Rogers Communications Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Rogers Communications Inc. is a Canadian communications and media company, primarily providing wireless, cable, and media services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Rogers Communications Inc., often referred to as RCI, is a major Canadian telecommunications and media company. It operates through three primary segments:

  • Wireless: This segment provides mobile services, including voice and data plans, devices, and roaming services. The largest in the company.
  • Cable: This segment offers internet, TV, and home phone services.
  • Media: This includes sports broadcasting and media networks.

RCI’s revenue streams are heavily reliant on its wireless segment, which contributes a substantial portion of its overall revenue and profits. The cable segment, while still significant, operates in a more mature and increasingly competitive market. The media segment, while important for branding and diversification, contributes the least to the bottom line, and has faced a lot of challenges.

The Canadian telecommunications landscape is an oligopoly, characterized by three major players: Rogers, Bell, and Telus. This high concentration provides some protection to existing players, but also results in aggressive competition for market share. It’s a large, capital intensive, regulated industry with stable cash flows. They need to invest large amounts of capital constantly. This competition has been intensified by the introduction of new players like Shaw mobile, which has been acquired by Rogers but remains highly competitive. The industry is also seeing a trend towards bundling of services, with customers preferring to purchase multiple services such as wireless, internet, and TV from a single provider. RCI has a fairly big market share, especially in the region around Toronto. They recently acquired the remaining part of Shaw Communications and integrated it to their business with the help of a bridge loan. They expect synergies from that merger to show up in the future. Margins at Rogers vary between segments:

  • Wireless: typically has high profit margins due to recurring subscription revenues and a lower cost structure, especially in the postpaid segments, however, the costs are also high due to investments in infrastructure.
  • Cable: tends to have moderate margins, being subject to high infrastructure costs and higher competition from other cable and new fiber providers.
  • Media: can have lower and more volatile margins, driven by the ad market. Over the years, the cable companies have seen declining margins on the traditional cable services and are offsetting that decline with the high margin broadband and mobile services. The company has been focusing a lot on growth and expanding its reach.

What makes the company different? RCI’s key differentiation is based on several aspects. First, their infrastructure footprint makes it really hard for competitors to take away market share. As a large incumbent player, they have a robust infrastructure that would be extremely difficult for a new entrant to replicate without massive capital investments. RCI focuses on creating brand loyalty through bundled services and personalized offerings. Second, their ownership of media content, particularly the Toronto Blue Jays and other professional sports franchises, gives them a competitive edge in bundling and content delivery. Finally, the integration of their wireless and cable operations is expected to drive future efficiencies and cross-selling opportunities.

Financial Deep Dive

RCI’s recent financials reveal both strengths and weaknesses. A notable trend is the company’s strategic shift to emphasize higher-value customer segments in wireless, with a focus on postpaid customers and bundling of multiple services. Let’s break down the performance through financial reports. The most recent yearly report is from December 31, 2023:

Revenues:

  • Total revenue for fiscal year 2023 was $15,591 Million CAD, which represents a 5.4% increase year-over-year.
  • Wireless segment accounted for $9,995 Million CAD (64.1%)
  • Cable segment contributed $4,219 Million CAD (27.1%)
  • Media segment accounted for $1,491 Million CAD (9.6%) * Acquisition of Shaw has contributed greatly to higher revenues, however, organic revenue growth has been fairly stagnant.

Profitability:

  • The adjusted EBITDA was $7,058 Million CAD in 2023, up by 11% year-over-year. This shows good profitability growth from operating activities.
  • Net income was $777 million CAD in 2023 (down from 1.5B in 2022).
  • Operating profit was $3,229 million. Operating margin improved from 17.5% to 20.7% (shows better management of costs).

Expenses:

  • Operating expenses totaled $8,533 Million CAD.
  • Selling, general, and administrative expenses were $3,564 Million CAD.
  • The company also has high interest expenses at $821 million because of the debt from their Shaw acquisition. * RCI expects their interest payments to increase in the future.

Financial Position:

  • Total Assets are at $51,441 million.
  • Total Liabilities is at $32,714 million.
    • A large portion is due to a high amount of long-term debt at $21.1 billion
  • Debt-to-equity ratio of 1.72. This is quite high given the regulatory and capital intensive business. They need a lot of capital to improve their network.
  • The book value of equity comes out to $18.7 billion CAD.
  • RCI’s current assets at the end of year 2023 is $9,577 million CAD and current liabilities are at $8,952 million CAD. Gives a current ratio of 1.07, which is not ideal.

Cash Flows:

  • Cash flows from operation in the year was $6,222 million CAD (showing solid cash conversion).
  • Capital expenditures were high at $2,824 million, and the company expects capital expenditure to remain at the high end for the next three years.
  • RCI’s total capital expenditures in 2024 should be around $3.4 billion CAD.
  • This is mainly for network upgrades and fiber rollouts.

Moat Rating and Justification: 3/5

RCI possesses a narrow economic moat stemming from several factors but is not strong enough to get a 4-5 rating. The company’s position in a concentrated Canadian market creates barriers to entry, as new players would face significant capital and regulatory hurdles, but also intense competition from existing players who are willing to defend their market share. The company’s vast infrastructure, including its wireless spectrum, cable networks, and distribution channels provides a cost advantage. However, those barriers are getting smaller due to technological advancements and government regulations pushing for more competition. Also, government regulation ensures that they have more stable cash flows as compared to other industries, which gives some protection, but also caps their potential returns. The company also benefits from customer lock-in and cross-selling opportunities due to their bundled services. The company has been building up brand and recognition, while that’s helpful for retention, it’s not a powerful tool in building a wide moat, as competitors can advertise their services as well. All in all, these elements combine to give them a solid, but not an impenetrable, competitive advantage.

Risks to the Moat and Business Resilience

The main risks facing RCI that might erode its economic moat include:

  • Technological Disruption: The telecommunications landscape is subject to rapid technological change, especially with the arrival of 5G technology. While they are spending a lot of capital on network upgrades and fibre deployment, new technologies and players could emerge, disrupting their position.
  • Regulatory Changes: Government regulations may change, such as allowing competitors easier access or lowering prices, impacting their profitability and competitive position.
  • Competition: The company has to compete against other big telecom companies, which may have different advantages or may have lower costs.
  • Debt Levels: RCI’s debt has increased due to acquisitions, which puts pressure on its financial flexibility and could increase the cost of funding.
  • If the company has trouble selling some assets or hitting their numbers for earnings, they may face serious troubles.
  • Overspending on acquisitions. If the company does not perform thorough analyses on the acquisitions they are making, they might overpay or acquire companies they are not able to manage.
    • Integrating them to their system could take time and be costly.
  • Economic Downturn: A recession could affect customer spending and reduce their revenues.

Business Resilience: RCI has proven to have good business resilience as they have managed to increase their earnings by a good amount every year, even though their core business, cable, is facing decline. The company has focused heavily on growing the wireless business to make up for the losses, and they have been successful at it. They are a stable company in a very stable and profitable industry.

Understandability: 3/5

RCI’s business model is relatively straightforward to understand. They offer communication services that are easy to grasp, but the technical and regulatory details, along with the complexity of their financials make it harder to understand the company fully. It’s a capital-intensive business with a lot of moving parts. Here’s the breakdown:

  • Business Operations: The core operations of providing wireless, internet, and television services are easily comprehensible.
  • Revenue Streams: Understanding the revenue generation of each segment-wireless, cable, and media-is not overly complex.
  • Financial Statements: Assessing RCI’s full financial position and making accurate predictions requires familiarity with telecommunications-specific accounting practices, as well as accounting for recent acquisitions, joint ventures, and complex ownership structures.
  • Understanding the impact of government regulations and any potential impact it has on prices, revenue, and costs can be difficult.
  • Overall the business is not extremely difficult to understand, but it’s not also straightforward as some may think, it’s a medium difficulty to understand business.

Balance Sheet Health: 3/5

RCI’s balance sheet health is moderate, characterized by high leverage, but adequate liquidity:

  • Debt Load: The substantial amount of long-term debt, primarily due to their acquisition strategy, poses a financial risk, as it increases interest expenses and reduces flexibility.
  • Assets: The company’s assets are largely illiquid, consisting of things like infrastructure, spectrum licenses, and a large number of acquired companies.
  • Working Capital: RCI has very minimal working capital, it is a capital intensive business, and their liquidity is just ok.

All these factors together push the rating toward 3, which is neither good nor bad. Their high debt puts them in a place where they need to generate continuous profits to service their debt load.

Recent Concerns, Controversies and Problems

RCI recently acquired the remaining parts of Shaw Communications for a hefty sum, which they funded through a bridge loan. This acquisition is expected to create a lot of cost and revenue synergies, but the costs associated with the debt from the acquisition is going to be significant for the years to come. They have also been dealing with the regulatory hurdles and the intense competition in the market. RCI’s recent earning calls have focused on the following:

  • Integration of Shaw: They have mentioned the integration is on track. They have also laid off a lot of staff and expect more layoffs to come.
  • Fibre Deployment: They have been touting their push to reach more of the canadian population with fibre infrastructure.
  • Cost-Cutting Initiatives: The company is pushing for cost cuts in areas that will not harm the customer experience.
  • Future Outlook: The management seemed fairly optimistic and confident about the future.

Overall, while RCI operates in a market that protects their existing business, intense competition and the need to heavily reinvest is an ongoing challenge that has to be kept in mind. They also face the danger of failing to create value through mergers and acquisitions. The business is understandable and offers stability, but it is not without its difficulties.