses 397 350 13 1,144 1,000 14
-------------------------------------------------------
756 660 15 2,106 1,857 13
-------------------------------------------------------
Operating profit
(as adjusted)(2) 686 564 22 1,931 1,466 32
Stock option plan
amendment(3) - - n/m (46) - n/m
Stock-based
compensation
expense(3) (2) (4) (50) (9) (11) (18)
Integration recovery
(expense)(4) - 1 n/m - (3) n/m
-------------------------------------------------------
Operating
profit(2)(5) $ 684 $ 561 22 $ 1,876 $ 1,452 29
-------------------------------------------------------
-------------------------------------------------------
Adjusted operating
profit margin
as % of network
revenue(2) 50.7% 49.4% 50.8% 46.5%
Additions to
property, plant
and equipment
("PP&E")(2) $ 164 $ 161 2 $ 570 $ 483 18
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(1) Certain prior year amounts related to equipment sales and cost of
equipment sales have been reclassified. Refer to the section
entitled "Reclassification of Wireless Equipment Sales and Cost of
Sales" in our 2006 Annual MD&A for further details.
(2) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and the "Supplementary Information" sections.
(3) See the section entitled "Stock-based Compensation Expense".
(4) Costs recovered (incurred) relate to the integration of Fido.
(5) Operating profit includes a loss of $8 million and $23 million
related to the Inukshuk wireless broadband initiative for the three
and nine months ended September 30, 2007, respectively, and a loss
of $8 million and $16 million for the three and nine months ended
September 30, 2006, respectively.
Summarized Wireless Subscriber Results
-------------------------------------------------------------------------
(Subscriber
statistics Three months ended Nine months ended
in thousands, September 30, September 30,
except ARPU, -------------------------------------------------------
churn and usage) 2007 2006 Chg 2007 2006 Chg
-------------------------------------------------------------------------
Postpaid
Gross additions 383.0 368.9 14.1 990.5 990.8 (0.3)
Net additions 195.1 171.2 23.9 422.6 390.7 31.9
Adjustment to
postpaid
subscriber base(1) - - - (64.9) - (64.9)
Total postpaid
retail
subscribers 5,755.9 5,208.9 547.0
Average monthly
revenue per user
("ARPU")(2) $ 75.15 $ 70.37 $ 4.78 $ 71.82 $ 66.66 $ 5.16
Average monthly
usage (minutes) 582 541 41 565 541 24
Monthly churn 1.12% 1.30% (0.18%) 1.14% 1.34% (0.20%)
Prepaid
Gross additions 179.0 169.4 9.6 478.7 434.3 44.4
Net additions
(losses) 48.0 31.9 16.1 44.7 (24.9) 69.6
Adjustment to
prepaid
subscriber base(1) - - - (25.5) - (25.5)
Total prepaid
retail
subscribers 1,399.3 1,324.9 74.4
ARPU(2) $ 18.15 $ 14.61 $ 3.54 $ 16.41 $ 12.93 $ 3.48
Monthly churn 3.20% 3.52% (0.32%) 3.52% 3.89% (0.37%)
-------------------------------------------------------------------------
(1) During the second quarter of 2007, Wireless decommissioned its Time
Division Multiple Access ("TDMA") and analog networks and
simultaneously revised certain aspects of its subscriber reporting
for data-only subscribers. The deactivation of the remaining TDMA
subscribers and the change in subscriber reporting resulted in the
removal of approximately 64,900 subscribers from Wireless' postpaid
subscriber base and the removal of approximately 25,500 subscribers
from Wireless' prepaid subscriber base. These adjustments are not
included in the determination of postpaid or prepaid monthly churn.
(2) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" section. As calculated in the "Supplementary Information"
section.
Wireless Network Revenue
The increases in network revenue for the three and nine months ended September 30, 2007 compared to the corresponding periods of the prior year were driven by the continued growth of Wireless' postpaid subscriber base and improvements in postpaid average monthly revenue per user ("ARPU"). The year-over-year increase in postpaid ARPU reflects the impact of higher data revenue, as well as increased long-distance, add-on features and roaming revenue. As Canada's only GSM provider, Wireless has experienced growth in roaming revenues from subscribers traveling outside of Canada as well as strong growth in inbound roaming revenues from travelers to Canada who utilize Wireless' network.
Prepaid revenue increased as a result of improved ARPU and a larger subscriber base. The year-over-year improvement in ARPU is a result of increased data usage and attractive prepaid offerings, including unlimited evening and weekend plans.
Wireless' success in the continued reduction in postpaid churn reflects proactive and targeted customer retention activities, the commitment to customer care and improvements in network coverage and quality. Prepaid churn has improved in the first nine months of 2007 due to changes in offerings and investments in retention programs.
During the three and nine months ended September 30, 2007, wireless data revenue increased by 53% and 49%, respectively, over the corresponding periods in 2006 and totalled $183 million and $491 million, respectively. This increase in data revenue reflects the continued 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 three and nine months ended September 30, 2007, data revenue represented approximately 13.6% and 12.9% of total network revenue, respectively, compared to 10.5% and 10.4%, respectively, in the corresponding periods last year.
Wireless Equipment Sales
The year-over-year increase in revenue from equipment sales, including activation fees and net of equipment subsidies, reflects the increase in gross additions and increased volume of handset upgrades associated with the growing subscriber base.
Wireless Operating Expenses
-------------------------------------------------------------------------
(In millions of Three months ended Nine months ended
dollars, except September 30, September 30,
per subscriber -------------------------------------------------------
statistics) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating expenses
Cost of
equipment
sales(1) $ 178 $ 158 13 $ 495 $ 439 13
Sales and
marketing
expenses 181 152 19 467 418 12
Operating,
general and
administrative
expenses 397 350 13 1,144 1,000 14
-------------------------------------------------------
Operating expenses
before the
undernoted 756 660 15 2,106 1,857 13
Stock option plan
amendment(2) - - n/m 46 - n/m
Stock-based
compensation
expense(2) 2 4 (50) 9 11 (18)
Integration recovery
(expense)(3) - (1) (100) - 3 (100)
-------------------------------------------------------
Total operating
expenses $ 758 $ 663 14 $ 2,161 $ 1,871 15
-------------------------------------------------------
-------------------------------------------------------
Average monthly
operating expense
per subscriber
before sales
and marketing
expenses(4) $ 20.74 $ 19.34 7 $ 20.39 $ 19.47 5
Sales and marketing
costs per gross
subscriber
addition(4) $ 392 $ 363 8 $ 388 $ 388 -
-------------------------------------------------------------------------
(1) Certain prior year amounts related to equipment sales and cost of
equipment sales have been reclassified. Refer to the section
entitled "Reclassification of Wireless Equipment Sales and Cost of
Sales" in our 2006 Annual MD&A for further details.
(2) See the section entitled "Stock-based Compensation Expense".
(3) Costs incurred (recovered) relate to the integration of Fido.
(4) As defined. See the "Key Performance Indicator and Non-GAAP
Measures" section. As calculated in the "Supplementary Information"
section. Average monthly operating expense per subscriber before
sales and marketing expenses excludes the one-time non-cash expense
related to the introduction of a cash settlement feature for stock
options, stock-based compensation expense and integration recovery
(expenses).
Cost of equipment sales increased for the three and nine months ended September 30, 2007 compared to the corresponding periods of the prior year primarily as a result of retention activity and hardware upgrades, as well as the increased volume of gross additions and the increased average cost of more advanced handsets.
The increase in sales and marketing expenses for the three and nine months ended September 30, 2007 compared to the corresponding period of the prior year was directly related to our largely successful sales and marketing efforts targeted at acquiring high value postpaid customers and BlackBerry customers. In addition, the increase was driven by increased marketing activity related to Wireless' "Most Reliable Network" campaign and the introduction of new products and services such as the BlackBerry Curve and Rogers Vision.
Growth in the Wireless subscriber base drove increases in operating, general and administrative expenses in the three and nine months ended September 30, 2007, compared to the corresponding periods of the prior year. These increases were reflected in higher retention spending, costs to support increased usage of data and roaming services, and increases in network operating expenses to accommodate the larger subscriber base. Customer care costs also increased as a result of Wireless Number Portability ("WNP"), the decommissioning of the TDMA network in May 2007, and the complexity of supporting more sophisticated handsets. These costs were partially offset by savings related to operating efficiencies across various functions.
Total retention spending, including subsidies on handset upgrades, has increased to $102 million and $293 million in the three and nine months ended September 30, 2007, respectively, compared to $72 million and $236 million, respectively, in the corresponding periods of the prior year due to a larger subscriber base which drove higher volumes of handset upgrades, as well as the introduction of WNP in March 2007. Retention spending during the nine months ended September 30, 2007 also increased due to the transition of customers to Wireless' more advanced GSM service from the older generation TDMA and analog networks, which were turned down in May 2007.
Wireless Operating Profit (as adjusted)
The strong year-over-year growth in operating profit (as adjusted) was the result of the significant growth in network revenue. As a result, Wireless' adjusted operating profit margins increased to 50.7% and 50.8% for the three and nine months ended September 30, 2007, respectively, compared to 49.4% and 46.5% in the corresponding periods in 2006.
Wireless Additions to Property, Plant and Equipment
Wireless additions to PP&E are classified into the following categories:
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In millions -------------------------------------------------------
of dollars) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Additions to PP&E
Network -
capacity $ 48 $ 48 - $ 131 $ 136 (4)
Network - other 34 15 127 75 46 63
High Speed Packet
Access ("HSPA") 36 62 (42) 259 182 42
Information and
technology
and other 42 28 50 93 58 60
Inukshuk 4 8 (50) 12 61 (80)
-------------------------------------------------------
Total additions
to PP&E $ 164 $ 161 2 $ 570 $ 483 18
-------------------------------------------------------------------------
The additions to PP&E for the three and nine months ended September 30, 2007, respectively, reflect spending on network capacity on the GSM and HSPA networks and technology enhancements. Other network-related additions to PP&E in the three and nine months ended September 30, 2007 primarily reflect technical upgrade projects, consisting primarily of network features, channel additions and operational support systems. Other additions to PP&E reflect information technology initiatives such as billing and back office system upgrades and other facilities and equipment spending. The reduction in expenditures related to the Inukshuk wireless broadband initiative for the nine months ended September 30, 2007 compared to the corresponding period of the prior year is a result of costs incurred in 2006 for the initial deployment of infrastructure in the largest Canadian markets.
CABLE AND TELECOM
-----------------
Summarized Cable and Telecom Financial Results
-------------------------------------------------------------------------
Three months ended Nine months ended
(In millions September 30, September 30,
of dollars, -------------------------------------------------------
except margin) 2007(1) 2006(2) % Chg 2007(1) 2006(2) % Chg
-------------------------------------------------------------------------
Operating revenue
Cable
Operations(3) $ 657 $ 580 13 $ 1,923 $ 1,695 13
Rogers Business
Solutions 140 148 (5) 431 441 (2)
Rogers Retail 104 73 42 288 226 27
Intercompany
eliminations (2) (1) 100 (7) (3) n/m
-------------------------------------------------------
Total operating
revenue 899 800 12 2,635 2,359 12
-------------------------------------------------------
-------------------------------------------------------
Operating profit
(loss) before
the undernoted
Cable
Operations(3) 256 210 22 733 630 16
Rogers Business
Solutions 7 6 17 4 37 (89)
Rogers Retail 2 3 (33) (1) 11 n/m
-------------------------------------------------------
Operating profit
(as adjusted)(4) 265 219 21 736 678 9
Stock option plan
amendment(5) - - n/m (113) - n/m
Stock-based
compensation
expense(5) (3) (3) - (13) (8) 63
Integration and
restructuring
expense(6) (5) (2) 150 (21) (11) 91
Adjustment for
CRTC Part II
fees decision(7) 15 - n/m 15 - n/m
-------------------------------------------------------
Operating
profit(4) $ 272 $ 214 27 $ 604 $ 659 (8)
-------------------------------------------------------
-------------------------------------------------------
Adjusted operating
profit margin(4)
Cable
Operations(3) 39.0% 36.2% 38.1% 37.2%
Rogers Business
Solutions 5.0% 4.1% 0.9% 8.4%
Rogers Retail 1.9% 4.1% (0.3%) 4.9%
Additions to
PP&E(4)
Cable
Operations(3) $ 176 $ 178 (1) $ 464 $ 426 9
Rogers Business
Solutions 18 26 (31) 58 50 16
Rogers Retail 5 3 67 12 5 140
-------------------------------------------------------
Total additions
to PP&E $ 199 $ 207 (4) $ 534 $ 481 11
-------------------------------------------------------------------------
(1) The operating results of Futureway Communications Inc. ("Futureway")
are included in Cable and Telecom's results of operations from the
date of acquisition on June 22, 2007.
(2) Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) Cable Operations segment includes Core Cable services, Internet
services and Rogers Home Phone services.
(4) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(5) See the section entitled "Stock-based Compensation Expense".
(6) Costs incurred relate to the integration of the operations of Call-
Net, the restructuring of Rogers Business Solutions and the closure
of 21 retail stores in the first quarter of 2006.
(7) Relates to an adjustment of CRTC Part II fees related to prior
periods as a result of a recent notice from the CRTC that the Part
II fees due in November 2007 will not be collected by the CRTC. See
"Government Regulation and Regulatory Developments" section.
The following segment discussions provide a detailed discussion of the Cable and Telecom operating results.
CABLE OPERATIONS
----------------
Summarized Financial Results
-------------------------------------------------------------------------
Three months ended Nine months ended
(In millions September 30, September 30,
of dollars, -------------------------------------------------------
except margin) 2007 2006(1) % Chg 2007 2006(1) % Chg
-------------------------------------------------------------------------
Operating revenue
Core Cable $ 386 $ 358 8 $ 1,143 $ 1,054 8
Internet 153 132 16 448 385 16
Rogers Home Phone 118 90 31 332 256 30
-------------------------------------------------------
Total Cable
Operations
operating revenue 657 580 13 1,923 1,695 13
-------------------------------------------------------
Operating
expenses before
the undernoted
Sales and
marketing
expenses 66 61 8 188 162 16
Operating,
general and
administrative
expenses 335 309 8 1,002 903 11
-------------------------------------------------------
401 370 8 1,190 1,065 12
-------------------------------------------------------
Operating profit
(as adjusted)(2) 256 210 22 733 630 16
Stock option plan
amendment(3) - - n/m (106) - n/m
Stock-based
compensation
expense(3) (1) (3) (67) (11) (8) 38
Integration
expense(4) (4) (2) 100 (9) (6) 50
Adjustment for
CRTC Part II
fees decision(5) 15 - n/m 15 - n/m
-------------------------------------------------------
Operating
profit(2) $ 266 $ 205 30 $ 622 $ 616 1
-------------------------------------------------------
-------------------------------------------------------
Adjusted operating
profit margin(2) 39.0% 36.2% 38.1% 37.2%
-------------------------------------------------------------------------
(1) Certain prior year amounts have been reclassified to conform with
the current year presentation.
(2) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(3) See the section entitled "Stock-based Compensation Expense".
(4) Costs incurred relate to the integration of the operations of
Call-Net.
(5) Relates to an adjustment of CRTC Part II fees related to prior
periods as a result of a recent notice from the CRTC that the
Part II fees due in November 2007 will not be collected by the CRTC.
See the "Government Regulation and Regulatory Developments" section.
Summarized Subscriber Results
-------------------------------------------------------------------------
(Subscriber Three months ended Nine months ended
statistics September 30, September 30,
in thousands, -------------------------------------------------------
except ARPU) 2007 2006(5) Chg 2007 2006(5) Chg
-------------------------------------------------------------------------
Cable homes passed 3,542.5 3,458.7 83.8
Basic Cable
Net additions 9.1 12.6 (3.5) (1.7) 2.6 (4.3)
Total Basic Cable
subscribers 2,275.4 2,266.4 9.0
Core Cable
ARPU(1) $ 56.69 $ 52.70 $ 3.99 $ 55.86 $ 51.91 $ 3.95
High-speed Internet
Net additions 55.0 51.0 4.0 118.2 113.0 5.2
Total Internet
subscribers
(residential)(2) 1,418.5 1,249.2 169.3
Internet
ARPU(1) $ 36.71 $ 35.50 $ 1.21 $ 36.46 $ 35.25 $ 1.21
Digital Cable
Terminals, net
additions 83.2 95.0 (11.8) 263.7 242.6 21.1
Terminals in
service 1,761.1 1,382.2 378.9
Households, net
additions 54.8 62.2 (7.4) 157.9 151.1 6.8
Households 1,291.8 1,064.4 227.4
Cable telephony
subscriber lines
Net additions(3) 81.2 106.1 (24.9) 224.6 222.9 1.7
Total Cable
telephony
subscriber lines 590.5 270.8 319.7
Circuit-switched
subscriber lines
Net losses and
migrations(3) (6.6) (24.1) 17.5 (33.1) (32.8) (0.3)
Total circuit-
switched
subscriber
lines(2) 354.3 357.9 (3.6)
Total Rogers Home
Phone subscriber
lines
Net additions 74.6 82.0 (7.4) 191.5 190.1 1.4
Total Rogers
Home subscriber
lines(2) 944.8 628.7 316.1
Revenue generating
units ("RGUs")(4)
Net additions 193.5 207.8 (14.3) 465.9 456.8 9.1
Total revenue
generating
units(2) 5,930.5 5,208.7 721.8
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(2) Included in total subscribers at September 30, 2007 are
approximately 3,700 high-speed Internet subscribers and 37,900
circuit-switched telephony subscriber lines, representing 41,600
RGUs, acquired from Futureway in June, 2007. These subscribers are
not included in net additions for the nine months ended
September 30, 2007.
(3) Includes approximately 7,800 and 38,900 migrations from circuit-
switched to cable telephony for the three and nine months ended
September 30, 2007, respectively, and 14,400 and 23,600 migrations
from circuit-switched to cable telephony for the three and nine
months ended September 30, 2006, respectively.
(4) RGUs are comprised of basic cable subscribers, digital cable
households, residential high-speed Internet subscribers and Rogers
Home Phone subscribers.
(5) Certain prior year amounts have been reclassified to conform to the
current year presentation.
Core Cable Revenue
The increases in Core Cable revenue for the three and nine months ended September 30, 2007 reflect price increases, the growth in basic subscribers and the growing penetration of our digital cable products. The price increases on service offerings, effective March 2006 and 2007, contributed to Core Cable revenue growth by approximately $14 million and $40 million, for the three and nine months ended September 30, 2007, respectively. The remaining increase in revenue of approximately $14 million and $49 million for the three and nine months ended September 30, 2007, respectively, is primarily related to the impact of the growth in digital subscribers.
The digital cable subscriber base has grown by 21% from September 30, 2006 to September 30, 2007. The digital penetration of basic cable households now represents 57%. Strong demand for high-definition and personal video recorder subscriber equipment combined with Cable and Telecom's Personal TV and the new 'triple play' marketing campaign, which offers cable television, high-speed Internet and Rogers Home Phone services in discrete packages, were contributors to the growth in the digital subscriber base of 54,800 and 157,900 households in the three and nine months ended September 30, 2007, respectively. Basic cable subscribers increased by 9,100 in the third quarter given the seasonal impact of college and university students connecting for the school year.
Internet (Residential) Revenue
The increase in Internet revenues for the three and nine months ended September 30, 2007 from the corresponding periods in 2006 primarily reflects the 14% year-over-year increase in the number of Internet subscribers and price increases of Internet offerings. The price increases on Internet offerings, effective March 2006 and 2007, contributed to the Internet revenue growth by approximately $4 million and $12 million for the three and nine months ended September 30, 2007, respectively. The remaining increases in revenue of approximately $17 million and $51 million for the three and nine months ended September 30, 2007, respectively, are largely the result of the impact of the growth in subscribers. The average monthly revenue per Internet subscriber has increased in the quarter compared to the corresponding period in 2006 given the price increases and was partially offset with the change in product mix to more Lite and Ultra-Lite subscribers.
With the high-speed Internet subscriber base now at approximately 1.4 million, Internet penetration is 62% of basic cable households, and 40% of homes passed by our cable networks.
Rogers Home Phone Revenue
The growth in Rogers Home Phone revenue for the three and nine months ended September 30, 2007 compared to the corresponding periods in 2006 is mainly a result of incremental revenues from Rogers Home Phone voice-over-cable telephony service, which added 81,200 and 224,600 net new lines in the three and nine months ended September 30, 2007, respectively. Partially offsetting the increase in voice-over-cable telephony lines is a decline in the number of circuit-switched local lines of 6,600 and 33,100 for the three and nine months ended September 30, 2007, respectively
