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Rogers Communications Reports Strong Second Quarter 2006 Results2 August 2006
-----------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------
(In millions
of dollars) 2006 2005 % Chg 2006 2005 % Chg
-------------------------------------------------------------------------
Operating
revenue $2,236.3 $1,732.5 29.1 $4,268.0 $3,314.9 28.8
Operating
profit(1) 742.1 565.5 31.2 1,338.4 1,040.6 28.6
Net income
(loss) 277.5 19.2 n/m 292.4 (26.8) n/m
Earnings
(loss) per
share
- basic 0.88 0.07 n/m 0.93 (0.10) n/m
- diluted 0.87 0.07 n/m 0.91 (0.10) n/m
-------------------------------------------------------------------------
(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 generally accepted accounting
principles ("GAAP"). See the "Reconciliation of Operating Profit to
Net Income (Loss) for the Period" section for a reconciliation of
operating profit to operating income and net income (loss) under GAAP
and the "Key Performance Indicators and Non-GAAP Measures" section.
Highlights of the second quarter of 2006 include the following:
- Operating revenue increased 29.1% for the quarter, with all three of
our operating units delivering solid growth, including 19.4% growth
at Rogers Wireless ("Wireless"), 57.3% growth at Rogers Cable and
Telecom ("Cable and Telecom") and 13.8% growth at Rogers Media
("Media"). On a pro forma basis, assuming the acquisition of Call-Net
Enterprises Inc. ("Call-Net") had occurred on January 1, 2005,
consolidated revenue growth would have been 14.7%.
- Consolidated quarterly operating profit grew 31.2% year-over-year,
primarily driven by 33.4% growth at Wireless, 35.4% growth at Cable
and Telecom and 17.6% growth at Media. On a pro forma basis, assuming
the acquisition of Call-Net had occurred on January 1, 2005,
consolidated operating profit growth would have been 24.4%.
- Postpaid subscriber growth continued to be strong at Wireless, where
quarterly net additions of 130,000 subscribers reflected an 11.6%
increase from the postpaid subscriber growth of 116,500 reported in
the second quarter of 2005. Cumulative postpaid subscribers have
increased 14.8% year-over-year, reflecting Wireless' continued focus
on the postpaid segment of the market.
- Wireless postpaid subscriber monthly churn continued to decrease,
down 20 basis points to 1.27% versus 1.47% in the second quarter of
2005, while postpaid monthly ARPU (average revenue per subscriber)
increased 6.9% in the quarter to $67.26. This increase reflects a
65.1% lift in data revenues, which represented 10.5% of total network
revenue in the quarter as well as continued growth in roaming and
optional services.
- Cable and Telecom ended the quarter with more than 164,700
residential voice-over-cable telephony subscriber lines, with net
additions of 68,000 cable telephony subscriber lines for the quarter.
Availability of voice-over-cable telephony service expanded through
the second quarter of 2006, with service now available to
approximately 90% of the homes in Cable and Telecom's cable service
areas. The combined number of local telephony lines on both the cable
telephony and circuit-switched platforms from Rogers Home Phone and
Rogers Business Solutions reached 734,500.
- Cable and Telecom added 38,900 net digital cable households in the
quarter to reach a total of 1,002,200, while residential high-speed
Internet subscribers grew by 21,600 in the quarter to a total of
1,198,200. The second quarter is seasonally the slowest of the year
for subscriber net additions reflecting the adjournment of colleges
and universities for the summer break.
- Cable and Telecom significantly expanded the availability of their
high-speed Internet services across Canada. Portable Internet from
Rogers Yahoo!, a fixed wireless offering, was made available in major
cities across Canada at the beginning of the second quarter, while
ADSL2 high-speed Internet service was launched in Vancouver and other
Ontario centres outside of Cable and Telecom's traditional cable
footprint.
- Media's operating profit increased 17.6% from the same quarter in
2005 on solid growth across all divisions. Media entered into an
agreement to purchase certain radio stations in Alberta for an
estimated purchase price of $39.7 million, subject to regulatory
approval, and also received regulatory approval to increase its
ownership of Biography Canada and G4TechTV Canada to now hold 100%
and 66 2/3%, respectively.
- Rogers was the lead Canadian broadcaster for the coverage of FIFA's
2006 World Cup Soccer - the world's single largest sporting event
which recently concluded in Germany. We provided unprecedented
coverage across our various broadcast and distribution platforms,
including Rogers Sportsnet, Rogers Wireless, Rogers Digital Cable,
Rogers Yahoo! Hi-Speed Internet, and Rogers OMNI Television.
- On June 1, 2006, we repaid at maturity the 10.5% Wireless Senior
Secured Notes in the aggregate principal amount outstanding of
$160 million.
- We declared a semi-annual dividend of $0.075 per share on each
outstanding RCI Class B Non-Voting share and RCI Class A Voting
share, which was paid on July 4, 2006 to shareholders of record on
June 14, 2006.
"This was an excellent quarter with solid financial and operating results in nearly every part of the company and a continuation of the momentum we established early in the year," said Ted Rogers, President and CEO of Rogers Communications Inc. "Our steady focus on execution, integration and profitable growth is clearly reflected in these second quarter financial results, while our commitment to delivering unparalleled innovation and service for our customers speaks for itself in our continued healthy subscriber growth and retention results."
ROGERS COMMUNICATIONS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
This management's discussion and analysis ("MD&A") should be read in conjunction with our 2005 Annual MD&A and our 2005 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 23 to our 2005 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, 2005. This MD&A is current as of July 31, 2006.
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 wholly owned subsidiary Rogers
Wireless Communications Inc. and its subsidiaries, including Rogers
Wireless Inc. ("RWI") and its subsidiaries;
- "Cable and Telecom", which refers to our wholly owned subsidiary
Rogers Cable Inc. and its subsidiaries. RCI acquired Call-Net
Enterprises Inc. on July 1, 2005 and subsequently changed its name to
Rogers Telecom Holdings Inc. ("RTHI"). The results of RTHI and RTHI's
operating subsidiaries ("Telecom") are consolidated effective as of
the July 1, 2005 acquisition date. On January 9, 2006, RCI's
ownership interest in Telecom was transferred to Rogers Cable Inc.
from RTHI. Beginning with the first quarter of 2006, the Cable and
Telecom operating unit reports its results according to the following
segments: Cable and Internet; Rogers Home Phone (voice-over-cable
telephony subscribers from Cable and residential circuit-switched
telephony customers from Telecom); Rogers Business Solutions
(business telephony and data subscribers primarily from Telecom); and
Video store operations. Comparative figures have been reclassified to
conform to this new segment reporting.
- "Media", which refers to our wholly owned subsidiary Rogers Media
Inc. and its subsidiaries including Rogers Broadcasting, which owns
Rogers Sportsnet 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.
"RCI" refers to the legal entity Rogers Communications Inc. excluding our subsidiaries.
Throughout this MD&A, percentage changes are calculated using numbers rounded to the decimal to which they appear.
SUMMARY CONSOLIDATED FINANCIAL RESULTS
-------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------
(In millions
of dollars,
except per
share
amounts) 2006 2005(4) % Chg 2006 2005(4) % Chg
-------------------------------------------------------------------------
Operating
revenue
Wireless $1,151.1 $ 963.9 19.4 $2,202.4 $1,839.3 19.7
Cable and
Telecom
Cable and
Internet 486.4 425.3 14.4 951.0 846.8 12.3
Rogers Home
Phone 85.8 - n/m 166.2 - n/m
Rogers
Business
Solutions 143.5 1.1 n/m 292.5 2.2 n/m
Video
stores 72.2 74.7 (3.3) 153.2 158.4 (3.3)
Corporate
items and
elimi-
nations (1.0) (1.0) - (2.0) (2.0) -
-----------------------------------------------------------
786.9 500.1 57.3 1,560.9 1,005.4 55.3
Media 333.8 293.4 13.8 574.0 512.7 12.0
Corporate
items and
elimi-
nations (35.5) (24.9) 42.6 (69.3) (42.5) 63.1
-----------------------------------------------------------
Total 2,236.3 1,732.5 29.1 4,268.0 3,314.9 28.8
Operating
expenses,
including
integration
and Video
store closure
expenses
Wireless 664.3 599.1 10.9 1,310.5 1,176.2 11.4
Cable and
Telecom
Cable and
Internet 276.3 253.0 9.2 545.4 498.0 9.5
Rogers
Home
Phone 80.9 - n/m 156.7 - n/m
Rogers
Business
Solutions 126.1 4.5 n/m 262.3 8.7 n/m
Video
stores 70.6 72.0 (1.9) 150.0 148.5 1.0
Integration
costs 1.6 - n/m 4.4 - n/m
Corporate
items and
elimi-
nations (1.0) (1.0) - (2.0) (2.0) -
-----------------------------------------------------------
554.5 328.5 68.8 1,116.8 653.2 71.0
Media 281.8 249.2 13.1 508.9 457.2 11.3
Corporate
items and
elimi-
nations (6.4) (9.8) (34.7) (6.6) (12.3) (46.3)
-----------------------------------------------------------
Total 1,494.2 1,167.0 28.0 2,929.6 2,274.3 28.8
Operating
profit, after
integration
and Video
store closure
expenses(1)
Wireless 486.8 364.8 33.4 891.9 663.1 34.5
Cable and
Telecom
Cable and
Internet 210.1 172.3 21.9 405.6 348.8 16.3
Rogers Home
Phone 4.9 - n/m 9.5 - n/m
Rogers
Business
Solutions 17.4 (3.4) n/m 30.2 (6.5) n/m
Video stores 1.6 2.7 (40.7) 3.2 9.9 (67.7)
Integration
costs (1.6) - n/m (4.4) - n/m
-----------------------------------------------------------
232.4 171.6 35.4 444.1 352.2 26.1
Media 52.0 44.2 17.6 65.1 55.5 17.3
Corporate
items and
elimi-
nations (29.1) (15.1) 92.7 (62.7) (30.2) 107.6
-----------------------------------------------------------
Total 742.1 565.5 31.2 1,338.4 1,040.6 28.6
-----------------------------------------------------------
Other income
and expense,
net(2) 464.6 546.3 (15.0) 1,046.0 1,067.4 (2.0)
-----------------------------------------------------------
Net income
(loss) $ 277.5 $ 19.2 n/m $ 292.4 $ (26.8) n/m
-----------------------------------------------------------
Earnings
(loss) per
share
- basic $ 0.88 $ 0.07 n/m $ 0.93 $ (0.10) n/m
- diluted 0.87 0.07 n/m 0.91 (0.10) n/m
Additions to
PP&E(1)
Wireless $ 207.0 $ 153.7 34.7 $ 321.9 $ 273.0 17.9
Cable and
Telecom
Cable and
Internet 106.9 136.3 (21.6) 188.7 223.1 (15.4)
Rogers Home
Phone 37.5 35.0 7.1 59.1 58.9 0.3
Rogers
Business
Solutions 16.3 6.2 162.9 23.8 7.7 n/m
Video
stores 1.3 4.2 (69.0) 2.4 7.8 (69.2)
-----------------------------------------------------------
162.0 181.7 (10.8) 274.0 297.5 (7.9)
Media 16.2 8.8 84.1 25.4 22.4 13.4
Corp-
orate(3) 17.5 0.5 n/m 121.5 12.3 n/m
-----------------------------------------------------------
Total $ 402.7 $ 344.7 16.8 $ 742.8 $ 605.2 22.7
-----------------------------------------------------------
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" section. Operating profit includes integration and Video
store closure expenses of $3.1 million and $14.1 million for the
three and six months ended June 30, 2006, respectively.
(2) See the "Reconciliation of Operating Profit to Net Income (Loss) for
the Period" section for details of these amounts.
(3) Corporate additions to PP&E for the six months ended June 30, 2006
includes $104.8 million for RCI's purchase of real estate in
Brampton. In addition, during the three and six months ended June 30,
2006, RCI's improvements related to the Brampton real estate totalled
$0.7 million and $7.1 million, respectively.
(4) Certain prior year amounts have been reclassified to conform to the
current year presentation.
For discussions of the results of operations of each of these segments, refer to the respective segment sections of this MD&A.
Reconciliation of Operating Profit to Net Income (Loss) for the Period
The items listed below represent the consolidated income and expense amounts that are required to reconcile operating profit to the net income (loss) for the period as defined under Canadian GAAP. 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 10 to the Interim Consolidated Financial Statements entitled "Segmented Information".
-------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------
(In millions
of dollars) 2006 2005 % Chg 2006 2005 % Chg
-------------------------------------------------------------------------
Operating
profit(1) $ 742.1 $ 565.5 31.2 $1,338.4 $1,040.6 28.6
Depreciation
and
amortization (394.8) (358.8) 10.0 (780.9) (700.4) 11.5
-----------------------------------------------------------
Operating
income 347.3 206.7 68.0 557.5 340.2 63.9
Interest
expense on
long-term
debt (154.7) (180.3) (14.2) (316.3) (365.1) (13.4)
Foreign
exchange
gain (loss) 45.3 (18.2) n/m 41.1 (24.2) n/m
Change in
the fair
value of
derivative
instruments (32.7) 10.5 n/m (29.6) 15.3 n/m
Other
income, net 4.3 4.3 (0.0) 6.6 14.3 (53.8)
Income tax
recovery
(expense) 68.0 (3.8) n/m 33.1 (7.3) n/m
-----------------------------------------------------------
Net income
(loss) $ 277.5 $ 19.2 n/m $ 292.4 $ (26.8) n/m
-----------------------------------------------------------
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" section.
Depreciation and Amortization Expense
The increases in depreciation and amortization expense for the three and six months ended June 30, 2006 as compared to the corresponding periods in 2005 primarily reflect the additional depreciation and amortization recognized on the fixed and intangible assets arising from the acquisition of Telecom as well as capital expenditures.
Operating Income
The growth in our consolidated operating income for the three and six months ended June 30, 2006 as compared to the corresponding periods in 2005 results from the higher operating profit across all of our operating units. See the section entitled "Operating Unit Review" for a detailed discussion of operating unit results.
Interest on Long-Term Debt
The reductions in interest expense for the three and six months ended June 30, 2006 compared to the corresponding periods in 2005 are primarily due to the decrease in debt as at June 30, 2006, compared to June 30, 2005, of more than $1.0 billion, including the impact of cross-currency interest rate exchange agreements. This decrease in debt was largely the result of the conversions during 2005 into Class B Non-Voting shares of our 5.75% Convertible Debentures due 2005 and our 5.5% Convertible Preferred Securities due 2009, the repayment at maturity in February 2006 of RCI's $75.0 million 10.50% Senior Notes, as well as the repayment in June 2006 of the 10.5% Wireless Senior Secured Notes in the aggregate principal amount outstanding of $160 million.
Foreign Exchange (Gain) Loss
The year-over-year change to foreign exchange gains during the three and six months ended June 30, 2006 from losses during the corresponding periods in 2005 reflects the recent strengthening of the Canadian dollar compared to its weakening during 2005. During the three months ended June 30, 2006, the Canadian dollar strengthened by 5.1 cents versus the U.S. dollar from $1.1659 at March 31, 2006 to $1.1150, compared to a 1.6 cent decrease in the Canadian dollar in corresponding period of 2005. During the six months ended June 30, 2006, the Canadian dollar strengthened by 4.8 cents compared to a 2.2 cent decrease in the Canadian dollar in the corresponding period of 2005.
Change in Fair Value of Derivative Instruments
The loss of $32.7 million and $29.6 million in the three and six months ended June 30, 2006, respectively, were the result of the changes in the Canadian dollar relative to that of the U.S. dollar as described above and the resulting change in fair value of our cross-currency interest rate exchange agreements not accounted for as hedges.
Other Income
Other income for the three and six months ended June 30, 2006 was primarily associated with distributions and investment income received from certain of our investments, while other income for the three and six months ended June 30, 2005 was primarily associated with gains on the sale of various investments.
Income Taxes
Current income tax expense has historically consisted primarily of the Canadian Federal Large Corporations Tax ("LCT"). Due to the elimination of the LCT, a current income tax recovery of $2.3 million was recorded for the three month period ended June 30, 2006 which includes a reversal of LCT expensed during the first quarter of 2006.
A net future income tax recovery of $65.7 million and $33.6 million has been recorded for the three and six month periods ended June 30, 2006, respectively. Based on management's assessment of the expected realization of future income tax assets during the current period, we reduced the valuation allowance recorded against certain future income tax assets by $429.2 million to reflect that it is more likely than not that the future income tax assets will be realized. Approximately $300.2 million of the reduction in the valuation allowance related to future income tax assets arising on acquisitions. Accordingly, the benefit related to these assets has been reflected as a reduction of goodwill in the amount of $208.6 million and other intangible assets in the amount of $91.6 million.
Net Income (Loss) and Earnings (Loss) Per Share
As a result of the changes discussed above, we recorded net income of $277.5 million for the three months ended June 30, 2006 or basic earnings per share of $0.88 (diluted - $0.87), compared to a net income of $19.2 million or basic earnings per share of $0.07 (diluted -$0.07) in the corresponding period in 2005. For the six months ended June 30, 2006, we recorded net income of $292.4 million or basic earnings per share of $0.93 (diluted - $0.91), compared to a loss of $26.8 million or basic loss per share of $0.10 (diluted - $0.10) in the corresponding period in 2005.
BASIS OF PRO FORMA INFORMATION
Certain financial and operating data information in the MD&A has been prepared on a pro forma basis as if the acquisition of Telecom, as described in our 2005 Annual MD&A, had occurred on January 1, 2005. Such information is based on our historical financial statements, the historical financial statements of Telecom and the accounting for this business combination.
Although we believe this presentation provides certain relevant contextual and comparative information for existing operations, the unaudited pro forma consolidated financial and operating data presented in this document is for illustrative purposes only and does not purport to represent what the results of operations actually would have been if the acquisition of Telecom had occurred on January 1, 2005, nor does it purport to project the results of operations for any future period.
This pro forma information reflects, among other things, adjustments to Telecom's historically reported financial information to conform to our accounting policies and the impacts of purchase accounting. The pro forma adjustments are based upon certain estimates and assumptions that we believe are reasonable. Accounting policies used in the preparation of these statements are those disclosed in our 2005 Annual Audited Consolidated Financial Statements and Notes thereto.
Certain tables in the "Cable and Telecom" section present selected unaudited pro forma information.
OPERATING UNIT REVIEW
WIRELESS
--------
Wireless Financial Results
-------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------
(In millions
of dollars,
except
margin) 2006 2005 % Chg 2006 2005 % Chg
-------------------------------------------------------------------------
Operating
revenue
Postpaid $1,002.5 $ 816.7 22.8 $1,909.2 $1,567.0 21.8
Prepaid 48.8 53.0 (7.9) 95.4 101.0 (5.6)
One-way
messaging 4.0 5.0 (20.0) 7.5 10.0 (25.0)
-----------------------------------------------------------
Network
revenue 1,055.3 874.7 20.6 2,012.1 1,678.0 19.9
Equipment
sales 95.8 89.2 7.4 190.3 161.3 18.0
-----------------------------------------------------------
Total
operating
revenue 1,151.1 963.9 19.4 2,202.4 1,839.3 19.7
-----------------------------------------------------------
Operating
expenses
Cost of
equipment
sales $ 189.7 $ 161.3 17.6 384.3 320.9 19.8
Sales and
marketing
expenses 137.6 133.2 3.3 265.8 257.2 3.3
Operating,
general
and admin-
istrative
expenses 335.8 292.9 14.7 655.9 582.5 12.6
Integration
expenses(1) 1.2 11.7 (89.7) 4.5 15.6 (71.2)
-----------------------------------------------------------
Total
operating
expenses 664.3 599.1 10.9 1,310.5 1,176.2 11.4
-----------------------------------------------------------
Operating
profit(2)(3) $ 486.8 $ 364.8 33.4 891.9 663.1 34.5
-----------------------------------------------------------
Operating
profit
margin as %
of network
revenue(3) 46.1% 41.7% 44.3% 39.5%
Additions to
property,
plant and
equipment
("PP&E")(3) $ 207.0 $ 153.7 34.6 $ 321.9 $ 273.0 17.9
-------------------------------------------------------------------------
(1) Expenses incurred relate to the integration of the operations of Fido
Solutions Inc ("Fido"), a wholly owned subsidiary of Rogers Wireless
Inc.
(2) Operating profit includes a loss of $5.3 million and $7.9 million
related to the Inukshuk wireless broadband initiative for the three
and six months ended June 30, 2006, respectively (2005 - loss of
$2.9 million and $4.4 million for the three and six months ended
June 30, 2005, respectively).
(3) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" section.
Wireless Network Revenue and Subscribers
-------------------------------------------------------------------------
Three Months Ended June 30,
---------------------------------------
(Subscriber statistics in
thousands, except ARPU, churn
and usage) 2006 2005 Chg % Chg
-------------------------------------------------------------------------
Postpaid
Gross additions 318.2 306.8 11.4 3.7
Net additions 130.0 116.5 13.5 11.6
Total postpaid retail
subscribers
Average monthly revenue per
user ("ARPU")(1) $ 67.26 $ 62.92 $ 4.34 6.9
Average monthly usage (minutes) 561 511 50 9.8
Monthly churn 1.27% 1.47% (0.20%) (13.6)
Prepaid
Gross additions 138.4 139.8 (1.4) (1.0)
Net additions (losses)(2) (15.9) 8.0 (23.9) -
Total prepaid retail
subscribers
ARPU(1) $ 12.57 $ 13.52 $ (0.95) (7.0)
Monthly churn(2) 3.97% 3.37% 0.60% 17.8
Wholesale
Total wholesale subscribers
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------
(Subscriber statistics in
thousands, except ARPU, churn
and usage) 2006 2005 Chg % Chg
-------------------------------------------------------------------------
Postpaid
Gross additions 621.8 636.4 (14.6) (2.3)
Net additions 219.6 205.7 13.9 6.8
Total postpaid retail
subscribers 5,037.8 4,389.8 648.0 14.8
Average monthly revenue per
user ("ARPU")(1) $ 64.75 $ 61.07 $ 3.68 6.0
Average monthly usage (minutes) 541 483 58 12.0
Monthly churn 1.37% 1.69% (0.32%) (18.9)
Prepaid
Gross additions 264.9 263.1 1.8 0.7
Net additions (losses)(2) (56.8) (16.2) (40.6) -
Total prepaid retail
subscribers 1,293.0 1,317.9 (24.9) (1.9)
ARPU(1) $ 12.12 $ 12.79 $ (0.67) (5.2)
Monthly churn(2) 4.08% 3.54% 0.54% 15.3
Wholesale
Total wholesale subscribers 123.8 106.4 17.4 16.4
-------------------------------------------------------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" section. As calculated in the "Supplementary Information"
section.
(2) Effective November 9, 2004, the deactivation of prepaid subscribers
acquired from Fido is recognized after 180 days of no usage to
conform to the Wireless prepaid churn definition. This had the impact
of decreasing prepaid subscriber net losses by approximately 12,000
in the six months ended June 30, 2005 and reducing prepaid churn by
0.18% for the six months ended June 30, 2005. There was no impact in
the three months ended June 30, 2005 or any period in 2006.
Wireless Network Revenue
The increases in network revenue for the three and six months ended June 30, 2006 compared to the prior year periods were driven by the continued growth of Wireless' postpaid subscriber base and improvements in postpaid average monthly revenue per user ("ARPU").
During the three and six months ended June 30, 2006, the increases in postpaid subscriber net additions were largely driven by the launch of innovative handsets and wireless applications, many of which are exclusive to Rogers, as well as unique promotions such as Wireless' successful Mother's Day and Fido Instant Messaging promotions. The net losses of prepaid subscribers during the second quarter and year-to-date period reflect Wireless' strategic focus on the postpaid segment of the market and highly competitive prepaid offerings in the market. In total, Wireless ended the quarter with a total of 6,330,800 postpaid and prepaid retail wireless subscribers.
The year-over-year increases in postpaid ARPU for both the second quarter and year-to-date periods reflect the combination of higher data and roaming revenues and increases in the penetration of optional services.
During the three and six months ended June 30, 2006, wireless data revenue increased by 65.1% and 68.3%, respectively, over the corresponding periods in 2005 and totalled $110.7 million and $209.2 million, respectively. These increases in data revenue reflect the continued rapid growth of text and multimedia messaging services, wireless Internet access, BlackBerry, downloadable ring tones, music and games, and other wireless data services and applications. For the second quarter of 2006, data revenue represented approximately 10.5% of total network revenue compared to 7.6% in the same period last year.
Roaming revenues during the three and six months ended June 30, 2006 increased 20.3% and 26.1%, respectively, over the corresponding periods in 2005. As Canada's only GSM/GPRS/EDGE provider, Wireless experienced increases in outbound roaming revenues from its subscribers travelling outside of Canada as well as strong growth in inbound roaming revenues from travelers to Canada who utilized Wireless' network.
Wireless' success in the continued reduction in postpaid churn largely reflects proactive and targeted customer retention activities as well as the increased network density and coverage quality resulting from the completion of the integration of the Fido GSM network in 2005. Wireless continues to have opportunity for improvement in the area of prepaid churn which, has increased on a year-over-year basis. The churn increase was largely due to competitive prepaid offerings in the market. Wireless is evaluating alternatives to enhance the competitiveness of Wireless' prepaid offerings. (See the section entitled "Caution Regarding Forward-Looking Statements" below).
Wireless Equipment Sales
The year-over-year increases in revenue from equipment sales, including activation fees and net of equipment subsidies, reflects the increased volume of handset upgrades associated with subscriber retention programs combined with the generally higher prices of handsets and devices.
Wireless Operating Expenses
-------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------
(In millions
of dollars,
except per
subscriber
statistics) 2006 2005 % Chg 2006 2005 % Chg
-------------------------------------------------------------------------
Operating
expenses
Cost of
equipment
sales $ 189.7 $ 161.3 17.6 $ 384.3 $ 320.9 19.8
Sales and
marketing
expenses 137.6 133.2 3.3 265.8 257.2 3.3
Operating,
general
and admin-
istrative
expenses 335.8 292.9 14.7 655.9 582.5 12.6
Integration
expenses(1) 1.2 11.7 (89.7) 4.5 15.6 (71.3)
-----------------------------------------------------------
Total
operating
expenses $ 664.3 $ 599.1 10.9 $1,310.5 $1,176.2 11.4
-----------------------------------------------------------
-----------------------------------------------------------
Average
monthly
operating
expense per
subscriber
before
sales and
marketing
expenses(2) $ 20.01 $ 19.52 2.5 $ 19.81 $ 19.36 2.3
Sales and
marketing
costs per
gross
subscriber
addition(2) $ 397 $ 374 6.1 $ 403 $ 377 6.9
-------------------------------------------------------------------------
(1) Expenses incurred related to the integration of the operations of
Fido.
(2) As defined. See the "Key Performance Indicator and Non-GAAP Measures"
section. As calculated in the "Supplementary Information" section.
The increases in cost of equipment sales for the three and six months ended June 30, 2006, were directly the result of the increased volume of handset upgrades, as discussed above.
Sales and marketing expenses increased slightly year-over-year compared to the corresponding periods in 2005 as Wireless' marketing efforts continue to include targeted programs to acquire higher value customers on longer term contracts, resulting in increases in sales and marketing costs per gross addition. During the second quarter of 2006, Wireless also launched a new collection of MP3 and video phones as well as an exclusive agreement with 2006 FIFA World Cup Soccer whereby for the first time ever, soccer fans across the country were able to experience the event with near-live news updates direct to their mobile phones - including game video highlights, ring tune and caller ring tracks, player interviews, country flags and graphics, and SMS update messages.
The increased operating, general and administrative expenses were primarily due to the increases in retention spending and costs to support data and roaming, partially offset by savings related to operating and scale efficiencies across various functions.
Total retention spending, including subsidies on handset upgrades, was $85.9 million and $164.3 million for the three and six months ended June 30, 2006, respectively, compared to $60.6 million and $121.0 million for the corresponding periods in 2005. Retention spending, on both an absolute and a per subscriber basis, is expected to continue to grow as wireless market penetration in Canada deepens and wireless number portability ("WNP") becomes available in March 2007. (See the section entitled "Caution Regarding Forward- Looking Statements" below.)
The substantial declines in integration expenses associated with the Fido acquisition from 2005 levels reflect the completion of the integration project. These current year integration expenses, which are predominantly for severance and consulting, have been recorded within operating expenses.
The modest increases in average monthly operating expense per subscriber, excluding sales and marketing expenses and including integration expenses, were primarily due to increased spending on handset upgrades associated with retention programs.
Wireless Operating Profit
The strong year-over-year growth in operating profit was largely the result of the growth in network revenue exceeding the growth in operating expenses. As a result, Wireless operating profit margins increased for both the three and six months ended June 30, 2006 compared to the corresponding periods in 2005.
Wireless' operating loss related to the Inukshuk wireless broadband initiative is included in the Wireless operating profit. During the three and six months ended June 30, 2006, the Inukshuk wireless broadband initiative recorded an operating loss of $5.3 million and $7.9 million, respectively, compared to an operating loss of $2.9 million and $4.4 million for the three and six months ended June 30, 2005, respectively.
Wireless Additions to Property, Plant And Equipment
Additions to Wireless property, plant and equipment ("PP&E") are classified into the following categories:
-------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-----------------------------------------------------------
(In millions
of dollars) 2006 2005 % Chg 2006 2005 % Chg
-------------------------------------------------------------------------
Additions to PP&E
Network
- capacity $ 50.1 $ 75.3 (33.5) $ 87.9 $ 162.0 (45.7)
Network
- other 24.4 25.6 (4.7) 31.3 41.3 (24.2)
Information
technology
and other 16.0 19.2 (16.7) 32.6 32.1 1.6
Inukshuk 12.5 - n/m 49.7 - n/m
HSDPA 103.9 - n/m 120.4 - n/m
Integration
of Fido - 33.6 n/m - 37.6 n/m
-----------------------------------------------------------
Total
additions
to PP&E $ 206.9 $ 153.7 34.6 $ 321.9 $ 273.0 17.9
-----------------------------------------------------------
-------------------------------------------------------------------------
The $206.9 million and $321.9 million of additions to PP&E for the three and six months ended June 30, 2006, respectively, reflect spending on network capacity and technology enhancements.
On February 9, 2006, Wireless announced its intention to begin deploying a 3G network based upon the UMTS/HSDPA (Universal Mobile Telecommunications System/High Speed Downlink Packet Access), which is the next-generation technology evolution for the global standard GSM platform, which provides broadband wireless data speeds that will enable new and faster data products such as video conferencing and mobile television as well as simultaneous voice and data usage. Wireless estimates that the deployment of this network across most of the major Canadian cities will require total spending of approximately $390 million over the combined course of 2006 and 2007, including approximately $70 million of capacity spending that would have otherwise been invested in GSM. (See the section entitled "Caution Regarding Forward-Looking Statements" below.) To date, $120.4 million has been incurred on the deployment of HSDPA.
Other network-related additions to PP&E in the three and six months ended June 30, 2006 primarily reflect capacity expansion of the GSM/GPRS network. The remaining network-related additions to PP&E relate mainly to technical upgrade projects, consisting primarily of new cell site build and operational support systems. Other additions to PP&E reflect information technology initiatives such as office system upgrades and other facilities and equipment.
Additions to PP&E during the three and six months ended June 30, 2006 also include $12.5 million and $49.7 million, respectively, of expenditures related to Inukshuk.
Recent Developments
Effective March 31, 2006, Wireless contributed certain assets to Inukshuk Wireless Partnership, a joint venture between Bell Canada ("Bell") and ourselves to build and manage a Canada-wide wireless broadband network licenced by Industry Canada. Each venturer has a 50% ownership interest. The network footprint is expected to cover over 45 cities and approximately 100 unserved rural and remote communities across Canada by the end of 2008.
The initial phase of the network covers over 5 million households and 40% of the Canadian population and is now available in 20 centres across Canada. This next generation Internet Protocol ("IP") wireless network based on pre- WiMAX standards enables portable megabit services, allowing subscribers to access the Internet and other applications such as voice-over Internet Protocol ("VoIP"), video streaming and a variety of data applications. The total investment in the partnership is expected to reach $200 million by 2008. Inukshuk also invests a minimum of $3 million per year to support content and connectivity initiatives. While this is a common network that we share with Bell, we each compete for customers and offer our own services, support and billing to these customers.
The Inukshuk fixed wireless network leverages existing network sites of both Rogers and Bell, wirelessly connecting each of the companies' respective customers to the Internet and providing secure data transmission over licenced spectrum. The new technology is also being deployed by companies in the U.S. and certain countries in Europe and Inukshuk expects Canadian users to have access to an extensive North American broadband footprint in the future.
Wireless' contribution to the partnership on March 31, 2006 included 2.5GHz spectrum with an estimated fair value of $55.0 million. As at June 30, 2006 and for the three and six months ended June 30, 2006, Wireless has proportionately consolidated 50% of Inukshuk's results.
CABLE AND TELECOM
-----------------
Reorganization of Cable and Telecom Group
On January 9, 2006, we completed an internal reorganization whereby the ownership interest in Telecom was transferred from RTHI to our subsidiary Rogers Cable Inc. As a result of this transaction, beginning with the results for the three months ended March 31, 2006, we report on the "Cable and Telecom" operating unit which is composed of the following segments: Cable and Internet, Rogers Home Phone, Rogers Business Solutions and Video stores. Comparative figures have been reclassified to reflect this new reporting.
Cable and Telecom Financial Results
---------------------------------------
Three Months Ended June 30,
-------------------------------------------------------------------------
2005
Actual 2005 % Chg
Reclas- Pro Pro
(In millions of dollars, 2006 sified Forma Forma
except margin) Actual (4) (5) (5)
-------------------------------------------------------------------------
Operating revenue
Cable $ 355.4 $ 319.1 $ 318.7 11.5
Internet 131.0 106.2 108.6 20.6
Rogers Home Phone 85.8 - 77.5 10.7
Rogers Business Solutions 143.5 1.1 138.9 3.3
Video stores 72.2 74.7 74.7 (3.3)
Intercompany eliminations (1.0) (1.0) (1.0) 0.0
---------------------------------------
Total operating revenue 786.9 500.1 717.4 9.7
---------------------------------------
Operating expenses
Cable and Internet 276.3 253.0 254.2 8.7
Rogers Home Phone 80.9 - 62.9 28.6
Rogers Business Solutions 126.1 4.5 126.6 (0.4)
Video stores(1) 70.6 72.0 72.0 (1.9)
Integration costs(2) 1.6 - - n/m
Intercompany eliminations (1.0) (1.0) (1.0) 0.0
---------------------------------------
Total operating expense 554.5 328.5 514.7 7.7
---------------------------------------
Operating profit (loss)(3)
Cable and Internet 210.1 172.3 173.1 21.4
Rogers Home Phone 4.9 - 14.6 (66.4)
Rogers Business Solutions 17.4 (3.4) 12.3 41.5
Video stores(1) 1.6 2.7 2.7 (40.7)
Integration costs(2) (1.6) - - n/m
---------------------------------------
Total operating profit 232.4 171.6 202.7 14.7
---------------------------------------
Operating profit margin:(3)
Cable and Internet 43.2% 40.5% 40.5%
Rogers Home Phone 5.7% n/a 18.8%
Rogers Business Solutions 12.1% n/a 8.9%
Video stores 2.2% 3.6% 3.6%
Additions to property,
plant and equipment ("PP&E")(3)
Cable and Internet $ 106.9 $ 136.3 $ 136.3 (21.6)
Rogers Home Phone 37.5 35.0 39.1 (4.1)
Rogers Business Solutions 16.3 6.2 22.4 (27.2)
Video stores 1.3 4.2 4.2 (69.0)
---------------------------------------
Total additions to PP&E $ 162.0 $ 181.7 $ 202.0 (19.8)
---------------------------------------
-------------------------------------------------------------------------
---------------------------------------
Six Months Ended June 30,
-------------------------------------------------------------------------
2005
Actual 2005 % Chg
Reclas- Pro Pro
(In millions of dollars, 2006 sified Forma Forma
except margin) Actual (4) (5) (5)
-------------------------------------------------------------------------
Operating revenue
Cable $ 697.8 $ 637.3 $ 636.8 9.6
Internet 253.2 209.5 214.5 18.0
Rogers Home Phone 166.2 - 150.9 10.1
Rogers Business Solutions 292.5 2.2 279.9 4.5
Video stores 153.2 158.4 158.4 (3.3)
Intercompany eliminations (2.0) (2.0) (2.0) 0.0
---------------------------------------
Total operating revenue 1,560.9 1,005.4 1,438.5 8.5
---------------------------------------
Operating expenses
Cable and Internet 545.4 498.0 500.6 8.9
Rogers Home Phone 156.7 - 122.3 28.1
Rogers Business Solutions 262.3 8.7 250.5 4.7
Video stores(1) 150.0 148.5 148.5 1.0
Integration costs(2) 4.4 - - n/m
Intercompany eliminations (2.0) (2.0) (2.0) 0.0
---------------------------------------
Total operating expense 1,116.8 653.2 1,019.9 9.5
---------------------------------------
Operating profit (loss)(3)
Cable and Internet 405.6 348.8 350.7 15.7
Rogers Home Phone 9.5 - 28.6 (66.8)
Rogers Business Solutions 30.2 (6.5) 29.4 2.7
Video stores(1) 3.2 9.9 9.9 (67.7)
Integration costs(2) (4.4) - - n/m
---------------------------------------
Total operating profit 444.1 352.2 418.6 6.1
---------------------------------------
Operating profit margin:(3)
Cable and Internet 42.6% 41.2% 41.2%
Rogers Home Phone 5.7% n/a 19.0%
Rogers Business Solutions 10.3% n/a 10.5%
Video stores 2.1% 6.3% 6.3%
Additions to property,
plant and equipment ("PP&E")(3)
Cable and Internet $ 188.7 $ 223.1 $ 223.1 (15.4)
Rogers Home Phone 59.1 58.9 64.6 (8.5)
Rogers Business Solutions 23.8 7.7 30.5 (22.0)
Video stores 2.4 7.8 7.8 (69.2)
---------------------------------------
Total additions to PP&E $ 274.0 $ 297.5 $ 326.0 (16.0)
---------------------------------------
-------------------------------------------------------------------------
(1) Video store operating expenses for the three and six months ended
June 30, 2006 include a charge of $0.4 million and $5.2 million,
respectively, related to the closure of 21 Video stores.
(2) Integration costs incurred relate to the integration of the
operations of Telecom.
(3) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(4) Certain prior year amounts have been reclassified to conform to the
current year presentation.
(5) See the "Basis of Pro Forma Information" section for a discussion of
considerations in the preparation of this pro forma information.
The growth in total Cable and Telecom operating revenue for the three and six months ended June 30, 2006 from the corresponding periods in 2005 is due to the following factors: the acquisition of Telecom operations on July 1, 2005 which contributed $213.5 million and $433.9 million, respectively; the organic growth of Cable and Internet revenues of $61.1 million and $104.2 million, respectively; incremental revenues related to the launch of Rogers Home Phone voice-over-cable in July 2005 of $11.5 million and $17.2 million, respectively; and growth in Rogers Business Solutions revenues of $3.2 million and $5.4 million, respectively. These increases in revenue were partially offset by a decline in Video stores revenues of $2.5 million and $5.2 million, respectively.
The increases in total Cable and Telecom operating profit for the three and six months ended June 30, 2006 from the corresponding periods last year were driven by a $37.8 million and $56.8 million increase in the Cable and Internet segment and a $20.8 million and $36.7 million increase in the Rogers Business Solutions segment, partially offset by integration expenses of $1.6 million and $4.4 million incurred for integration-related activities for the three and six months ended June 30, 2006, respectively. See the following segment discussions for a detailed discussion of the operating results.
CABLE AND INTERNET
Cable and Internet Financial and Operating Results
----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------- -----------------------------
2005 % Chg 2005 % Chg
Actual Actual Actual Actual
(In millions Reclas- Reclas- Reclas- Reclas-
of dollars, 2006 sified sified 2006 sified sified
except margin) Actual (2) (2) Actual (2) (2)
------------------------------------------- -----------------------------
Operating
revenue
Cable $ 355.4 $ 319.1 11.4 $ 697.8 $ 637.3 9.5
Internet 131.0 106.2 23.4 253.2 209.5 20.9
----------------------------- -----------------------------
Total 486.4 425.3 14.4 951.0 846.8 12.3
Operating
expenses
Sales and
marketing
expenses $ 30.9 $ 33.8 (8.6) $ 61.4 $ 64.6 (5.0)
Operating,
general and
administrative
expenses 245.4 219.2 12.0 484.0 433.4 11.7
----------------------------- -----------------------------
Total 276.3 253.0 9.2 545.4 498.0 9.5
----------------------------- -----------------------------
Operating
profit(1) $ 210.1 $ 172.3 21.9 $ 405.6 $ 348.8 16.3
----------------------------- -----------------------------
Operating
profit
margin(1) 43.2% 40.5% 42.6% 41.2%
----------------------------- -----------------------------
------------------------------------------- -----------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.
(2) Certain prior year amounts have been reclassified to conform with the
current year presentation.
----------------------------- -----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
(Subscriber
statistics in
thousands, 2006 2005 2006 2005
except ARPU) Actual Actual Change Actual Actual Change
------------------------------------------- -----------------------------
Cable homes
passed 3,428.3 3,333.2 95.1
Basic cable,
net loss (6.3) (11.1) 4.8 (10.0) (16.3) 6.3
Basic cable
subscribers 2,253.8 2,238.3 15.5
Core cable
ARPU(1) $ 52.55 $ 47.34 $ 5.21 $ 51.52 $ 47.20 $ 4.32
Internet, net
additions 21.6 33.0 (11.4) 62.0 84.2 (22.2)
Internet
subscribers
(residential)
(2) 1,198.2 1,015.5 182.7
Internet ARPU
(1)(2) $ 36.79 $ 35.55 $ 1.24 $ 36.62 $ 35.83 $ 0.79
Digital
terminals,
net additions 64.5 75.4 (10.9) 147.6 128.4 19.2
Digital
terminals
in service 1,287.2 924.0 363.2
Digital
households,
net additions 38.9 56.9 (18.0) 88.9 93.7 (4.8)
Digital
households 1,002.2 769.1 233.1
------------------------------------------- -----------------------------
(1) As defined. See the "Key Performance Indicators and Non-GAAP
Measures" and "Supplementary Information" sections.<
Source: prnewswire
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