Rogers Communications Inc. (RCIB) Earnings Call Transcript & Summary

Okay. I'm going to kick things off. So thank you for joining. I'm super pleased to have back again to our 2 Bryant Park facility, the CEO and CFO of Rogers Communications, Tony Staffieri and Glenn Brandt. So thank you guys for coming again. I appreciate you being here and having this conversation.

Thank you for having us.

Look, I've been -- I've gotten a lot of inbounds on the Canadian market because the valuations of the Canadian telecom stocks have come in quite a bit. Most people are blaming you guys for the perception that there's something going on in wireless pricing that's problematic. And so I wanted to start there and have maybe you guys tell me what you think is going on in the Canadian wireless pricing environment right now during the back-to-school promotional season. It doesn't feel like a price war is happening, but everyone is worried that one's about to happen.

I think it's probably helpful to put it in the context of what the total market is doing. And so we continue to have healthy growth in terms of the backdrop. Last year, we saw the market grow over 5%. The governments curbed some of the new-to-Canada categories, foreign students. And so you saw that most notably on this back-to-school as well as most recently, temporary workers, foreign temporary workers into Canada. And so they scaled those back by about 1/3. But even with that, together with continued penetration gains, we've got a market that we think is -- continues to grow in the 4% to 4.5% range. So that's one.

Did you say revenue or subscribers?

Subscribers. At this -- and our focus has been making sure we get leading share in that growing market, while at the same time continuing to grow ARPU. And we've been delivering on that strategy in terms of solid ARPU, flat to growing, as well as good subscriber gains and market share. So as we approached back-to-school, our approach was rather than slide into increasing promotional activity late July, early August, we came out with what our value proposition was going to be and watched how the market responded. And I would say as we look to back-to-school, we're encouraged for the back half of the year in the sense that it was fairly responsible market activity and pricing in the marketplace. If you were to look at the extent of promotional offers compared to prior year, there were less. And so we can see that the market players are looking to grow their ARPU as well and doing all the right things to bring that to the industry. So that's our sense and our read as we've gone through the back-to-school period. And next, we'll -- milestone is probably going to be a pick up around mid-October as we head into the holiday season.

So the only thing I would add to that is the premise of the question that started was -- and you've heard this from others, that we are the cause of some of that pressure on price or on the economics, and yet we've got leading share of the net adds. We've got leading margin at 65% in our wireless business, and we've got flat to positive ARPU growth and solid service revenue growth. And so we have leaned in hard and consistently with our premium brand to try and protect pricing and to try and drive healthy net adds, healthy revenue growth, without repricing the base, without negatively impacting the economics. And so we have found a path that's been successful for almost 3 years now.

So I wanted to maybe dig more into the volumes to start and then talk about pricing a little bit. So you guys have had some pretty innovative programs in the new-to-Canada category. You've kind of set up kiosks in airports and other countries and have been kind of a share leader there. I know some of your competitors have talked about maybe leaning into that market to fight back a little bit, given that the pool might be a little smaller than it ordinarily would be. If you kind of look at the main drivers of sub growth is it's -- maybe it starts with population and new house formation. Then it's immigration, and we're kind of maybe -- that's been running about 1 million post-pandemic. But pre-pandemic, it was 300,000. Where do you think we're landing on that number in terms of new population?

Go ahead, Tony.

Yes. In terms of population growth, the organic, we continue to see the same in terms of the 1 million to 1.5 million new to Canada. Our sense is that number is probably based on what the government is saying. It's probably going to be in the [ 700,000 to 900,000 ] range, so still healthy in terms of as we think about population growth in developed countries against a pretty good economic backdrop as well. We're going through a bit of a slowdown. But we continue -- this morning, you would have seen Bank of Canada reduce interest rates again. And so all the right ingredients are there for continued population growth. Housing supply is the other important one for our wireline business. And so we've been traditionally stuck at 2% to 2.5%. Notwithstanding the population growth, housing supply hasn't expanded. And so every government you talk to, municipal, provincial and federal, is focused on housing supply and how do we get the approvals going faster. Right now, housing starts have stalled because sales stalled. But our expectation is, as we head into '25, that housing supply starts to pick up and the size of the wireline space addressable market starts to grow in the 2.5% to 3% range.

Well, and affordability should improve as interest rates come down too, right? That's been a big issue in some of the big markets as well.

Yes.

Okay. And so your kind of industry-leading net add market share, how has that been affected by your ability now that you control the Shaw Cable business and you can bundle that with your mobile product in ways that you could do in the East? Has that had a material effect on your ability to kind of grow nets?

Very much so. As we look to the West, Alberta and B.C. would be our fastest-growing markets right now. And so while we traditionally had good share on the wireless side, what we're seeing today is strong growth in each of those. Now as a precursor to it, I will say we spent quite a bit of time and money continuing to improve our 5G network in places like Edmonton. And so what we needed to do is to make sure our network coverage and performance moved from second or third to first in those markets. So that was one, and then combining it with wireline products in a bundle has been well-received. The Rogers brand has traditionally had very strong NPS out West. And so bundling that halo effect with Shaw's wireline assets has allowed us to improve our market share performance on the wireline side as well. And so while we would have sat in the low 30s 2 years ago on market share in the West on wireline, today, we are just under 50% with a goal to get on the other side of 50% by the end of this year. And so we're tracking well in terms of share performance there.

And on the pricing side, I mean, it's been interesting. So Canada has kind of made the 5G investments, bought the spectrum, in a way that's been similar to what we've seen in the U.S. market. You've had inflation, maybe not necessarily so much at the margin now. But the U.S. carriers somehow, in a 3-player market, have been able to change the front book pricing, address back book pricing. And that's been leading to some pretty healthy low single-digit ARPU growth across industry, by and large. Why can't Canada do this?

Well, I think we are. As Glenn referred to it, we've got a playbook on ARPU growth that we continue to focus on. Our focus has been on the Rogers premium brand. We made that clear almost 3 years ago that we were going to pivot from 3 brands, move more and more of our subscriber loadings to the Rogers brand. And so consistently, over the last 1.5 years, almost all our net add growth is on the Rogers brand. And so that's what we've been focused on. Our strategy to move and redefine what I would call the value proposition on flanker is moving more down market. And so what you're seeing is a blending of the prepaid and the bottom end of postpaid on the flanker side sort of melding together. And so you'll likely see a blending of those brands for us with, as I said, the vast majority on the Rogers brand, which lends itself to bundling with home products that are all on the Rogers brand. So that's been our focused strategy. You'll continue to see us redefine the value proposition on the premium side beyond just data bucket sizes, whether it's unlimited, et cetera. But much like you see in the U.S. today in terms of network performance and network slicing, it's going to be a big enabler for that so that customers on our ultimate top-tier plan are never going to face network congestion and create a dedicated lane for that category of customer. So you'll see more and more of that play out in our value propositions.

So Sampath from Verizon was here, the CEO of the consumer business. And he kind of articulated a view that 50% of their service revenue -- or 40% of their service revenue growth would come from these kinds of up-tiering and value accretion types of exercises. 40% would come from just raising prices, either in the front book or the back book, and then 20% would come from volume growth. How would you kind of describe the Rogers game plan?

The dynamics in Canada are a little different. So we'll continue -- with the market growing at 4% to 4.5% over the next several years, we want to make sure we get our fair share of that, and so think about volume growth driving 4% to 4.5%. And we see ARPU growth through a number of initiatives in the 1% to 2% range. So that's how we think about growth in our wireless business.

Is it politically difficult to do what the U.S. carriers are doing, which is just, again, I'm trying to get you to raise prices? And if you're not raising prices, why are you not raising prices? Is it the optics? Is it that share is so much more important? Because growing through volume is more expensive than simply raising price. If you just raise price, it gets that much easier. Now it might -- again, it might be politically indelicate. But every one of you, costs are rising, inflation is going up, you should be raising prices. Why are you not raising prices?

Well, I think you have seen it in various parts of our business where it makes sense to maximize the compensation we get for the value we bring. So it's as simple as that. In terms of political pressure, the politicians are always going to try to be the voice of the consumer or the Canadian, so we listen to it. But in cases where costs are going up and they are in some parts of the business, then we're looking to be fairly compensated. And so if you were to look over the last 3 to 4 months alone, you would have seen price increases from us as well as competitors, not only in terms of price plans but in terms of some of the ancillary services we provide.

I'll point again, though, to the fact that you've seen our margins respond accordingly with an uptick in the wireless margin, which already at 64% is a leading margin. And last quarter, we reported 65% and there's still room for that to move. I think one of the things that we have the advantage of in wireless and in wireline is the data loading. Every month, every year, more and more data gets loaded to the handsets too and there's more and more handsets per person, per household. And so there's an avenue to grow services that helps augment the opportunities for price increases here and there on the different services. As we up-tier customers, that grows ARPU, it grows service revenue. And so not all of it is an across-the-board reprice the base and cross your fingers that most of that will stick and be accretive. It's the more balanced approach as well is finding ways to find those customers that come in even as prepaid and then up-tier along the way over several years. That's healthy growth as well, so we're finding that balance.

The -- there's a theory out there that having lived through, I think it was -- I want to say it was October 2017. Freedom came into Ontario with the Big Gig program and kind of changed how Canada prices. And there was this -- they were able to wedge their way into the marketplace, even though their network was not that great, and they established a foothold. And over the course of the merger, the whole relationship with Freedom was recast, Quebecor acquired it. There's a roaming relationship. There's an MVNO relationship. But with the tack that Rogers took this time was to not allow as much daylight between the pricing that Rogers has on their flanker brands and the pricing that Freedom has. Is that a lesson learned? Is that a core tenet of your strategy? Because one of the ways that you could raise your ARPU would just be to raise prices and give Freedom a little more freedom. And maybe they'd take it because they need to create funding for building their own network. Or maybe your strategy is to not let them have that daylight, keep them under your thumb, and then maybe their network never really does materialize, and they become your wholesale customer captive forever. Am I getting too conspiratorial? Glenn's smirking. I don't know. But -- and Tony is stone faced. I don't know. No one can see this.

Yes. Dave, I would say -- and maybe we should. But in the near term, we don't think about it as thoughtfully as you laid out. We're very tactical. So what we see is Freedom largely playing in the $30 to $35 space. And that segment would roughly capture about 1/3 of the market. So I think it's important to put it in perspective.

In gross add terms?

In gross add terms and probably in net add too. And so as I said earlier, we continue to focus on the 2/3 that are premium segments for us. In that space, we sort of look at it and say, okay, they're going to go to price and have consistently priced $5 to $10 lower. Do we have to? And I think what you've seen us do, sometimes, we'll pulse to match. But generally, we'll sit at $39 to $44 because we have a premium network. And keep in mind, we're talking this is in the 4G space. We've left 5G to the Rogers brand only, and so we sit with a better network. We sit with better distribution points. We sit with better brand recognition nationally. And then the last piece that we just added in Q2 is more cleverly use the chatr prepaid, which more and more looks and feels like postpaid in the sense that it's on automatic credit card top-ups or debit. And so the profile -- and it actually works well for the new-to-Canada category as well. And so we hit more and more, we're using chatr up against their $34 price point, and it's working well. And so that's how we think about it is in that segment, how do we make sure we get what we think is the share we deserve and compete with them on day-to-day based on the tactics they use. In terms of where they go from there, it's interesting. They raised their price from $34 to $35, not big but symbolic in terms of how they're thinking about things. And so we continue to read the marketplace, and that's how we think about competing with Freedom.

So rather than prices coming down, what we're actually seeing on the ground is the price leader in the market came up a little bit. And you've been introducing higher-value programs and focusing on 5G and the main brand, the Rogers brand. So the fears of the market kind of on this volume price side doesn't seem to have materialized yet if -- and maybe not even directionally going where the market fears go in the opposite direction. So maybe we go through one more holiday cycle and convince everybody that everyone is kind of playing in the sandbox reasonably well together, and we start to make more money. And so speaking of making more money, so...

I think we also continue to invest in our network in 5G, and that's a key driver. And as Tony said, that price-sensitive point is about 1/3 of the market, 30% of the market. The rest of it is looking for service quality and network quality. And the 5G service available in our network far surpasses the -- that price-sensitive segment that's largely being served in 4G. And so that's one reason for being able to sustain our premium brand is that the services underneath that drive a premium service and a premium customer.

If what we're saying is true and everything sounds great, why are your competitors seeing flat to negative ARPU growth?

It's probably something for them to answer, frankly, Dave.

You don't want any speculation, Tony?

Well, I mean, if we were to look at -- just look at market share in terms of demographics, then I would say, as Glenn sort of alluded to, they over the last several quarters and only most recently changed tack was to focus on that segment in what I would describe as the $30 to $40 price point. They put 5G on the flanker brands. We stuck to 5G only on premium. They've now pulled 5G out of the flanker segment, except for TELUS, which still has 5G on public mobile at a $34 price point. And so their tactics are what they are. And I don't think we're surprised to sort of see the ARPU performance based on the pricing and approach that we're seeing in the marketplace and where they're getting their net subscribers from.

Got it. That -- so Bell pulling 5G out of their flankers is encouraging too. That's like all moving kind of in the right direction.

Yes, it's a premium service.

Yes. Okay. So speaking of making money, so the Rogers-Shaw merger, right, very idiosyncratic to you guys. I think that there was, at very beginning, a lot of skepticism about how they're going to pull $1 billion of cost structure, cost out of this combined business. I don't think people really understood that it was never just about cutting costs in the West. It was about holistically looking at optimizing the cost structure across the totality of the business. In which case, looked through that lens, it wasn't actually that crazy an objective. It was $1 billion on a run rate basis. You guys were targeting -- getting there in a couple years. You said you got there...

We got there within 4 quarters.

Yes. Within...

Well, 3 quarters ago.

One quarter ago. So what's next, Glenn?

There's still more opportunity for cost synergies to come. There's the longer target date synergies. It's the wire -- the fiber backhaul to the wireless towers to replace microwave backhaul.

Was that not the original plan?

It's in the original plan, but it's a longer build cycle to run the fiber to the towers and then to eliminate the cost of that microwave spectrum tower by tower. So that's just a longer burn rate to get full completion on that file. We're really just getting started on that one. On the wireline space, the larger -- largest opportunity now is on the media content cost. It's more than $1 billion a year for wireline.

How much is this fiber stuff, just by the way?

Fiber stuff would be in the tens of millions of dollars a year.

So just tens? Okay.

For the microwave backhaul.

So the content...

Many tens, but it's less than $100 million. It's probably somewhere around $80 million or $90 million for the microwave spectrum for that backhaul. The -- and the other part of that though is the fiber backhaul gives greater bandwidth capabilities for -- as the data loading grows. And you can -- you put fixed wireless on it. You've just got more flexibility with each of the towers. So it's a service issue as well. On the wireline side, it really is rightsizing channel lineups for customers to match their viewing habits. My kids will never own a cable TV package. They'll stream all of their video entertainment. And so we've got cord trimming that's doing some of that already. But we've still got many cable customers that are getting cable TV packages, and they don't spend much time watching all the packages. They're supplementing it or replacing it with streaming. And so as we move more and more to a broadband model, the broadband margins don't have media content costs in them. We're now twice the scale we were before, that drives better pricing for the media content that we are delivering. But then also, we've got the opportunity to go directly to the studios because of that scale. And we're like the middle person.

But that's contract by contract by contract in each of these things.

Some of it is block and tackle and contract by contract. Some of it is transformational in terms of the media content we are delivering to customers and moving to a different model, a different plan, where you use the Xfinity platform to curate the streaming services with the traditional broadcast channel services that people want to watch live sports, for example. It's finding that mix and right sizing it for customers. That will drive out costs as well. And then finally, on the customer care side, the move towards digital fulfillment for customers that want digital fulfillment, that will take costs out. Those are the largest opportunities still to come on the cost side. The largest opportunity for us you've already touched on, on the revenue side is the ability to bundle now nationally wireless and wireline. We now reach 60% of homes in Canada with our wireline footprint. We have the largest 5G wireless network from coast to coast in Canada. And so we cover the entire country now from coast to coast with wireless and wireline services. Where we don't have wireline, we can sell either wholesale or fixed wireless services in those areas. And so that's a tremendous opportunity for driving revenue growth.

It's super interesting because one of the big topics in the U.S. has been convergence, right? And the company that I think people are starting to look at harder is AT&T, who's got this goal to have 30 million homes passed with fiber by the end of next year. Maybe that number could go to 45 million in territory. Maybe that number could go up with more BEAD funding. Maybe that could go up if they go out of region. We're hearing today that Verizon might be in the market to buy Frontier, so -- but the -- all of this is to say that for instance, Sampath said today that when you bundle fiber and mobile, like your churn is 50%. Now that you have 60% of Canada, you're really in a lot of ways double, twice as important as AT&T is today in terms of that bundling capability. So how much different -- what upside opportunity? Can you quantify or can you give me some examples of where you have the ability to bundle? What does it do for the business in terms of churn, in terms of customer lifetime value, in terms of margin or whatever, relative to where you can't do that? And now that you've got it in the West, how long does it take to get to where you are in the East?

A couple of things. One is in terms of the bundle, just to put it in size of market, it's certainly less than half but approaching 50%. So there's an appetite for the consumer to look at the bundle more than they would have 2 years ago. And it largely comes in the form of ease of doing business but also price, the bundled pricing as well. And I would say that's sort of step one. I think as you said, it's really convergence of the product that is going to be the next phase of this. Today, you look at your phone as personal to you. But when you walk in the home, Wi-Fi is everyone. And so as more and more in-home becomes personalized and simple things like you're on a call, in-home Wi-Fi, on a Teams meeting, and you're moving to your car, you drop and have to pick up on the mobile network. So the convergence of the 2 seamlessly and the functionality that has is really the next wave. And I would say that's the opportunity that excites us because, as you said, we have 60% overlap today on -- between wireless and wireline. And so we see that as a good opportunity. CableLabs has been investing heavily into this convergence. And you would have seen us, together with CableLabs, open CableLabs North in Calgary as a research facility there. That is working on applications globally for this wireless-wireline convergence. In the 40% we don't cover, we think it's so important that we've entered that market with fixed wireless access. And network slicing is going to give us even more capability to excel in fixed wireless access. And we're also wholesaling from our competitors in those spaces so we can offer a converged bundle to customers in those territories. And we're pleased with the market share gains that we're seeing there.

And how -- and so 60% of how many homes?

We have 10 million, so think about it as approaching 17 million homes. We pass about, with our wireline business today, 10 million. So there's 7 million homes, just under 7 million, that we previously did not address. And as I said, our primary go-to in those markets has been fixed wireless access. And we'll augment or complement that with wholesale as well.

Got it. So I'm just doing it this way kind of to go back to where we were. I think the deal closed April 1 a year ago. And the fears people had was, oh, we're going to have a price war. It doesn't sound like that's actually happened anyway. The fear was, oh, you won't be able to execute and get your cost saves. That hasn't happened. As a matter of fact, it looks like there's more runway there.

The run rate of realized cost synergies in Q2 was $240 million. We're there already with the realized.

And the reason why those were concerns was because you took on a fair amount of leverage to get this deal done. And you were going to spend a fair amount to put the 2 businesses together, good healthy cost to achieve. And so we've been working on the de-leveraging equation. So I guess the first question then related to the de-leveraging is the asset sales seem to be taking a lot longer. Maybe the higher interest rate environment affected that with the interest rate environment kind of correcting it. Are things gaining steam in terms of asset sales?

I think they will. I think -- let me rewind a little bit. So a year ago, we had announced -- just over a year ago, we had announced a target of $1 billion of asset sales that, frankly, I was to have realized by now. We have a couple of projects still underway, data centers being one, the most significant or the one that got a couple potential buyers winding up their diligence on that exercise. And I'm hoping over the next few weeks, we'll see whether or not that comes to fruition or not. Real estate assets, the real estate market really has slowed tremendously because of the interest rate environment. Bank of Canada cut rates again this morning. And so I'm hoping as the rates come down, the real estate market will rebound. We had targeted $1 billion. That hasn't been realized yet. All through this, the intention was, let's go through the asset sales and then move to other assets like the Cogeco shares. As we closed out 2023 and realized the asset sales looked like they might be slower than anticipated, we just pivoted. And I look to the Cogeco shares and had full support of the Board and the executive to sell the Cogeco shares, realized $840 million of proceeds from that. And that helped then fulfill the initiative of, okay, it wasn't the asset sales first. It was the Cogeco shares first, but we de-levered with that. The asset sales are still on the drawing board. We will still execute on those. But we've got a few other projects that we can look to as well to drive that de-levering.

Any major sports franchises you want to talk about?

I wouldn't look to the sports franchises on the immediate term horizon for de-levering. The opportunity with our sports franchises and our sports investments is to pull them all together and do something. We don't need to own all of them. We don't need to own 100% of all of them. But the real opportunity is to bring together Sportsnet and the rest of Rogers Sports & Media with the Toronto Blue Jays, the Rogers Centre and MLSE, Toronto Raptors, Toronto Maple Leafs, Scotiabank Arena and the Minor League teams and TFC and the Argos, Marlies and the D League team for the Raptors. Bring all of those together along with the concert venue, Budweiser Stage, you bring that all together, you've now got a collection of all of the major league sports franchises in Toronto, the third largest metropolitan area in North America, not counting Mexico City. It would be third, we'd be fourth if you count Mexico City. But if you want to invest in the North American sports leagues, we're the third largest metropolitan area to invest in for that. We can't just pull those all together. We've got partners in MLSE. We own Toronto Blue Jays and Rogers Centre 100%. The opportunity is to, over time, figure out the ownership within MLSE, all ambiguously or vaguely, say figure that out in terms of whether the partners stay in or don't stay in, but bring those properties together. And now you've got something that is a collection of sports and media assets that will be very, very attractive to monetize. None of that value today is reflected in the Rogers share price, and it's billions and billions of dollars. That's ultimately the opportunity with our sports and media assets that will take time.

So the last piece to talk about is the wireline piece where, on balance, growth has struggled. But you've got ambitions to turn that around. One of the reasons I think that growth was challenged was you kind of were doing things in the West to become more competitive in terms of pricing and responding to some of the TELUS maneuvering in the West. I've heard that what's happening now is that there are some new programs being instituted. For instance, maybe raising modem fees and doing a few other things at the margin to try to maybe extract value from the wireline business that maybe has been left on the table a little bit while you were in the integration phase. Could you elaborate a little bit on the wireline strategy?

It's really grounded in a couple of fundamentals. And one was to regain market share in subscriber growth, where we pass homes. And as I think I said earlier, a few years ago, we've been sitting in the low 30s in terms of market share in a 2-player market. So job one was to turn that around, and a lot of good progress by the team in a short period of time. The second is to make sure we get value for what we're putting out there. We're seeing much higher data usage, much higher speeds. But ARPU had been going negative, frankly. And so what you see us doing is making sure the pricing model and the value proposition construct drives the type of ARPU and ARPA growth that we want to see. And we're seeing good progress on that as well. So those are the 2 fundamentals within the wireline side. As we think about cable business overall, and we said by a year ago, we were declining at 4% top line. In the most recent quarter, we're declining 2%. And we said by the fourth quarter, we'll return to growth. And we're executing on all the plans we've been putting in place to get to positive top line growth by the fourth quarter, which sets us up well for continued growth into '25. The 2 additional areas that contribute to that growth relate to, well, you touched on it, some of the price increases. So in July, as we looked at things we have in market, we weren't charging, for example, for additional set-top boxes, whereas the market is in terms of the competition. And so you saw us put in -- start charging for those. We have the next round of annual price increases that will come through in October to the base.

Is it the new norm, October? It used to be, I think, February. But is it new now in October?

It's based on a number of different things, but I don't know that we're necessarily fixated on an annual cycle. We just look at pricing relative to what new pricing in the market is and try to balance it on a real-time basis. You've also seen us, particularly on the higher tiers, reduce the amount of promotional discounting we do. And so the product is a good product. You just saw umlaut, Opensignal, Rogers Internet, fastest and most reliable nationally. And so we feel we deserve to get compensated for what is a premium product, and so you see us doing that in the pricing. We're expanding. I mentioned the 40% of homes we don't pass. And so that fixed wireless access and wholesale, those penetration gains, you'll see contribute to cable top line growth. And then the last piece we haven't talked about is the enterprise, in particular, mid-to-small business. And so the type of gains we're seeing through bundling and everything else in the consumer side, we're seeing on the enterprise side as well, particularly in the West. Our enterprise business is growing double digits, and so it's become more and more significant. In the mid to large, we are now -- we have a credible offering in that we have a much bigger expanded footprint for the wireline side of it to combine with wireless. So those are all the factors that are contributing and give us confidence to moving to growth on the cable side of the business and, as I said, into '25.

That's a great place to leave it. Thank you, Tony. Thank you, Glenn.

Very good. Thank you. Appreciate it.

Appreciate it.

Thank you so much for the conversation.

Thanks, Dave. Thank you.