Rogers Reports Strong Fourth Quarter 2007 Results
Consolidated Revenue Grows 13% to $2.7 Billion, Adjusted Operating Profit Increases 25% to $957 Million, and Net Income Increases 44% to $254 Million;
Wireless Postpaid ARPU Grows 6% and Postpaid Churn Falls to 1.17%, While Cable Maintains Strong Net Additions of Revenue Generating Units
TORONTO, Feb. 22 -- Rogers Communications Inc. today announced its consolidated financial and operating results for the three and twelve months ended December 31, 2007.
Financial highlights are as follows:
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Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars, except
per share amounts) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating revenue $ 2,687 $ 2,370 13 $10,123 $ 8,838 15
Operating profit(1) 884 752 18 3,099 2,875 8
Net income 254 176 44 637 622 2
Net income per
share:
Basic $ 0.40 $ 0.28 43 $ 1.00 $ 0.99 1
Diluted 0.40 0.27 48 0.99 0.97 2
As adjusted:(2)
Operating profit $ 957 $ 768 25 $ 3,703 $ 2,942 26
Net income 302 192 57 1,066 684 56
Net income per
share:
Basic $ 0.47 $ 0.30 57 $ 1.67 $ 1.08 55
Diluted 0.47 0.30 57 1.66 1.07 55
-------------------------------------------------------------------------
(1) 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 Net Income to
Operating Profit and Adjusted Operating Profit for the Period"
section for a reconciliation of operating profit and adjusted
operating profit to operating income and net income under Canadian
GAAP and see the "Key Performance Indicators and Non-GAAP Measures
and "Supplementary Information" sections. 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 twelve months ended December 31,
2007. See the section entitled "Stock-based Compensation Expense".
(2) 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 expenses; (iv) the impact of a one-time charge
resulting from the renegotiation of an Internet-related services
agreement; 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 fourth quarter of 2007 include the following:
- Generated continued strong double-digit growth in quarterly revenue
and adjusted operating profit of 13% and 25%, respectively, while net
income increased 44% to $254 million, (or by 57% to $302 million on
an adjusted basis).
- Wireless subscriber postpaid net additions were 158,000, while
postpaid subscriber monthly churn fell to 1.17% versus 1.24% in the
fourth quarter of 2006. Wireless postpaid monthly ARPU (average
revenue per user) increased 6% year-over-year to $73.33 driven in
part by the 48% growth in data revenue to $192 million, or 14.1% of
network revenue.
- Wireless announced that its High-Speed Packet Access ("HSPA") network
and related new advanced services were available in 25 markets across
the country, representing approximately 58% of the Canadian
population. Rogers' HSPA network, the fastest wireless network in
Canada, operates on a next generation wireless protocol which
significantly increases download speeds on wireless devices,
providing a user experience similar to broadband high-speed services.
- Cable ended the quarter with 656,000 residential voice-over-cable
telephony subscriber lines. Net additions of voice-over-cable
telephony lines were 65,000 for the quarter, of which approximately
2,000 were migrations from the circuit-switched platform.
- Cable's Internet subscriber base grew by 46,000 in the quarter to
1,465,000, while basic cable subscribers increased by 20,000 to
2,295,000 and digital cable households increased by 61,000 to reach
1,353,000.
- Cable entered into a renegotiated agreement with Yahoo! that will
eliminate monthly per subscriber fees and see both companies work
jointly on advertising revenue opportunities leveraging Rogers' high-
speed Internet access portal and subscriber base. In connection with
this new agreement, Rogers made a one-time payment to Yahoo!, and
Cable's cost of providing its Internet service will be reduced
over the four year term of the new agreement.
- Media closed the acquisition of five Citytv television stations on
October 31, 2007. This acquisition gives Media a significantly
enhanced broadcast television presence in the largest Canadian
markets outside of Quebec and is a natural complement to Media's
existing television, radio and specialty channel assets.
- Subsequent to the end of the fourth quarter, on January 7, 2008,
Rogers' Board of Directors approved an increase in the annual
dividend from $0.50 to $1.00 per share to be paid in quarterly
amounts of $0.25 per share effective with its next quarterly
dividend. At the same time, Rogers also announced a Normal Course
Issuer Bid ("NCIB") to repurchase up to the lesser of 15 million of
its Class B Non-Voting shares and that number of Class B Non-Voting
shares that can be purchased under the NCIB for an aggregate purchase
price of $300 million.
"2007 was a year of continued solid growth in customers, revenues and cash flow while at the same time we further deleveraged our balance sheet, simplified our corporate structure and laid the groundwork for returning increasing amounts of cash to our shareholders," said Ted Rogers, President and CEO of Rogers Communications Inc. "While we have much to do in continuing to reinforce our services and systems, I am confident that we are exceptionally well positioned to carry on our growth and success in 2008 and beyond."
This earnings release should be read in conjunction with our 2006 Annual MD&A and our 2006 Annual Audited Consolidated Financial Statements and Notes thereto, as well as our 2007 quarterly interim financial and other recent securities filings available on SEDAR at www.sedar.com. As this earnings release includes forward-looking statements and assumptions, readers should carefully review the sections of this release entitled "Caution Regarding Forward-Looking Statements, Risks and Assumptions".
In this release, the terms "we", "us", "our", "Rogers" 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 Solutions Inc.
("Fido");
- "Cable" (formerly "Cable and Telecom"), which refers to our wholly
owned cable television subsidiaries, including Rogers Cable
Communications Inc. ("RCCI"). In January 2007, we completed an
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 segment
consists of the following segments: Cable Operations, Rogers Business
Solutions ("RBS") 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, a group of AM and FM 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. Media also
holds ownership interests in entities involved in specialty TV
content, TV production and broadcast sales. In addition, the
operating results of Citytv are included in Media's results of
operations from the date of acquisition on October 31, 2007.
Substantially all of our operations are in Canada.
"RCI" refers to the legal entity Rogers Communications Inc. excluding our subsidiaries.
Throughout this release, percentage changes are calculated using numbers rounded to which they appear.
SUMMARIZED CONSOLIDATED FINANCIAL RESULTS (Unaudited)
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Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars, except
per share amounts) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating revenue
Wireless $ 1,466 $ 1,257 17 $ 5,503 $ 4,580 20
Cable
Cable Operations 680 604 13 2,603 2,299 13
RBS 140 155 (10) 571 596 (4)
Rogers Retail 105 84 25 393 310 27
Corporate items
and eliminations (2) (1) 100 (9) (4) 125
-----------------------------------------------------
923 842 10 3,558 3,201 11
Media 364 317 15 1,317 1,210 9
Corporate items
and eliminations (66) (46) 43 (255) (153) 67
-----------------------------------------------------
Total 2,687 2,370 13 10,123 8,838 15
-----------------------------------------------------
-----------------------------------------------------
Adjusted operating
profit (loss)(1)
Wireless 658 521 26 2,589 1,987 30
Cable
Cable Operations 260 224 16 1,008 854 18
RBS 8 12 (33) 12 49 (76)
Rogers Retail (3) 2 n/m (4) 13 n/m
-----------------------------------------------------
265 238 11 1,016 916 11
Media 63 48 31 176 156 13
Corporate items
and eliminations (29) (39) (26) (78) (117) (33)
-----------------------------------------------------
-----------------------------------------------------
Adjusted operating
profit(1) 957 768 25 3,703 2,942 26
Stock option plan
amendment(2) - - n/m (452) - n/m
Stock-based
compensation
expense(2) (4) (12) (67) (62) (49) 27
Integration and
restructuring
expenses(3) (17) (4) n/m (38) (18) 111
Contract
renegotiation
fee(4) (52) - n/m (52) - n/m
-----------------------------------------------------
Operating
profit(1) 884 752 18 3,099 2,875 8
Other income and
expense, net(5) 630 576 9 2,462 2,253 9
-----------------------------------------------------
Net income $ 254 $ 176 44 $ 637 $ 622 2
-----------------------------------------------------
-----------------------------------------------------
Net income per
share:
Basic $ 0.40 $ 0.28 43 $ 1.00 $ 0.99 1
Diluted 0.40 0.27 48 0.99 0.97 2
As adjusted:(1)
Net income $ 302 $ 192 57 $ 1,066 $ 684 56
Net income per
share:
Basic $ 0.47 $ 0.30 57 $ 1.67 $ 1.08 55
Diluted 0.47 0.30 57 1.66 1.07 55
Additions to
property, plant
and equipment
("PP&E")(1)
Wireless $ 252 $ 201 25 $ 822 $ 684 20
Cable
Cable Operations 246 259 (5) 710 685 4
RBS 25 48 (48) 83 98 (15)
Rogers Retail 9 6 50 21 11 91
-----------------------------------------------------
280 313 (11) 814 794 3
Media 32 16 100 77 48 60
Corporate(6) 60 24 150 83 186 (55)
-----------------------------------------------------
Total $ 624 $ 554 13 $ 1,796 $ 1,712 5
-----------------------------------------------------
-----------------------------------------------------
(1) As defined. See the "Supplementary Information" and the "Key
Performance Indicators and Non-GAAP Measures" sections.
(2) See the section entitled "Stock-based Compensation Expense".
(3) Costs incurred related to the integration of Fido and Call-Net
Enterprises Inc. ("Call-Net"), the restructuring of RBS and the
closure of 21 Retail stores in the first quarter of 2006.
(4) One-time charge resulting from the renegotiation of an
Internet-related services agreement. See the section entitled
"Cable Operations Operating Expenses".
(5) See the "Reconciliation of Net Income to Operating Profit and
Adjusted Operating Profit for the Period" section for details of
these amounts.
(6) Corporate additions to property, plant and equipment ("PP&E")
include the acquisition of various corporate properties and related
building improvements.
n/m: not meaningful.
For discussions of the results of operations of each of these segments, refer to the respective segment sections of this release.
Reconciliation of Net Income to Operating Profit and Adjusted Operating
Profit 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 adjusted operating profit for the period. See the "Supplementary Information" section for a full reconciliation to adjusted operating profit, adjusted net income and adjusted net income per share. 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 tables in the Supplemental Information section entitled "Segmented Information".
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Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Net income $ 254 $ 176 44 $ 637 $ 622 2
Income tax expense 84 13 n/m 249 56 n/m
Other expense
(income) (2) 1 n/m 4 (10) n/m
Change in the fair
value of derivative
instruments 3 (24) n/m 34 4 n/m
Loss on repayment
of long-term debt - 1 (100) 47 1 n/m
Foreign exchange
loss (gain) (1) 39 n/m (54) (2) n/m
Interest on long-
term debt 138 151 (9) 579 620 (7)
-----------------------------------------------------
Operating income 476 357 33 1,496 1,291 16
Depreciation and
amortization 408 395 3 1,603 1,584 1
-----------------------------------------------------
Operating profit 884 752 18 3,099 2,875 8
Stock option plan
amendment - - n/m 452 - n/m
Stock-based
compensation
expense 4 12 (67) 62 49 27
Integration and
restructuring
expenses 17 4 n/m 38 18 111
Contract
renegotiation fee 52 - n/m 52 - n/m
-----------------------------------------------------
Adjusted operating
profit $ 957 $ 768 25 $ 3,703 $ 2,942 26
-----------------------------------------------------
Net Income and Net Income Per Share
As a result of the changes discussed below, we recorded net income of $254 million for the three months ended December 31, 2007, or basic and diluted earnings per share of $0.40, compared to net income of $176 million or basic earnings per share of $0.28 (diluted - $0.27) in the corresponding period in 2006.
Income Tax Expense
Due to our non-capital loss carryforwards, our income tax expense for the three months ended December 31, 2007 and 2006 substantially represents non- cash income taxes. As illustrated in the table below, our effective income tax rate for the three months ended December 31, 2007 and 2006 was 24.9% and 6.9%, respectively. The effective income tax rates for the three months ended December 31, 2007 and 2006 differed from the respective statutory income tax rates of 35.2% and 35.8%, primarily due to benefits realized from changes to prior year tax filing positions and other adjustments.
Income tax expense varies from the amounts that would be computed by applying the statutory income tax rate to income before income taxes for the following reasons:
Three months Twelve months
ended ended
December 31, December 31,
-----------------------------------
(In millions of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Statutory income tax rate 35.2% 35.8% 35.2% 35.8%
-------------------------------------------------------------------------
Income before income taxes $ 338 $ 189 $ 886 $ 678
Computed income tax expense $ 119 $ 68 $ 312 $ 243
Increase (decrease) in income taxes
resulting from:
Difference between rates applicable
to subsidiaries in other
jurisdictions (3) (2) (12) (12)
Change in the valuation allowance
for future income tax assets (13) (8) (20) (168)
Videotron termination payment - - (25) 25
Adjustments to future income tax
assets and liabilities for changes
in substantively enacted income
tax rates 21 (17) 47 (14)
Stock-based compensation 2 4 (17) 15
Benefits realized from changes to
prior year income tax filing
positions and other adjustments (42) (32) (36) (33)
-----------------------------------
Income tax expense $ 84 $ 13 $ 249 $ 56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Effective income tax rate 24.9% 6.9% 28.1% 8.3%
-------------------------------------------------------------------------
Change in Fair Value of Derivative Instruments
The changes in fair value of the derivative instruments in the three months ended December 31, 2007 was primarily the result of the changes in measurement of hedge ineffectiveness and the change in fair value of the embedded prepayment option on long-term debt.
Loss on Repayment of Long-Term Debt
During the twelve months ended December 31, 2007, we redeemed Wireless' US$155 million 9.75% Senior Debentures due 2016 and Wireless' US$550 million Floating Rate Senior Notes due 2010. These redemptions resulted in a loss on repayment of long-term debt of $47 million, 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 December 31, 2007, the Canadian dollar strengthened by 0.8 cents versus the U.S. dollar. This resulted in a foreign exchange gain of $1 million during the three months ended December 31, 2007. During the corresponding period of 2006, there was a foreign exchange loss of $39 million primarily related to foreign exchange on long-term debt not hedged for accounting purposes given a 5 cent decrease in the Canadian dollar in this period.
Interest on Long-Term Debt
Interest expense decreased by $13 million for the three months ended December 31, 2007 compared to the corresponding period in 2006. The decrease in interest expense is primarily due to the repayment of long-term debt in 2007, including the settlement of certain of our cross-currency interest rate exchange agreements.
The decrease in debt was largely the result of the February 2007 repayment at maturity of Cable'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 $1,080 million net increase in bank debt as at December 31, 2007, compared to December 31, 2006.
Operating Income
The 33% increase in our operating income to $476 million from $357 million for the three months ended December 31, 2007 compared to the corresponding period of the prior year is primarily due to the growth in revenue of $317 million exceeding the growth in operating expenses and depreciation and amortization of $198 million. See the section entitled "Operating Unit Review" for a detailed discussion of operating unit results.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended December 31, 2007 increased nominally over the corresponding period of the prior year. An increase in depreciation and amortization related to PP&E was partially offset by a decrease in amortization of intangible assets resulting from the reduction in the carrying value of certain intangible assets due to the reduction in the valuation allowance recorded in 2006 related to future income tax assets acquired as part of business acquisitions in prior periods.
Stock-based Compensation Expense
A summary of stock-based compensation expense is as follows:
Stock-based Compensation Expense (Recovery)
Included in Operating, General
and Administrative Expenses
One-time -----------------------------------------------
Non-cash Three months Twelve months
Charge ended ended
Upon December 31, December 31,
(In millions Adoption -----------------------------------------------
of dollars) in Q207 2007 2006 2007 2006
-------------------------------------------------------------------------
Wireless $ 46 $ 2 $ 4 $ 11 $ 15
Cable 113 (2) 3 11 11
Media 84 1 1 10 5
Corporate 209 3 4 30 18
-----------------------------------------------------------
$ 452 $ 4 $ 12 $ 62 $ 49
-------------------------------------------------------------------------
Adjusted Operating Profit
Wireless, Cable and Media all contributed to the increase in adjusted operating profit. Refer to the individual segment discussions for details of the respective increases in adjusted operating profit.
For the three months ended December 31, 2007, adjusted operating profit increased to $957 million, from $768 million in the corresponding period of the prior year. Adjusted operating profit for the three months ended December 31, 2007 and 2006, respectively excludes: (i) stock-based compensation expense of $4 million and $12 million; (ii) integration and restructuring expenses of $17 million and $4 million; and (iii) the impact of a one-time charge of $52 million resulting from the renegotiation of an Internet-related services agreement in the three months ended December 31, 2007.
For the twelve months ended December 31, 2007, adjusted operating profit increased to $3,703 million, from $2,942 million in 2006. Adjusted operating profit 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 twelve months ended December 31, 2007; (ii) stock-based compensation expense of $62 million and $49 million for the twelve months ended December 31, 2007 and 2006, respectively; (iii) integration and restructuring expenses of $38 million and $18 million for the twelve months ended December 31, 2007 and 2006, respectively; and (iv) the impact of a one-time charge of $52 million resulting from the renegotiation of an Internet-related services agreement in the twelve months ended December 31, 2007.
For details on the determination of adjusted operating profit, 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 Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars, except
margin) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating revenue
Postpaid $ 1,283 $ 1,095 17 $ 4,868 $ 4,084 19
Prepaid 70 61 15 273 214 28
One-way messaging 3 4 (25) 13 15 (13)
-----------------------------------------------------
Network revenue 1,356 1,160 17 5,154 4,313 19
Equipment sales 110 97 13 349 267 31
-----------------------------------------------------
Total operating
revenue 1,466 1,257 17 5,503 4,580 20
-----------------------------------------------------
Operating expenses
before the
undernoted
Cost of equipment
sales 208 189 10 703 628 12
Sales and
marketing
expenses 186 186 - 653 604 8
Operating,
general and
administrative
expenses 414 361 15 1,558 1,361 14
-----------------------------------------------------
808 736 10 2,914 2,593 12
-----------------------------------------------------
Adjusted operating
profit(1)(2) 658 521 26 2,589 1,987 30
Stock option plan
amendment(3) - - n/m (46) - n/m
Stock-based
compensation
expense(3) (2) (4) (50) (11) (15) (27)
Integration
expenses(4) - - n/m - (3) n/m
-----------------------------------------------------
Operating profit(1) $ 656 $ 517 27 $ 2,532 $ 1,969 29
-----------------------------------------------------
-----------------------------------------------------
Adjusted operating
profit margin as
% of network
revenue(1) 48.5% 44.9% 50.2% 46.1%
Additions to
PP&E(1) $ 252 $ 201 25 $ 822 $ 684 20
-----------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and the "Supplementary Information" sections.
(2) Adjusted operating profit includes a loss of $8 million and
$31 million related to the Inukshuk wireless broadband initiative for
the three and twelve months ended December 31, 2007, respectively,
and a loss of $10 million and $25 million for the three and
twelve months ended December 31, 2006, respectively.
(3) See the section entitled "Stock-based Compensation Expense".
(4) Costs incurred related to the integration of Fido.
Summarized Wireless Subscriber Results
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Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(Subscriber
statistics
in thousands,
except ARPU,
churn and usage) 2007 2006 Chg 2007 2006 Chg
-------------------------------------------------------------------------
Postpaid
Gross additions 362 385 (23) 1,352 1,375 (23)
Net additions 158 189 (31) 581 580 1
Adjustment to
postpaid
subscriber
base(1) - - - (65) - (65)
Total postpaid
retail
subscribers 5,914 5,398 516
Average monthly
revenue per user
("ARPU")(2) $ 73.33 $ 69.04 $ 4.29 $ 72.21 $ 67.27 $ 4.94
Average monthly
usage (minutes) 596 556 40 573 545 28
Monthly churn 1.17% 1.24% (0.07%) 1.15% 1.32% (0.17%)
Prepaid
Gross additions 156 181 (25) 635 615 20
Net additions 25 55 (30) 70 30 40
Adjustment to
prepaid
subscriber
base(1) - - - (26) - (26)
Total prepaid
retail
subscribers 1,424 1,380 44
ARPU(2) $ 16.59 $ 15.15 $ 1.44 $ 16.46 $ 13.49 $ 2.97
Monthly churn 3.12% 3.14% (0.02%) 3.42% 3.70% (0.28%)
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(1) During the second quarter of 2007, Wireless decommissioned its 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 65,000 subscribers from
Wireless' postpaid subscriber base and the removal of approximately
26,000 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 increase in network revenue for the three months ended December 31, 2007 compared to the corresponding period of the prior year was 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. Wireless has experienced growth in roaming revenues from subscribers using services outside of Canada as well as strong growth in inbound roaming revenues from visitors 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 more 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 compared to the corresponding period in 2006 due to changes in offerings and investments in retention programs.
During the three months ended December 31, 2007, wireless data revenue increased by 48% over the corresponding period in 2006 and totalled $192 million. 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 months ended December 31, 2007, data revenue represented approximately 14.1% of total network revenue, compared to 11.2% in the corresponding period last year.
Wireless Equipment Sales
The year-over-year increase in revenue from equipment sales, including activation fees and net of equipment subsidies, reflects an increased volume of handset upgrades associated with the growing subscriber base.
Wireless Operating Expenses
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars, except
per subscriber
statistics) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Operating expenses
Cost of equipment
sales $ 208 $ 189 10 $ 703 $ 628 12
Sales and
marketing
expenses 186 186 - 653 604 8
Operating,
general and
administrative
expenses 414 361 15 1,558 1,361 14
-----------------------------------------------------
Operating expenses
before the
undernoted 808 736 10 2,914 2,593 12
Stock option plan
amendment(1) - - n/m 46 - n/m
Stock-based
compensation
expense(1) 2 4 (50) 11 15 (27)
Integration
expenses(2) - - n/m - 3 n/m
-----------------------------------------------------
Total operating
expenses $ 810 $ 740 9 $ 2,971 $ 2,611 14
-----------------------------------------------------
-----------------------------------------------------
Average monthly
operating
expense per
subscriber
before sales
and marketing
expenses(3) $ 21.25 $ 19.51 9 $ 20.61 $ 19.48 6
Sales and
marketing costs
per gross
subscriber
addition(3) $ 440 $ 427 3 $ 401 $ 399 1
-------------------------------------------------------------------------
(1) See the section entitled "Stock-based Compensation Expense".
(2) Costs incurred related to the integration of Fido.
(3) 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 expenses.
Cost of equipment sales increased for the three months ended December 31, 2007 compared to the corresponding period of the prior year primarily as a result of retention activity, hardware upgrades, and the increased average cost of handsets.
Sales and marketing expenses for the three months ended December 31, 2007 remained flat compared to the corresponding period of the prior year. Marketing efforts were largely focused on acquiring high value postpaid voice and data customers, as well as the continuation of Wireless' "Most Reliable Network" campaign and the introduction of new services and devices. Because of the seasonally heavy mass market advertising component associated with the fourth quarter, sales and marketing costs per gross addition are less variable than in other quarters.
Growth in the Wireless subscriber base drove increases in operating, general and administrative expenses in the three months ended December 31, 2007, compared to the corresponding period of the prior year. These increases were reflected in higher customer 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 the launch of Wireless Number Portability ("WNP") in March 2007, the decommissioning of the TDMA network in May 2007, and the complexity of supporting more sophisticated services and devices. These costs were partially offset by savings related to operating and scale efficiencies across various functions.
Total retention spending, including subsidies on handset upgrades, has increased to $110 million in the three months ended December 31, 2007, compared to $85 million in the corresponding period of the prior year due to a larger subscriber base which drove higher volumes of handset upgrades.
Wireless Adjusted Operating Profit
The strong year-over-year growth in adjusted operating profit was due to the significant growth in network revenue. As a result, Wireless' adjusted operating profit margins increased to 48.5% for the three months ended December 31, 2007, compared to 44.9% in the corresponding period in 2006.
Wireless Additions to PP&E
Wireless additions to PP&E are classified into the following categories:
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Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions
of dollars) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
Additions to PP&E
Network
- capacity $ 38 $ 14 171 $ 169 $ 159 6
Network
- other 100 42 138 175 89 97
HSPA 57 82 (30) 316 264 20
Information and
technology
and other 54 50 8 147 112 31
Inukshuk 3 13 (77) 15 60 (75)
-----------------------------------------------------
Total additions
to PP&E $ 252 $ 201 25 $ 822 $ 684 20
-------------------------------------------------------------------------
Additions to Wireless PP&E for the three months ended December 31, 2007 reflects network capacity spending on the GSM network, continued rollout of the HSPA network to the top 25 markets across Canada and the introduction of faster network throughput speeds. Other network-related additions included national site build activities and additional spending on test and monitoring equipment. Other additions to PP&E reflect information technology initiatives such as billing and back office system upgrades, facilities upgrades and other facilities and equipment spending.
CABLE
-----
Summarized Cable Financial Results
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions
of dollars,
except margin) 2007(1) 2006(2) % Chg 2007(1) 2006(2) % Chg
-------------------------------------------------------------------------
Operating revenue
Cable
Operations(3) $ 680 $ 604 13 $ 2,603 $ 2,299 13
RBS 140 155 (10) 571 596 (4)
Rogers Retail 105 84 25 393 310 27
Intercompany
eliminations (2) (1) 100 (9) (4) 125
-----------------------------------------------------
Total operating
revenue 923 842 10 3,558 3,201 11
-----------------------------------------------------
Operating profit
(loss) before
the undernoted
Cable
Operations(3) 260 224 16 1,008 854 18
RBS 8 12 (33) 12 49 (76)
Rogers Retail (3) 2 n/m (4) 13 n/m
-----------------------------------------------------
Adjusted operating
profit(4) 265 238 11 1,016 916 11
Stock option plan
amendment(5) - - n/m (113) - n/m
Stock-based
compensation
recovery
(expense)(5) 2 (3) n/m (11) (11) -
Integration and
restructuring
expenses(6) (17) (4) n/m (38) (15) 153
Contract
renegotiation
fee(7) (52) - n/m (52) - n/m
-----------------------------------------------------
Operating
profit(4) $ 198 $ 231 (14) $ 802 $ 890 (10)
-----------------------------------------------------
-----------------------------------------------------
Adjusted
operating profit
(loss) margin(4)
Cable
Operations(3) 38.2% 37.1% 38.7% 37.1%
RBS 5.7% 7.7% 2.1% 8.2%
Rogers Retail (2.9%) 2.4% (1.0%) 4.2%
Additions
to PP&E(4)
Cable
Operations(3) $ 246 $ 259 (5) $ 710 $ 685 4
RBS 25 48 (48) 83 98 (15)
Rogers Retail 9 6 50 21 11 91
-----------------------------------------------------
Total additions
to PP&E $ 280 $ 313 (11) $ 814 $ 794 3
-------------------------------------------------------------------------
(1) The operating results of Futureway Communications Inc. ("Futureway")
are included in Cable'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 related to the integration of the operations of
Call-Net, the restructuring of RBS and the closure of 21 Retail
stores in the first quarter of 2006.
(7) One-time charge resulting from the renegotiation of an
Internet-related services agreement. See the section entitled
"Cable Operations Operating Expenses".
The following segment discussions provide a detailed discussion of the Cable operating results.
CABLE OPERATIONS
Summarized Financial Results
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions
of dollars,
except margin) 2007 2006(1) % Chg 2007 2006(1) % Chg
-------------------------------------------------------------------------
Operating revenue
Core Cable $ 397 $ 367 8 $ 1,540 $ 1,421 8
Internet 160 138 16 608 523 16
Rogers Home Phone 123 99 24 455 355 28
-----------------------------------------------------
Total Cable
Operations
operating revenue 680 604 13 2,603 2,299 13
-----------------------------------------------------
Operating expenses
before the
undernoted
Sales and
marketing
expenses 69 57 21 257 219 17
Operating, general
and administrative
expenses 351 323 9 1,338 1,226 9
-----------------------------------------------------
420 380 11 1,595 1,445 10
-----------------------------------------------------
Adjusted operating
profit(2) 260 224 16 1,008 854 18
Stock option plan
amendment(3) - - n/m (106) - n/m
Stock-based
compensation
recovery
(expense)(3) 1 (3) n/m (10) (11) (9)
Integration
expenses(4) - (2) n/m (9) (8) 13
Contract
renegotation
fee(5) (52) - n/m (52) - n/m
-----------------------------------------------------
Operating
profit(2) $ 209 $ 219 (5) $ 831 $ 835 (0)
-----------------------------------------------------
-----------------------------------------------------
Adjusted operating
profit margin(2) 38.2% 37.1% 38.7% 37.1%
-------------------------------------------------------------------------
(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 related to the integration of the operations of
Call-Net.
(5) One-time charge resulting from the renegotiation of an
Internet-related services agreement. See the section entitled
"Cable Operations Operating Expenses".
Summarized Subscriber Results
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(Subscriber
statistics in
thousands,
except ARPU) 2007 2006 Chg 2007 2006 Chg
-------------------------------------------------------------------------
Cable homes passed 3,575 3,481 94
Basic Cable
Net additions 20 11 9 18 13 5
Total Basic Cable
subscribers 2,295 2,277 18
Core Cable
ARPU(1) $ 57.97 $ 53.83 $ 4.14 $ 56.39 $ 52.37 $ 4.02
High-speed
Internet(2)
Net additions 46 47 (1) 165 160 5
Total Internet
subscribers
(residential)(3) 1,465 1,297 168
Internet ARPU(1) $ 36.67 $ 35.50 $ 1.17 $ 36.51 $ 35.32 $ 1.19
Digital Cable
Terminals, net
additions 110 115 (5) 374 358 16
Terminals
in service 1,871 1,497 374
Households, net
additions 61 70 (9) 219 221 (2)
Households 1,353 1,134 219
Cable telephony
subscriber lines
Net additions
and migrations(4) 65 95 (30) 290 318 (28)
Total Cable
telephony
subscriber lines 656 366 290
Circuit-switched
subscriber lines
Net losses and
migrations(4) (3) (8) 5 (37) (41) 4
Total circuit-
switched
subscriber
lines(3) 334 350 (16)
Total Rogers
Home Phone
subscriber lines
Net additions 62 87 (25) 253 277 (24)
Total Rogers
Home subscriber
lines(3) 990 716 274
RGUs(2)(5)
Net additions 189 215 (26) 655 671 (16)
Total revenue
generating
units(3) 6,103 5,424 679
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(2) Prior year high-speed Internet subscribers and RGUs have been
reclassified to conform to the current year presentation.
(3) Included in total subscribers at December 31, 2007, are approximately
3,000 high-speed Internet subscribers and 21,000 circuit-switched
telephony subscriber lines, representing 24,000 RGUs, acquired from
Futureway in June, 2007. These subscribers are not included in net
additions for the twelve months ended December 31, 2007.
(4) Includes approximately 2,000 and 42,000 migrations from circuit-
switched to cable telephony for the three and twelve months ended
December 31, 2007, respectively, and 13,000 and 37,000 migrations
from circuit-switched to cable telephony for the three and twelve
months ended December 31, 2006, respectively.
(5) RGUs are comprised of basic cable subscribers, digital cable
households, residential high-speed Internet subscribers and
residential cable and circuit-switched telephony subscribers.
Core Cable Revenue
The increase in Core Cable revenue for the three months ended December 31, 2007 reflects the impact of price increases, growth in basic subscribers and the growing penetration of our digital cable products. The price increases on service offerings, that became effective in March 2007, contributed approximately $14 million to Core Cable revenue growth for the three months ended December 31, 2007. The remaining increase in revenue of approximately $16 million for the three months ended December 31, 2007 is primarily related to the growth in digital subscribers.
The digital cable subscriber base grew by 19% from December 31, 2006 to December 31, 2007. Digital penetration now represents 59% of basic cable households. Strong demand for High Definition ("HD") and Personal Video Recorder ("PVR") digital set top box equipment combined with the success of Cable's "Personal TV" and awareness of the "triple play" marketing campaign, which offers cable television, high-speed Internet and Rogers Home Phone services in discrete packages, contributed to the growth in the digital subscriber base of 61,000 households in the three months ended December 31, 2007. In addition, basic cable subscribers increased by 20,000 in the fourth quarter.
Internet (Residential) Revenue
The increase in Internet revenues for the three months ended December 31, 2007 from the corresponding period in 2006 reflects the 13% year-over-year increase in the number of Internet subscribers in addition to price increases to our Internet offerings. These price increases, effective in March 2007, contributed to the Internet revenue growth by approximately $4 million for the three months ended December 31, 2007. The remaining increase in revenue of approximately $18 million for the three months ended December 31, 2007 was largely the result of the impact of the growth in subscribers. The average monthly revenue per Internet subscriber increased in the quarter compared to the corresponding period in 2006. This was the result of price increases partially offset by a shift in subscriber mix to a higher number of subscribers on lower priced service tiers.
With the high-speed Internet subscriber base now at approximately 1.5 million, Internet penetration is 64% of basic cable households, and 41% of homes passed by our network.
Rogers Home Phone Revenue
The growth in Rogers Home Phone revenue for the three months ended December 31, 2007 compared to the corresponding period in 2006 is the result of the addition of 65,000 Rogers Home Phone voice-over-cable telephony service lines in the three months ended December 31, 2007. Partially offsetting the increase in voice-over-cable telephony lines is a decline in the number of circuit-switched local lines of 3,000 for the three months ended December 31, 2007. Of this amount, 2,000 represented migrations from the circuit-switched to cable telephony platform.
Long-distance revenues for the three months ended December 31, 2007 were relatively flat versus the corresponding period in 2006.
Cable Operations Operating Expenses
Cable Operations sales and marketing expenses increased by $12 million for the three months ended December 31, 2007, compared to the corresponding period of 2006, reflecting the significant growth in cable telephony service in addition to certain targeted promotional activities.
The increases in operating, general and administrative costs for the three months ended December 31, 2007 compared to the corresponding period of 2006 were primarily driven by increases in digital cable, Internet and Rogers Home Phone subscriber bases, resulting in higher costs associated with programming content, customer care, technical service and network operations. This increase was partially offset by the elimination of Canadian Radio- television and Telecommunication Commission ("CRTC") Part II fees.
In January 2004, Cable entered into a multi-year agreement with Yahoo! Inc. ("Yahoo!") to offer Cable's high-speed Internet access subscribers a co- branded broadband experience, which included: Yahoo!'s email functionality; hosting and storage; security, pop-up blocking and parental control tools; digital photo tools; online music and game services; and an array of content in a personalized user environment. Under this agreement, Cable paid portal fees to Yahoo! for these services on a per subscriber basis. On October 31, 2007, Cable and Yahoo! entered into a renegotiated agreement effective January 1, 2008, under which Cable and Yahoo! will share advertising revenue opportunities leveraging the high-speed Internet access subscribers, and Cable will no longer pay portal fees to Yahoo!. This renegotiated agreement will now expire on December 31, 2011. In connection with the renegotiation of this agreement, Cable made a one-time payment to Yahoo! in the fourth quarter of 2007 of $52 million and Cable's cost of providing its high-speed Internet service will be reduced by approximately $25 million per year over the term of the renegotiated agreement. Rogers' branding of its Internet service is being transitioned to "Rogers Hi-Speed Internet", while the online portal will continue to be branded as "Rogers Yahoo!".
Cable Operations Adjusted Operating Profit
The year-over-year growth in adjusted operating profit was primarily the result of growth in revenue and subscribers in addition to the impact of the elimination of CRTC Part II fees. As a result, Cable Operations adjusted operating profit margins increased to 38.2% for the three months ended December 31, 2007 compared to 37.1% in the corresponding period in 2006.
Cable Operations' base of circuit-switched local telephony customers, which was acquired in July 2005 through the acquisition of Call-Net, is generally less capital intensive than its on-net cable telephony business but also generates lower margins. As a result, the inclusion of the circuit- switched local telephony business with Cable Operations' on-net in-region telephony business has a dilutive impact on operating profit margins.
Rogers Business Solutions
Summarized Financial Results
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(In millions of
dollars,
except margin) 2007 2006 % Chg 2007 2006 % Chg
-------------------------------------------------------------------------
RBS operating
revenue $ 140 $ 155 (10) $ 571 $ 596 (4)
-----------------------------------------------------
Operating expenses
before the
undernoted
Sales and
marketing
expenses 18 19 (5) 75 70 7
Operating, general
and administrative
expenses 114 124 (8) 484 477 1
-----------------------------------------------------
132 143 (8) 559 547 2
-----------------------------------------------------
Adjusted operating
profit(1) 8 12 (33) 12 49 (76)
Stock option
plan amendment(2) - - n/m (2) - n/m
Stock-based
compensation
recovery(2) 1 - n/m - - n/m
Integration and
restructuring
expenses(3) (17) (1) n/m (29) (1) n/m
-----------------------------------------------------
Operating profit
(loss)(1) $ (8) $ 11 n/m $ (19) $ 48 n/m
-----------------------------------------------------
-----------------------------------------------------
Adjusted operating
profit margin(1) 5.7% 7.7% 2.1% 8.2%
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(2) See the section entitled "Stock-based Compensation Expense".
(3) Costs incurred relate to the integration of the operations of Call-
Net and the restructuring of RBS.
Summarized Subscriber Results
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
-----------------------------------------------------
(Subscriber
statistics in
thousands) 2007 2006 Chg 2007 2006 Chg
-------------------
