Rogers Communications Reports Second Quarter 2014 Results

Delivered Healthy Margins and Operating Cash Flow

Introduced Rogers 3.0 Plan to Enhance Customer Experience and Re-Accelerate Growth

Deployed Newly Acquired 700 MHz Wireless Spectrum in Major Canadian Cities Giving Canadians Ultimate Mobile Video Experience

TORONTO, July 24, 2014 /CNW/ - Rogers Communications Inc., a leading diversified Canadian communications and media company, today announced its unaudited consolidated financial and operating results for the second quarter ended June 30, 2014, prepared in accordance with International Financial Reporting Standards (IFRS).

Financial Highlights

"During the second quarter, we continued to improve churn rates, generate strong margins and successfully expand upon our sports media platform," said Guy Laurence, President and Chief Executive Officer of Rogers Communications Inc.

Laurence continued, "Late in the quarter we also announced Rogers 3.0, a seven-point multi-year plan that lays the groundwork to significantly enhance our customer experience and re-accelerate growth relative to peers. Over time this new customer centric structure will streamline the organization, clarify accountabilities, and improve our agility and execution."

Quarterly Highlights

New Strategic Plan Unveiled

• On May 23, 2014, CEO Guy Laurence, unveiled Rogers 3.0, a multi-year, seven-point plan that reflects feedback from thousands of customers, employees and shareholders. The plan builds on Rogers unrivaled asset mix and the underlying strengths of the Company to execute consistently, improve customer experience, and identify and capitalize on opportunities for growth and innovation.

Operating revenue

• Consolidated revenue this quarter was consistent with the second quarter of 2013, reflecting revenue growth of 1% in Media and 6% in Business Solutions. Wireless network revenue was relatively unchanged year over year, a sequential improvement from the 3% decline in the first quarter of 2014. Excluding the decline in roaming revenue due to the new roaming plans introduced over the past year, Wireless network revenue would have been 2% higher than in the second quarter of 2013. Cable revenue was consistent with the second quarter of 2013 as continued Internet revenue growth combined with the impact of pricing changes across all product types was mostly offset by television subscriber losses.
  
  
• Activated 588,000 smartphones, of which 31% were new subscribers, with higher-value smartphone customers growing to 76% of Wireless postpaid subscribers.

Adjusted operating profit and net income

• The increase in consolidated adjusted operating profit reflects increases in Wireless of 3% and Business Solutions of 12%, partly offset by decreases at Cable of 2% and at Media of 16%. Wireless results benefited from lower levels of hardware upgrades and new activations. Cable's results were negatively impacted by higher investment in customer care and network, while Media's results were negatively impacted by lower advertising revenues, and investments in Toronto Blue Jays player salaries, programming costs, Next Issue Canada and Rogers' NHL initiative.
  
  
• Consolidated adjusted operating profit margin was 40.9% this quarter, higher than the same quarter last year, because of strong adjusted operating profit margins at Wireless of 50.4%, and Business Solutions of 29.5%.
  
  
• The reductions in adjusted net income and adjusted earnings per share are primarily the result of 15% higher depreciation and amortization expenses partially offset by the increase in the adjusted operating profit. Net income was 24% lower and diluted earnings per share were 18% lower than the second quarter of 2013.

Enhanced our leading networks to continue monetizing rapid data growth

• Deployed 700 MHz spectrum in select Vancouver, Calgary, Montreal and Toronto communities, delivering the ultimate mobile video experience to Rogers customers as they access the Internet and stream video deep inside buildings, basements and elevators.
  
  
• Announced $450 million of planned investments over the next three years to further expand our wireless network in more than 70 communities across British Columbia, including enhancing existing LTE connections with 700 MHz spectrum to allow customers to access the Internet at broadband speeds in even more places. When complete, Rogers will have invested $2 billion in its network in British Columbia, giving both rural and urban customers reliable and consistent access to the latest technology across the province.

Enriched the customer experience

• Signed a Partner Market agreement with Vodafone to become its partner in Canada. The agreement extends Vodafone's international experience, innovation and scale to Rogers in the Canadian market to generate a number of revenue, cost saving and product opportunities.
  
  
• Launched international wireless travel packs, bundling services consumers and small businesses need to stay connected, including data, talk and text, as well as providing for travellers who want to go online with their smartphone or tablet can now take advantage of a new data-only rate of $9.99 per day.
  
  
• Introduced Rogers Check-In, a new service capability that allows small business customers to quickly and easily review their account at any time with a Small Business Specialist to ensure they have the right services for their business needs.
  
  
• Launched suretap™ wallet, a new application that lets customers use their smartphones to securely store eligible payment cards and make payments at tens of thousands of retailers across the country.
  
  
• Became the first Canadian carrier to give details about how and when we shared customer information in response to requests from legal authorities, through the release of Rogers' 2013 Transparency Report.
  
  
• Rogers Vicinity, an automated loyalty program offering small businesses and their customers access to loyalty programs and awards, won Product of the Year award for the Rewards / Financial Services Programs category by a consumer-voted program. Vicinity's availability was also expanded this quarter to include Western Canada.

Accelerated sports and other content

• Launched Sportsnet WOW, a 24/7, live HD-quality stream of all seven of Sportsnet's TV channels. Designed to keep sports fans connected to their favourite teams, players, and Sportsnet programming, Sportsnet NOW is available on all mobile devices and computers for free with a Sportsnet TV subscription.
  
  
• Unveiled our 2014-2015 NHL national broadcast schedule, delivering double the number of games on free over-the-air TV and twice as many Hockey Night in Canada Saturday night games than ever before for Canadians. Respected announcers Jim Hughson, Dave Randorf, Paul Romanuk and Bob Cole will be the play-by-play team that will call NHL national games across all Rogers media properties, and for Hockey Night in Canada.
  
  
• Next Issue Canada continued to expand the offerings on its digital newsstand by adding People Magazine, National Geographic, Travel + Leisure, and Food & Wine to its already expansive list of more than 140 available North American magazine titles.

Invested in and developed our people

• Named one of Canada's 'Top Employers for Young People' for fifth consecutive year by Canada's Top 100 Employers. Judges noted that Rogers provides exciting and challenging work, a broad range of career opportunities, a strong total rewards package and a chance to work with the best and the brightest in the industry.

Maintained strong balance sheet and available liquidity

• Generated $436 million of consolidated quarterly free cash flow, while cash provided by operating activities was $1,202 million, and repaid $500 million of bank debt that was originally drawn under our credit facility in April 2014 to partially fund our 700 MHz spectrum purchase.
  
  
• Approximately $2.6 billion of available liquidity at June 30, 2014 includes $2.5 billion available under the bank credit facility and $0.1 billion available under the accounts receivable securitization program.

About non-GAAP measures
This earnings release contains non-GAAP measures such as adjusted operating profit, adjusted net income, adjusted basic and diluted earnings per share, adjusted net debt and free cash flow. These are non-GAAP measures and should not be considered as a substitute or alternative for GAAP measures. They are not defined terms under IFRS, and do not have standard meanings, so may not be a reliable way to compare us to other companies. See the section "Non-GAAP Measures" for information about these measures, including how we calculate them.This earnings release contains important information about our business and our performance in the three and six months ended June 30, 2014.

This earnings release is a summary of our Second Quarter 2014 results, and should be read in conjunction with our Second Quarter 2014 MD&A, our Second Quarter 2014 Unaudited Interim Condensed Consolidated Financial Statements and Notes thereto which have been prepared in accordance with IFRS, our 2013 Annual MD&A and our 2013 Audited Annual Consolidated Financial Statements and Notes thereto, and our other recent filings with Canadian and U.S. securities regulatory authorities, which are available on SEDAR at sedar.com or EDGAR at sec.gov, respectively.

All amounts are in Canadian dollars unless otherwise stated. All percentage changes are calculated using the rounded numbers as they appear in the tables. Information is current as of July 23, 2014 and was reviewed by the Audit Committee of our Board of Directors. This earnings release includes forward-looking statements and assumptions. See "About Forward-Looking Information" for more information.

We, us, our, Rogers, Rogers Communications and the Company refer to Rogers Communications Inc. and our subsidiaries: Wireless, Cable, Business Solutions and Media. RCI refers to the legal entity Rogers Communications Inc., not including our subsidiaries. RCI also holds interests in various investments and ventures.

Consolidated Financial Results

Key Changes in Financial Results from 2013

Operating revenue
Wireless network revenue this quarter was consistent with the same period last year. Year to date, Wireless network revenue was lower mainly because of pricing changes made over the past year primarily associated with our customer friendly simplified pricing plans and the introduction in 2013 of lower priced roaming plans.

Cable operating revenue this quarter and year to date was consistent with the same periods last year, mainly because the Internet revenue growth and the impact of pricing increases across all product types was offset by a decline in television and phone revenue associated with TV subscriber losses and a more competitive pricing environment compared to the prior year.

Business Solutions operating revenue was higher this quarter and year to date compared to the same periods last year mainly because of continuing growth in on-net and next generation services and increased revenue from the new data centre businesses partially offset by a reduction in low margin, off-net legacy revenue.

Media operating revenue was higher this quarter and year to date compared to the same periods last year, mainly because of revenue growth at Sportsnet, Radio, Toronto Blue Jays and The Shopping Channel.

Adjusted operating profit
Wireless adjusted operating profit was higher this quarter and year to date compared to the same periods last year, mainly because of lower volumes of subsidized smartphone sales combined with the network revenue changes described above.

Cable adjusted operating profit was lower this quarter and year to date compared to the same periods last year primarily because of increased spending in customer care and network, in addition to offsetting revenue changes discussed above.

Media's adjusted operating profit was lower this quarter and year to date compared to the same periods last year, as the increase in Media's operating revenue was more than offset by investment in player salaries at the Toronto Blue Jays, increased programming costs, and ramp-up costs associated with the launch of Next Issue Canada and the NHL licensing agreement which became effective July 1, 2014.

Results of our Business Segments

WIRELESS

Financial results

Subscriber results ^1,2

Network revenue
Network revenue was consistent this quarter and lower year to date compared to 2013. This represents a sequential improvement from the 3% decline in the first quarter of 2014 and is the net result of:

• higher data revenue related to an increase in postpaid subscriber levels and higher usage of wireless data services; offset by
• the continued adoption of customer friendly simplified pricing plans, which generally bundle in certain features like voicemail, caller ID and domestic long-distance for which we have charged separately in the past, and
• the introduction over the past twelve months of lower priced US and international roaming plans and rates which offer consumers more value.

Excluding the decline in roaming revenue, network revenue would have increased 2% this quarter and 1% year to date compared to the same periods last year.

Postpaid churn continued to improve this quarter falling four basis points to 1.13%, compared to 1.17% in the second quarter of 2013. We believe the improved churn rate is partly attributable to our simplified pricing plans and the introduction of our higher value roaming plans.

Gross postpaid subscriber additions were 312,000 this quarter or 17% lower than the same period last year, which reduced net postpaid subscriber additions to 38,000, despite the lower postpaid churn. The industry transition from three year to two year plans as a result of the recent adoption of the Canadian Radio-television and Telecommunications Commission (CRTC) Wireless Code appears to have slowed overall wireless subscriber growth over the past year.

We activated and upgraded approximately 588,000 smartphones for new and existing subscribers this quarter, compared to approximately 678,000 in the same period last year. The decrease was mainly because there was an 8% reduction in hardware upgrades by existing subscribers this quarter together with the 17% reduction in gross additions.

The percentage of subscribers with smartphones this quarter was 76% of our total postpaid subscriber base, compared to 72% in the second quarter of last year. Smartphone subscribers typically generate significantly higher ARPU and are less likely to churn than customers on less advanced devices.

Data revenue was 12% higher this quarter and 11% higher year to date compared to the same periods last year, mainly because of the continued penetration and growing use of smartphones, tablet devices and wireless laptops, which are increasing the use of e-mail, Internet access, social media, mobile video, text messaging and other wireless data services. Data revenue exceeded voice revenue and represented approximately 51% of total network revenue this quarter, compared to approximately 46% in the same period last year.

Lower equipment sales
Revenue from equipment sales was 12% lower this quarter and 1% lower year to date compared to the same periods last year mainly because of the fewer existing subscriber upgrades and the lower number of gross activations. Year to date, this impact was offset by a shift in the mix of smartphones activated to higher priced devices. During the second quarter, customers choosing to upgrade wireless devices represented approximately 5% of the postpaid subscriber base compared to 6% in the prior year period.

Lower operating expenses
The cost of equipment sales was 12% lower this quarter and 13% lower year to date compared to the same periods last year, mainly because of fewer subscriber hardware upgrades and fewer gross activations, as described above.

Total customer retention spending (including subsidies on handset upgrades) was $209 million this quarter, consistent with $208 million in the same period last year. Year to date retention spending decreased to $420 million compared to $455 million last year as 11% fewer existing subscribers upgraded their hardware.

Other operating expenses (excluding retention spending) were up by 1% this quarter as improvements in cost management and efficiency were offset by investments in customer care, and were relatively consistent year to date.

Higher adjusted operating profit
Adjusted operating profit was 3% higher this quarter and year to date compared to the same periods last year because of:

• continued growth of wireless data revenue and improvement in churn
• lower volumes of hardware sales and upgrades
• partially offset by pricing changes associated with our simplified plans and the introduction of lower priced and higher value roaming plans.

CABLE

Financial results

Subscriber results ¹

Operating revenue
Overall cable revenue this quarter and year to date was consistent to the same periods last year, the net result of:

• continued growth in subscribers to our Internet and phone products combined with the impact of pricing changes
• the May 2013 acquisition of Mountain Cable
• offset by television subscriber losses and retention-related discounting.

Lower television revenue
Revenue from television was down this quarter and year to date as a result of:

• the year-over-year decline in television subscribers
• the impact of promotional and retention pricing activity associated with heightened pay TV competition
• partially offset by the acquisition of Mountain Cable and the impact of pricing changes implemented over the past year.

The digital cable subscriber base represented 86% of our total television subscriber base at the end of the quarter, compared to 82% at June 30, 2013. The larger selection of digital content, video on-demand, HDTV and PVR equipment, combined with the ongoing analog to digital conversion initiative, continues to contribute to the increasing penetration of the digital subscriber base as a percentage of our total television subscriber base.

Higher Internet revenue
Internet revenue was 9% higher this quarter and year to date compared to the same periods last year as a net result of a larger Internet subscriber base, general movement to higher end speed and usage tiers, and changes in Internet service pricing.

Our Internet customer base is approximately 2.0 million subscribers, and Internet penetration represents:

• 96% of our television subscribers, compared to 88% at June 30, 2013
• 50% of the homes passed by our cable network, compared to 49% at June 30, 2013.

Lower cable telephony revenue
Phone revenue was 3% lower this quarter and 2% lower year to date compared to the same periods last year. This was the net result of:

• higher promotional pricing activity for new subscribers on multi-product bundles
• partially offset by a higher phone subscriber base and the impact of pricing changes.

There were 2% more phone subscribers this quarter compared to last year, the penetration of which now represents:

• 56% of our television subscribers, compared to 52% last year
• 29% of the homes passed by our cable network, compared to 29% last year.

Higher operating expenses
Operating expenses were 2% higher this quarter and 3% higher year to date compared to the same periods last year mainly due to:

• higher investments in customer care and network
• incremental costs associated with Mountain Cable which was acquired in May 2013
• partially offset by various cost efficiency and productivity initiatives.

Additionally, year to date Cable results in 2013 benefitted from a one-time $8 million positive adjustment to licence fees payable to match the CRTC's billing period.

Adjusted operating profit
Adjusted operating profit was 2% lower this quarter and 3% lower year to date compared to the same periods last year, mainly the net result of the service revenue levels which were consistent and the higher operating expenses as discussed above.

BUSINESS SOLUTIONS

Financial results

Business Solutions continues to focus mainly on next generation IP-based services, and on leveraging higher margin on-net and near-net service revenue opportunities, using existing network facilities to expand offerings to the medium and large sized enterprise, public sector and carrier wholesale markets. Business Solutions is also focused on data centre colocation, hosting, cloud and disaster recovery services. Next generation services in the second quarter represented 71% of total service revenue. Revenue from the lower margin off-net legacy business generally includes local and long-distance voice services and legacy data services which often use facilities that are leased from other carriers rather than owned.

Higher operating revenue
Service revenue was 6% higher this quarter and 8% higher year to date compared to the same periods last year, the net result of:

• growth from the acquisitions of Blackiron and Pivot Data Centres in 2013
• continuing execution of our plan to grow higher margin on-net and next generation IP-based services revenue
• partially offset by the continuing decline in the legacy off-net voice and data business, a trend we expect to continue as we focus the business on on-net opportunities and customers move to more advanced and cost effective IP services.

Excluding data centre acquisitions, service revenue this quarter would have been 8% lower, and next generation services revenue this quarter would have been 8% higher, compared to same period last year.

Equipment sales were unchanged this quarter compared to the second quarter of 2013 and were lower year to date as the first quarter of 2013 included a non-recurring equipment sale.

Higher operating expenses this quarter
Operating expenses were 3% higher this quarter compared to the same period last year, the net result of:

• higher on-net and next generation service costs associated with higher volumes
• incremental expenses related to our data centre acquisitions
• partially offset by lower legacy service costs related to the planned lower volumes and customer levels, and ongoing initiatives to improve costs and productivity.

Operating expenses were 1% lower year to date as the comparative period included cost of sales associated with a non-recurring equipment sale.

Higher adjusted operating profit
Adjusted operating profit was 12% higher this quarter and 17% higher year to date compared to the same periods last year, the net result of the contribution of the new data centres, the continued growth in higher margin on-net and next generation business, and cost efficiency and productivity improvements.

MEDIA

Financial results

Higher operating revenue
Operating revenue was 1% higher this quarter and 4% higher year to date compared to the same periods last year, the net result of:

• higher subscription revenue generated by our Sportsnet properties
• higher revenue associated with the Toronto Blue Jays
• higher sales at Radio, The Shopping Channel and Next Issue Canada
• partially offset by lower advertising revenue in television and the impact of 25 fewer NHL games in 2014 resulting from the compressed season in the prior year.

Higher operating expenses
Operating expenses were 4% higher this quarter and 8% higher year to date compared to the same periods last year, the net result of investments made for:

• higher player salaries at the Toronto Blue Jays
• higher programming costs due to contractual rate increases and our investments to secure premium and exclusive content partially offset by savings from fewer NHL games aired in 2014
• higher merchandise costs at The Shopping Channel driven by the increased sales
• costs associated with the growth of Next Issue Canada which launched in late 2013
• the ramp-up associated with the NHL licensing agreement which became effective July 1, 2014.

Lower adjusted operating profit
Adjusted operating profit was lower this quarter and year to date compared to the same periods last year, reflecting the revenue and expense changes described above.

ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT

Total capital spending this quarter and year to date was higher than in the same periods of 2013, as we expected, reflecting a heightened focus on deploying our capital in a way that better spreads the work more manageably throughout the year.

Wireless
Wireless capital additions in 2014 reflect LTE capacity investments, site build activity to further enhance network coverage and quality, and our continued deployment of the LTE network, which reached approximately 77% of Canada's population at June 30, 2014.

Cable
Cable capital additions were 10% lower this quarter and 9% higher year to date compared to the same period last year, mainly due to timing of initiatives. Investments this year were made to improve the capacity and speed of our Internet platforms as well as for various network components to enhance the overall reliability and quality of the network and development costs related to next generation IP based video services. We also invested in customer premise equipment related to the continued roll out of our next generation NextBox digital set-top boxes and for the analog to digital subscriber migration.

Business Solutions
Business Solutions capital additions were higher this quarter and year to date compared to the same periods last year because we spent more on expanding customer specific networks and because of capital investments made by Blackiron and Pivot Data Centres, which we acquired last year.

Media
Media capital additions were higher this quarter and year to date compared to the same period last year due to investments made to our IT infrastructure and broadcast facilities, a portion of which was associated with a ramp up in facilities and capabilities associated with the NHL licencing agreement.

Financial Guidance

We have no changes to the 2014 annual consolidated guidance ranges for adjusted operating profit, additions to property, plant and equipment, and free cash flow that we provided on February 12, 2014. See the sections entitled "About Forward-Looking Information" in this earnings release and in our 2013 Annual MD&A.

Non-GAAP Measures

We use the following Non-GAAP measures. These are reviewed regularly by management and our Board in assessing our performance and making decisions regarding the ongoing operations of our business and its ability to generate cash flows. These measures are also used by investors, lending institutions and credit rating agencies as an indicator of our operating performance and our ability to incur and service debt, and as a measurement to value companies in the telecommunications sector. These are not recognized measures under GAAP and do not have a standardized meaning under IFRS, so they may not be a reliable way to compare us to other companies.

About Forward-Looking Information 

This earnings release includes "forward-looking information" within the meaning of applicable securities laws, and assumptions about, among other things, our business, operations and financial performance and condition approved by management on the date of this earnings release. This forward-looking information and these assumptions include, but are not limited to, statements about our objectives and strategies to achieve those objectives, and about our beliefs, plans, expectations, anticipations, estimates or intentions.

Forward-looking information and statements

• typically include words like could, expect, may, anticipate, assume, believe, intend, estimate, plan, project, guidance, outlook and similar expressions, although not all forward-looking information and statements include them
• include conclusions, forecasts and projections that are based on our current objectives and strategies and on estimates, expectations, assumptions and other factors, most of which are confidential and proprietary and that we believe to be reasonable at the time they were applied but may prove to be incorrect
• were approved by our management on the date of this earnings release.

Our forward-looking information and statements include forecasts and projections related to the following items, among others:

• revenue
• adjusted operating profit
• property, plant and equipment expenditures
• cash income tax payments
• free cash flow
• dividend payments
• expected growth in subscribers and the services they subscribe to
• the cost of acquiring subscribers and deployment of new services
• continued cost reductions and efficiency improvements
• the growth of new products and services
• all other statements that are not historical facts.

We base our conclusions, forecasts and projections on the following factors, among others:

• general economic and industry growth rates
• currency exchange rates
• product pricing levels and competitive intensity
• subscriber growth
• pricing, usage and churn rates
• changes in government regulation
• technology deployment
• availability of devices
• timing of new product launches
• content and equipment costs
• the integration of acquisitions
• industry structure and stability.