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Rogers Communications Reports First Quarter 2019 Results

  • Increased total service revenue and adjusted EBITDA by 3% and 7%, respectively, excluding the impact of certain baseball-related transactions
  • Delivered strong financial and operational performance in Wireless
    • Grew service revenue by 4% and adjusted EBITDA by 9%
    • Delivered postpaid churn of 0.99%, our best postpaid churn result ever
    • Increased blended ABPU by 3%; increased blended ARPU by 1% driven by continued disciplined postpaid subscriber loading with 23,000 net additions
  • Grew Cable revenue and adjusted EBITDA by 1% and 3%, respectively
    • Continued strong Internet revenue growth of 7% and net additions of 14,000, reflecting continued growth in Internet penetration
  • Returned $402 million to shareholders, including $247 million in dividend payments and $155 million in share repurchases through our normal course issuer bid program
  • Secured strategic 5G-capable 600 MHz spectrum licences in every province and territory
  • Reiterating strong financial guidance for full-year 2019
    • Targeted revenue growth of 3% to 5%; adjusted EBITDA growth of 7% to 9%

TORONTO, April 18, 2019 (GLOBE NEWSWIRE) -- Rogers Communications Inc. today announced its unaudited financial and operating results for the first quarter ended March 31, 2019.

Consolidated Financial Highlights

  Three months ended March 31
(In millions of Canadian dollars, except per share amounts, unaudited)   2019     2018 1   % Chg  
       
Total revenue   3,587     3,633   (1 )
Total service revenue 2,3   3,143     3,127   1  
Adjusted EBITDA 2,4   1,335     1,338    
Net income   391     425   (8 )
Adjusted net income 4   405     477   (15 )
       
Diluted earnings per share   $0.76     $0.80   (5 )
Adjusted diluted earnings per share 4   $0.78     $0.90   (13 )
       
Cash provided by operating activities   998     885   13  
Free cash flow 5   405     441   (8 )

1  Effective January 1, 2019, we adopted IFRS 16, Leases (IFRS 16), with the ongoing impacts of this standard included in our results prospectively from that date. Our 2018 results have not been restated. See "Critical Accounting Policies and Estimates".
2  Excluding the impact of the distribution from Major League Baseball in 2018, total service revenue growth would have been 3% this quarter. Excluding the impacts of the distribution from Major League Baseball and the timing of certain Toronto Blue Jays player salaries pertaining to player trades in 2019, adjusted EBITDA growth would have been 7% this quarter.
3  As defined. See "Key Performance Indicators".
4  As defined. See "Non-GAAP Measures". These measures should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies.
Effective January 1, 2019, we have redefined free cash flow such that we no longer adjust for the "net change in contract asset and deferred commission cost asset balances". We have redefined free cash flow to simplify this measure and believe removing it will make us more comparable within our industry.

"In the first quarter, we delivered strong growth in service revenue and adjusted EBITDA in both Wireless and Cable. We achieved the best Wireless postpaid churn in our company's history and continued to deliver on ARPU growth," said Joe Natale, President and CEO. "These solid results are underpinned by our strong balance sheet and we used this strength to actively return cash to shareholders through the repurchase of $155 million of shares, our first buyback since 2013. This strength also allowed us to secure strategic 5G spectrum for our customers in every province and territory. Overall, we have confidence in our long-term growth plans, and remain on track to deliver on our healthy outlook for 2019."

Quarterly Financial Highlights

Revenue
Total revenue decreased 1% this quarter, largely driven by 12% decreases in both Wireless equipment revenue and Media revenue. Declining Wireless equipment revenue was primarily a result of our disciplined approach to postpaid subscriber loading this quarter, whereas Media revenue decreased due to a distribution from Major League Baseball in the first quarter of 2018.

These declines were partially offset by strong service revenue growth of 4% in Wireless, where blended ARPU continued to increase year on year for the twelfth consecutive quarter, and 1% in Cable, where Internet revenue growth of 7% continued to drive this segment. Overall, total service revenue increased by 1% this quarter.

Excluding the impact of the distribution from Major League Baseball last year, total revenue and total service revenue would have remained stable and increased by 3%, respectively, this quarter.

Adjusted EBITDA and margins
This quarter, consolidated adjusted EBITDA was stable, but we still delivered an adjusted EBITDA margin expansion of 40 basis points. Excluding the impact of certain baseball-related items, consolidated adjusted EBITDA would have increased by 7% this quarter and margin would have increased by 250 basis points from last year. The adoption of IFRS 16 has resulted in an increase in adjusted EBITDA compared to last year as we have not restated 2018 comparatives; this contributed 3 percentage points of the growth, the majority of which impacts Wireless.

Wireless adjusted EBITDA grew 9%, leading to a margin of 46.4%, an expansion of 380 basis points from last year, as a result of strong growth in Wireless service revenue and the impact of adopting IFRS 16.

Cable adjusted EBITDA increased 3% this quarter primarily from the ongoing product mix shift to higher-margin Internet services and various cost efficiencies achieved. This gave rise to a margin of 45.6% this quarter, up 90 basis points from last year.

Media adjusted EBITDA decreased by 465%, or $107 million, this quarter primarily from lower Media revenue, as discussed above, and higher Media operating expenses as a result of the timing of player salaries pertaining to Toronto Blue Jays trades in 2019. Excluding the impact of these baseball-related items, Media adjusted EBITDA would have decreased by 25% this quarter.

Net income and adjusted net income
Net income and adjusted net income decreased this quarter by 8% and 15%, respectively, primarily as a result of the baseball-related transactions discussed above. Excluding the impacts of these transactions, net income would have increased by 10% and adjusted net income would have remained stable.

Substantial cash flow affords financial flexibility and supports network evolution
We continued to generate substantial cash flow from operating activities of $998 million this quarter, up 13%, and free cash flow of $405 million this quarter, down 8%.

Our solid financial results enable us to continue to make investments in our network and spectrum holdings, strengthen our balance sheet and liquidity, and still return substantial cash to shareholders through dividends and share repurchases. We paid $247 million in dividends this quarter and announced a 4.2% increase to our annualized dividend rate, bringing our annualized dividend rate to $2.00 per share. We also repurchased for cancellation 2.2 million Class B Non-Voting common shares (Class B Non-Voting Shares) for $155 million under our normal course issuer bid (NCIB) program and ended the first quarter with a debt leverage ratio of 2.7, up from 2.5 at the end of 2018, as a result of our adoption of IFRS 16.

As a result of our financial strength, in April 2019, we secured $1.7 billion of 600 MHz spectrum licences. We also entered into a new US$2.2 billion ($2.9 billion) non-revolving credit facility in April, which provides us with significant incremental available liquidity we can use to make the required payments for the spectrum licences. When factoring in the pending acquisition of these spectrum licences, our debt leverage ratio would have been 3.0 as at March 31, 2019.

Strategic Highlights

Our six company priorities guide our work and decision-making as we further improve our operational execution and make well-timed investments to grow our core businesses and deliver increased shareholder value. Below are some highlights.

Create best-in-class customer experiences by putting our customers first in everything we do

  • Delivered our best Wireless postpaid churn ever at 0.99%.
  • Grew customer digital adoption and reduced call volume.
  • Improved service levels in our call centres and reduced the average handle time for calls.

Invest in our networks and technology to deliver leading performance and reliability

  • Secured, in April, 20-year 600 MHz spectrum licences covering all provinces and territories across the country for a total price of $1.7 billion to give our customers the best wireless experience. This low-frequency spectrum is a critical foundation to deploy 5G technology across Canada.
  • Announced a $100 million investment to bring wireless coverage to over 1,000 kilometres of rural and remote corridors across Canada.
  • Completed our first 5G data test in Toronto over a 5G-enabled network.
  • Signed national master service agreements with leading real estate partners to support 5G infrastructure deployment.

Deliver innovative solutions and compelling content that our customers will love

  • Partnered with the Aboriginal Peoples Television Network to broadcast the first-ever NHL game in Plains Cree.
  • Continued accelerating engagement on our Ignite TV service with millions of voice searches for content.
  • Announced the sale of our publishing division to St. Joseph Communications.

Drive profitable growth in all the markets we serve

  • Increased total service revenue and adjusted EBITDA by 3% and 7%, respectively, excluding the impact of certain baseball-related transactions.
  • Increased Wireless blended ABPU by 3% and blended ARPU by 1%.
  • Repurchased 2.2 million Class B Non-Voting Shares for $155 million.

Develop our people and a high performance culture

  • Named to the 2019 Bloomberg Gender-Equality Index (GEI) in January 2019, which named 230 companies committed to transparency in gender reporting and advancing women's equality in the workplace.
  • Recognized as one of Canada's Best Diversity Employers by MediaCorp Canada Inc. in March 2019.
  • Introduced a new inclusion and diversity strategy with three-year representation targets for women in leadership, visible minorities, LGBTQ+, Indigenous peoples, and peoples with disabilities.

Be a strong, socially responsible leader in our communities across Canada

  • Increased access to low-cost high-speed Internet through the expansion of our Connected for Success program and participating in the Government of Canada's Connecting Families initiative.
  • Raised over $180,000 for community causes across the country through fundraisers organized by Rogers Media radio stations.

About Rogers

Rogers is a leading diversified Canadian communications and media company. We are Canada's largest provider of wireless voice and data communications services and one of Canada's leading providers of cable television, high-speed Internet and telephony services to consumers and businesses. Through Rogers Media, we are engaged in radio and television broadcasting, sports, televised and online shopping, and digital media. Our shares are publicly traded on the Toronto Stock Exchange (TSX:RCI.A and RCI.B) and on the New York Stock Exchange (RCI).

Investment community contact Media contact
   
Paul Carpino Terrie Tweddle
647.435.6470 647.501.8346
paul.carpino@rci.rogers.com  terrie.tweddle@rci.rogers.com 

Quarterly Investment Community Teleconference

Our first quarter 2019 results teleconference with the investment community will be held on:

  • April 18, 2019
  • 8:00 a.m. Eastern Time
  • webcast available at investors.rogers.com
  • media are welcome to participate on a listen-only basis

A rebroadcast will be available at investors.rogers.com for at least two weeks following the teleconference. Additionally, investors should note that from time to time, Rogers' management presents at brokerage-sponsored investor conferences. Most often, but not always, these conferences are webcast by the hosting brokerage firm, and when they are webcast, links are made available on Rogers' website at investors.rogers.com.

For More Information

You can find more information relating to us on our website (investors.rogers.com), on SEDAR (sedar.com), and on EDGAR (sec.gov), or you can e-mail us at investor.relations@rci.rogers.com. Information on or connected to these and any other websites referenced in this earnings release is not part of, or incorporated into, this earnings release.

You can also go to investors.rogers.com for information about our governance practices, corporate social responsibility reporting, a glossary of communications and media industry terms, and additional information about our business.

About this Earnings Release

This earnings release contains important information about our business and our performance for the three months ended March 31, 2019, as well as forward-looking information about future periods. This earnings release should be read in conjunction with our First Quarter 2019 MD&A; our First Quarter 2019 Interim Condensed Consolidated Financial Statements and notes thereto, which have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB); our 2018 Annual MD&A; our 2018 Annual Audited Consolidated Financial Statements and notes thereto, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB; and our other recent filings with Canadian and US securities regulatory authorities, including our Annual Information Form, which are available on SEDAR at sedar.com or EDGAR at sec.gov, respectively.

Effective January 1, 2019, we adopted the new accounting standard, IFRS 16, Leases (IFRS 16), that is discussed in "Critical Accounting Policies and Estimates" in this earnings release and in our First Quarter 2019 MD&A. The adoption of IFRS 16 had a significant effect on our reported results. Due to our selected transition method, we have not restated our prior year comparatives.

Effective January 1, 2019, we have redefined free cash flow, a non-GAAP measure, such that we no longer adjust for the "net change in contract asset and deferred commission cost asset balances". We have redefined free cash flow to simplify this measure and believe removing it will make us more comparable within our industry. See "Non-GAAP Measures" for more information.

For more information about Rogers, including product and service offerings, competitive market and industry trends, our overarching strategy, key performance drivers, and objectives, see "Understanding Our Business", "Our Strategy, Key Performance Drivers, and Strategic Highlights", and "Capability to Deliver Results" in our 2018 Annual MD&A. In April 2019, we sold certain assets of our publishing division, including our print and digital magazine brands, to St. Joseph Communications.

We, us, our, Rogers, Rogers Communications, and the Company refer to Rogers Communications Inc. and its subsidiaries. RCI refers to the legal entity Rogers Communications Inc., not including its subsidiaries. Rogers also holds interests in various investments and ventures.

All dollar amounts are in Canadian dollars unless otherwise stated and are unaudited. All percentage changes are calculated using the rounded numbers as they appear in the tables. Information is current as at April 17, 2019 and was approved by RCI's Board of Directors (the Board) on that date. This earnings release includes forward-looking statements and assumptions. See "About Forward-Looking Information" for more information.

In this earnings release, this quarter, the quarter, or the first quarter refer to the three months ended March 31, 2019, unless the context indicates otherwise. All results commentary is compared to the equivalent periods in 2018 or as at December 31, 2018, as applicable, unless otherwise indicated.

Reportable segments
We report our results of operations in three reportable segments. Each segment and the nature of its business is as follows:

Segment Principal activities
Wireless Wireless telecommunications operations for Canadian consumers and businesses.
Cable Cable telecommunications operations, including Internet, television, telephony (phone), and smart home monitoring services for Canadian consumers and businesses, and network connectivity through our fibre network and data centre assets to support a range of voice, data, networking, hosting, and cloud-based services for the business, public sector, and carrier wholesale markets.
Media A diversified portfolio of media properties, including sports media and entertainment, television and radio broadcasting, specialty channels, multi-platform shopping, and digital media.

Wireless and Cable are operated by our wholly-owned subsidiary, Rogers Communications Canada Inc. (RCCI), and certain of our other wholly-owned subsidiaries. Media is operated by our wholly-owned subsidiary, Rogers Media Inc., and its subsidiaries.

Summary of Consolidated Financial Results

  Three months ended March 31  
(In millions of dollars, except margins and per share amounts)   2019     2018 1   % Chg  
       
Revenue      
Wireless   2,189     2,191    
Cable   976     969   1  
Media   468     532   (12 )
Corporate items and intercompany eliminations   (46 )   (59 ) (22 )
Revenue   3,587     3,633   (1 )
Total service revenue 2   3,143     3,127   1  
       
Adjusted EBITDA 3      
Wireless   1,015     934   9  
Cable   445     433   3  
Media   (84 )   23   n/m  
Corporate items and intercompany eliminations   (41 )   (52 ) (21 )
Adjusted EBITDA   1,335     1,338    
       
Adjusted EBITDA margin 3   37.2 %   36.8 % 0.4 pts
       
Net income   391     425   (8 )
Basic earnings per share   $0.76     $0.83   (8 )
Diluted earnings per share   $0.76     $0.80   (5 )
       
Adjusted net income 3   405     477   (15 )
Adjusted basic earnings per share 3   $0.79     $0.93   (15 )
Adjusted diluted earnings per share 3   $0.78     $0.90   (13 )
       
Capital expenditures   617     605   2  
Cash provided by operating activities   998     885   13  
Free cash flow 3,4   405     441   (8 )

n/m - not meaningful
1 Effective January 1, 2019, we adopted IFRS 16, with the ongoing impacts of this standard included in our results prospectively from that date. Our 2018 results have not been restated. See "Critical Accounting Policies and Estimates".
2 As defined. See "Key Performance Indicators".
3 Adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted basic and diluted earnings per share, and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. These are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See "Non-GAAP Measures" for information about these measures, including how we calculate them.
2018 free cash flow has been restated. See "Managing our Liquidity and Financial Resources" for more information.

Results of our Reportable Segments

WIRELESS

Wireless Financial Results

  Three months ended March 31  
(In millions of dollars, except margins) 2019   2018   % Chg  
       
Revenue      
Service revenue 1,747   1,687   4  
Equipment revenue 442   504   (12 )
Revenue 2,189   2,191    
       
Operating expenses      
Cost of equipment 501   561   (11 )
Other operating expenses 673   696   (3 )
Operating expenses 1,174   1,257   (7 )
       
Adjusted EBITDA 1,015   934   9  
       
Adjusted EBITDA margin 46.4 % 42.6 % 3.8 pts
Capital expenditures  282   260   8  

Wireless Subscriber Results 1

  Three months ended March 31  
(In thousands, except churn, blended ABPU, and blended ARPU) 2019   2018   Chg  
       
Postpaid      
Gross additions 295   377   (82 )
Net additions 23   95   (72 )
Total postpaid subscribers 2 9,180   8,799   381  
Churn (monthly) 0.99 % 1.08 % (0.09 pts)
Prepaid      
Gross additions 171   163   8  
Net losses (56 ) (60 ) 4  
Total prepaid subscribers 2 1,570   1,718   (148 )
Churn (monthly) 4.69 % 4.24 % 0.45 pts
Blended ABPU (monthly) $64.62   $62.67   $1.95  
Blended ARPU (monthly) $54.13   $53.68   $0.45  

Subscriber counts, subscriber churn, blended ABPU, and blended ARPU are key performance indicators. See "Key Performance Indicators".
As at end of period.

Service revenue
The 4% increase in service revenue this quarter was a result of:

  • a larger postpaid subscriber base; and
  • 1% increase in blended ARPU this quarter, primarily due to the increased mix of subscribers on higher-rate plans from our various brands.

The 3% increase in blended ABPU this quarter was a result of the increased service revenue as described above.

Gross postpaid subscriber additions this quarter were 295,000 and net postpaid subscriber additions were 23,000. The decreases in these figures from the same period last year were a result of our disciplined approach around subscriber base management and an overall softness in the market this quarter compared to last year. We believe the lower postpaid churn this quarter was a result of our strategic focus on enhancing the customer experience by improving our customer service and continually increasing the quality of our network.

Equipment revenue
The 12% decrease in equipment revenue this quarter was a result of:

  • a decrease in device upgrades by existing subscribers; and
  • the decrease in gross postpaid subscriber additions described above.

Operating expenses
Cost of equipment
The 11% decrease in the cost of equipment this quarter was a result of:

  • the decreases in device upgrades by existing subscribers and gross postpaid additions, as discussed above; partially offset by
  • a shift in the product mix of device sales towards higher-cost smartphones.

Other operating expenses
The 3% decrease in other operating expenses this quarter was primarily a result of the impact of the adoption of IFRS 16.

Adjusted EBITDA
The 9% increase in adjusted EBITDA this quarter was a result of the revenue and expense changes discussed above.

CABLE

Cable Financial Results

  Three months ended March 31  
(In millions of dollars, except margins) 2019   2018   % Chg  
       
Revenue      
Internet 541   506   7  
Television 357   365   (2 )
Phone 76   96   (21 )
Service revenue 974   967   1  
Equipment revenue 2   2    
Revenue 976   969   1  
       
Operating expenses      
Cost of equipment 5   5    
Other operating expenses 526   531   (1 )
Operating expenses 531   536   (1 )
       
Adjusted EBITDA 445   433   3  
       
Adjusted EBITDA margin 45.6 % 44.7 % 0.9 pts
Capital expenditures
289   297   (3 )

Cable Subscriber Results 1

  Three months ended March 31  
(In thousands) 2019   2018   Chg  
       
Internet      
Net additions 14   26   (12 )
Total Internet subscribers 2 2,444   2,347   97  
Television      
Net losses (28 ) (12 ) (16 )
Total Television subscribers 2 1,657   1,728   (71 )
Phone      
Net (losses) additions (10 ) 9   (19 )
Total Phone subscribers 2 1,106   1,117   (11 )
       
Homes passed 2 4,381   4,327   54  
Total service units 3      
Net (losses) additions (24 ) 23   (47 )
Total service units 2 5,207   5,192   15  

Subscriber counts are key performance indicators. See "Key Performance Indicators".
2  As at end of period.
3  Includes Internet, Television, and Phone.

Revenue
The 1% increase in revenue this quarter was a result of:

  • the movement of Internet customers to higher speed and usage tiers;
  • the impact of service pricing changes; and
  • a larger Internet subscriber base; partially offset by
  • promotional pricing provided to subscribers; and
  • a lower subscriber base for our Television products.

Internet revenue
The 7% increase in Internet revenue this quarter was a result of:

  • the impact of Internet service pricing changes;
  • general movement of customers to higher speed and usage tiers of our Internet offerings; and
  • a larger Internet subscriber base; partially offset by
  • promotional pricing provided to subscribers.

Television revenue
The 2% decrease in Television revenue this quarter was a result of:

  • the decline in Television subscribers over the past year; partially offset by
  • new Ignite TV subscribers; and
  • the impact of Television service pricing changes, net of promotional pricing provided to subscribers.

Phone revenue
The 21% decrease in Phone revenue this quarter was primarily a result of new bundled pricing constructs that provide a larger Phone discount.

Operating expenses
The 1% decrease in operating expenses this quarter was a result of the impact of the adoption of IFRS 16.

Adjusted EBITDA
The 3% increase in adjusted EBITDA this quarter was a result of the revenue and expense changes discussed above.

MEDIA

Media Financial Results

  Three months ended March 31  
(In millions of dollars, except margins) 2019   2018   % Chg  
       
Revenue 468   532   (12 )
Operating expenses 552   509   8  
       
Adjusted EBITDA (84 ) 23   n/m  
       
Adjusted EBITDA margin (17.9 )% 4.3 % (22.2 pts)
Capital expenditures  22   15   47  

Revenue
The 12% decrease in revenue this quarter was a result of a prior year Major League Baseball distribution to the Toronto Blue Jays. Excluding the impact of the Major League Baseball distribution, Media revenue would have been stable year on year.

Operating expenses
The 8% increase in operating expenses this quarter was a result of:

  • the timing of player salaries pertaining to Toronto Blue Jays player trades that otherwise would have been incurred throughout the regular season; and
  • higher programming costs.

Adjusted EBITDA
The decrease in adjusted EBITDA this quarter was a result of the revenue and expense changes discussed above. Excluding the impact of the baseball-related transactions discussed above, Media adjusted EBITDA would have decreased by 25% this quarter.

Other Media developments
In April 2019, we sold certain assets of our publishing division, including our print and digital magazine brands, to St. Joseph Communications.

CAPITAL EXPENDITURES

  Three months ended March 31  
(In millions of dollars, except capital intensity) 2019   2018   % Chg  
       
Capital expenditures 1
     
Wireless 282   260   8  
Cable 289   297   (3 )
Media 22   15   47  
Corporate 24   48   (50 )
       
Capital expenditures before proceeds on disposition 617   620    
Proceeds on disposition   (15 ) (100 )
       
Capital expenditures 1 617   605   2  
       
Capital intensity 2 17.2 % 16.7 % 0.5 pts

Includes additions to property, plant and equipment net of proceeds on disposition, but does not include expenditures for spectrum licences or additions to right-of-use assets.
As defined. See "Key Performance Indicators".

Wireless
The increase in capital expenditures in Wireless this quarter was a result of investments made to upgrade our wireless network to continue delivering reliable performance for our customers. We have continued augmenting our existing LTE network with 4.5G technology investments that are also 5G-ready.

Cable
The decrease in capital expenditures in Cable this quarter was a result of lower investments in customer premise equipment, partially offset by greater investments in information technology and our network. We continued upgrading our hybrid fibre-coaxial infrastructure with additional fibre deployments and further DOCSIS technology enhancements. These deployments and enhancements will help deliver more bandwidth and an even more reliable customer experience.

Media
The increase in capital expenditures in Media this quarter was a result of higher investments in our broadcast infrastructure and the Rogers Centre.

Corporate
The decrease in capital expenditures in Corporate this quarter was a result of higher investments in information technology in 2018.

Capital intensity
Capital intensity increased this quarter as a result of higher capital expenditures, as discussed above, and lower total revenue.

Regulatory Developments

See our 2018 Annual MD&A for a discussion of the significant regulations that affected our operations as at March 6, 2019. The following is the significant regulatory development since that date.

600 MHz spectrum licence band
Innovation, Science and Economic Development Canada's 600 MHz wireless spectrum licence auction began on March 12, 2019, and ended on April 4, 2019. The results were publicly released on April 10, 2019. Twelve companies participated in the auction and 104 of 112 licences were awarded to nine of those participants, with a total value of $3.5 billion. We acquired 52 licences at a cost of $1.7 billion. We will take possession of these licences in the second quarter of 2019, after making payment for the licences and passing Canadian Ownership and Control review.

Critical Accounting Policies and Estimates

See our 2018 Annual MD&A and our 2018 Annual Audited Consolidated Financial Statements and notes thereto for a discussion of the accounting policies and estimates that are critical to the understanding of our business operations and the results of our operations.

New accounting pronouncements adopted in 2019
IFRS 16
Effective January 1, 2019, we adopted IFRS 16, which supersedes previous accounting standards for leases, including IAS 17, Leases (IAS 17) and IFRIC 4, Determining whether an arrangement contains a lease (IFRIC 4).

IFRS 16 introduced a single accounting model for lessees unless the underlying asset is of low value. A lessee is required to recognize, on its statement of financial position, a right-of-use asset, representing its right to use the underlying leased asset, and a lease liability, representing its obligation to make lease payments. As a result of adopting IFRS 16, we have recognized a significant increase to both assets and liabilities on our Consolidated Statements of Financial Position, as well as a decrease to operating costs (for the removal of rent expense for leases), an increase to depreciation and amortization (due to depreciation of the right-of-use asset), and an increase to finance costs (due to accretion of the lease liability). The accounting treatment for lessors remains largely the same as under IAS 17.

We adopted IFRS 16 with the cumulative effect of initial application recognized as an adjustment to retained earnings within shareholders' equity on January 1, 2019. We have not restated comparatives for 2018. At transition, we applied the practical expedient available to us as lessee that allows us to maintain our lease assessments made under IAS 17 and IFRIC 4 for existing contracts. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed after January 1, 2019.

For leases that were classified as operating leases under IAS 17, lease liabilities at transition have been measured at the present value of remaining lease payments, discounted at the related incremental borrowing rate as at January 1, 2019. Generally, right-of-use assets at transition have been measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid or accrued rent relating to that lease. For certain leases where we have readily available information, we have elected to measure the right-of-use assets at their carrying amounts as if IFRS 16 had been applied since the lease commencement date using the related incremental borrowing rate for the remaining lease period as at January 1, 2019.

When applying IFRS 16 to leases previously classified as operating leases, the following practical expedients were available to us. We have:

  • applied a single discount rate to a portfolio of leases with similar characteristics;
  • excluded initial direct costs from measuring the right-of-use asset as at January 1, 2019;
  • used hindsight in determining the lease term where the contract contains purchase, extension, or termination options; and
  • relied upon our assessment of whether leases are onerous under the requirements of IAS 37, Provisions, contingent liabilities and contingent assets as at December 31, 2018 as an alternative to reviewing our right-of-use assets for impairment.

We have elected to not separate fixed non-lease components from lease components and instead account for each lease component and associated fixed non-lease components as a single lease component. On transition, we have not elected the recognition exemptions on short-term leases or low-value leases; however, we may choose to elect the recognition exemptions on a class-by-class basis for new classes, and lease-by-lease basis, respectively, in the future.

There was no significant impact for contracts in which we are the lessor.

Effect of IFRS 16 Transition
Below is a summary of the IFRS 16 adjustments on certain key financial metrics from our Consolidated Statement of Financial Position as at January 1, 2019.

(in millions of dollars) Reference As reported as at
December 31, 2018
  Effect of IFRS 16
transition
  Subsequent to
transition as at
January 1, 2019
 
         
Assets        
Current assets:        
Other current assets   436   (23 ) 413  
Remainder of current assets   4,452     4,452  
Total current assets   4,888   (23 ) 4,865  
         
Property, plant and equipment i 11,780   1,481   13,261  
Remainder of long-term assets   15,250     15,250  
         
Total assets   31,918   1,458   33,376  
         
Liabilities and shareholders' equity        
Current liabilities:        
Accounts payable and accrued liabilities   3,052   (55 ) 2,997  
Current portion of lease liabilities i   190   190  
Remainder of current liabilities   3,784     3,784  
Total current liabilities   6,836   135   6,971  
         
Lease liabilities i   1,355   1,355  
Deferred tax liabilities   2,910   (9 ) 2,901  
Remainder of long-term liabilities   13,993     13,993  
Total liabilities   23,739   1,481   25,220  
         
Shareholders' equity   8,179   (23 ) 8,156  
         
Total liabilities and shareholders' equity   31,918   1,458   33,376  

i) Right-of-use assets and lease liabilities
We have recorded a right-of-use asset and a lease liability for all existing leases at the lease commencement date, which is January 1, 2019 for the purposes of our adoption. The lease liability has been initially measured at the present value of lease payments that remain to be paid at the commencement date. Lease payments included in the measurement of the lease liability include:

  • fixed payments, including in-substance fixed payments;
  • variable lease payments that depend on an index or rate;
  • amounts expected to be payable under a residual value guarantee; and
  • the exercise price under a purchase option that we are reasonably certain to exercise, lease payments in an optional renewal period if we are reasonably certain to exercise an extension option, and penalties for early termination of a lease unless we are reasonably certain not to terminate early.

After transition, the right-of-use asset will initially be measured at cost, consisting of:

  • the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date; plus
  • any initial direct costs incurred; and
  • an estimate of costs to dismantle and remove the underlying asset or restore the site on which it is located; less
  • any lease incentives received.

The right-of-use asset will typically be depreciated on a straight-line basis over the lease term, unless we expect to obtain ownership of the leased asset at the end of the lease. The lease term will consist of:

  • the non-cancellable period of the lease;
  • periods covered by options to extend the lease, where we are reasonably certain to exercise the option; and
  • periods covered by options to terminate the lease, where we are reasonably certain not to exercise the option.

Financial Guidance

There are no changes at this time to the consolidated guidance ranges for revenue, adjusted EBITDA, free cash flow, or capital expenditures, which were provided on January 24, 2019. See "About Forward-Looking Information" in this earnings release and "Financial and Operating Guidance" in our 2018 Annual MD&A. Adjusted EBITDA and free cash flow are non-GAAP measures and should not be considered substitutes or alternatives for GAAP measures. They are not defined terms under IFRS and do not have standard meanings, so may not be a reliable way to compare us to other companies. See "Non-GAAP Measures" for information about these measures, including how we calculate them.

Key Performance Indicators

We measure the success of our strategy using a number of key performance indicators that are defined and discussed in our 2018 Annual MD&A and our First Quarter 2019 MD&A. We believe these key performance indicators allow us to appropriately measure our performance against our operating strategy and against the results of our peers and competitors. The following key performance indicators are not measurements in accordance with IFRS and should not be considered alternatives to net income or any other measure of performance under IFRS. They include:

  • subscriber counts;
    • Wireless;
    • Cable; and
    • homes passed (Cable);
  • subscriber churn (churn);
  • blended average billings per user (ABPU);
  • blended average revenue per user (ARPU);
  • capital intensity; and
  • total service revenue.

Non-GAAP Measures

We use the following non-GAAP measures. These are reviewed regularly by management and the Board in assessing our performance and making decisions regarding the ongoing operations of our business and its ability to generate cash flows. Some or all of these measures may also be used by investors, lending institutions, and credit rating agencies as indicators of our operating performance, of our ability to incur and service debt, and as measurements to value companies in the telecommunications sector. These are not recognized measures under GAAP and do not have standard meanings under IFRS, so may not be reliable ways to compare us to other companies.


Non-GAAP measure


 Why we use it


How we calculate it

Most
comparable
IFRS financial
measure
Adjusted EBITDA
 
Adjusted EBITDA margin
  To evaluate the performance of our businesses, and when making decisions about the ongoing operations of the business and our ability to generate cash flows. Adjusted EBITDA:
Net income
add (deduct)
income tax expense (recovery); finance costs; depreciation and amortization; other expense (income); restructuring, acquisition and other; and loss (gain) on disposition of property, plant and equipment.
 
Adjusted EBITDA margin:
Adjusted EBITDA
divided by
revenue.

Net income
  We believe that certain investors and analysts use adjusted EBITDA to measure our ability to service debt and to meet other payment obligations.
  We also use it as one component in determining short-term incentive compensation for all management employees.
Adjusted net
income
 
Adjusted basic
and diluted
earnings per
share
  To assess the performance of our businesses before the effects of the noted items, because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. Excluding these items does not imply that they are non-recurring. Adjusted net income:
Net income
add (deduct)
restructuring, acquisition and other; loss (recovery) on sale or wind down of investments; loss (gain) on disposition of property, plant and equipment; (gain) on acquisitions; loss on non-controlling interest purchase obligations; loss on repayment of long-term debt; loss on bond forward derivatives; and income tax adjustments on these items, including adjustments as a result of legislative changes.
 
Adjusted basic and diluted earnings per share:
Adjusted net income and adjusted net income including the dilutive effect of stock-based compensation
divided by
basic and diluted weighted average shares outstanding.
Net income
 
Basic and
diluted
earnings per
share
Free cash flow 1   To show how much cash we have available to repay debt and reinvest in our company, which is an important indicator of our financial strength and performance. Adjusted EBITDA
deduct
capital expenditures; interest on borrowings net of capitalized interest; and cash income taxes.

Cash provided
by operating
activities
  We believe that some investors and analysts use free cash flow to value a business and its underlying assets.
Adjusted net
debt
  To conduct valuation-related analysis and make decisions about capital structure. Total long-term debt
add (deduct)
current portion of long-term debt; deferred transaction costs and discounts; net debt derivative (assets) liabilities; credit risk adjustment related to net debt derivatives; current portion of lease liabilities; lease liabilities; bank advances (cash and cash equivalents); and short-term borrowings.
Long-term
debt
  We believe this helps investors and analysts analyze our enterprise and equity value and assess our leverage.
Debt leverage ratio   To conduct valuation-related analysis and make decisions about capital structure. Adjusted net debt (defined above)
divided by
12-month trailing adjusted EBITDA (defined above).
Long-term debt
divided by net
income
  We believe this helps investors and analysts analyze our enterprise and equity value and assess our leverage.

Effective January 1, 2019, we redefined free cash flow such that we no longer adjust for the "net change in contract asset and deferred commission cost asset balances". We redefined free cash flow to simplify this measure and we believe removing it will make us more comparable within our industry.

Reconciliation of adjusted EBITDA

  Three months ended March 31  
(In millions of dollars) 2019   2018  
     
Net income 391   425  
Add:    
Income tax expense 139   141  
Finance costs 189   219  
Depreciation and amortization 609   544  
     
EBITDA 1,328   1,329  
Add (deduct):    
Other income (13 ) (23 )
Restructuring, acquisition and other 20   43  
Gain on disposition of property, plant and equipment   (11 )
     
Adjusted EBITDA 1,335   1,338  

Reconciliation of adjusted EBITDA margin

  Three months ended March 31  
(In millions of dollars, except margins) 2019   2018  
     
Adjusted EBITDA 1,335   1,338  
Divided by: total revenue 3,587   3,633  
Adjusted EBITDA margin 37.2  % 36.8  %

Reconciliation of adjusted net income

  Three months ended March 31  
(In millions of dollars) 2019   2018  
     
Net income 391   425  
Add (deduct):    
Restructuring, acquisition and other 20   43  
Loss on repayment of long-term debt   28  
Gain on disposition of property, plant and equipment   (11 )
Income tax impact of above items (6 ) (8 )
     
Adjusted net income 405   477  

Reconciliation of adjusted earnings per share

  Three months ended March 31  
(In millions of dollars, except per share amounts; number of shares outstanding in millions)   2019     2018  
     
Adjusted basic earnings per share:    
Adjusted net income   405     477  
Divided by:    
Weighted average number of shares outstanding   514     515  
     
Adjusted basic earnings per share   $0.79     $0.93  
     
Adjusted diluted earnings per share:    
Diluted adjusted net income   405     464  
Divided by:    
Diluted weighted average number of shares outstanding   516     516  
     
Adjusted diluted earnings per share   $0.78     $0.90  

Reconciliation of free cash flow

  Three months ended March 31  
  2019   2018  
(In millions of dollars)   (restated) 1  
     
Cash provided by operating activities 998   885  
Add (deduct):    
Capital expenditures (617 ) (605 )
Interest on borrowings, net of capitalized interest (168 ) (182 )
Restructuring, acquisition and other 20   43  
Interest paid 220   238  
Program rights amortization (19 ) (14 )
Net change in contract asset balances 9   69  
Change in non-cash operating working capital items 13   21  
Other adjustments (51 ) (14 )
     
Free cash flow 405   441  

1 Effective January 1, 2019, we have redefined free cash flow such that we no longer adjust for the "net change in contract asset and deferred commission cost asset balances". We have redefined free cash flow to simplify this measure and believe removing it will make us more comparable within our industry.

Reconciliation of adjusted net debt and debt leverage ratio

  As at
March 31
  As at
January 1
  As at
December 31
 
(In millions of dollars) 2019   2019   2018  
       
Current portion of long-term debt 500   900   900  
Long-term debt 13,224   13,390   13,390  
Deferred transaction costs and discounts 111   114   114  
  13,835   14,404   14,404  
Add (deduct):      
Net debt derivative assets (1,059 ) (1,373 ) (1,373 )
Credit risk adjustment related to net debt derivative assets (45 ) (75 ) (75 )
Short-term borrowings 2,648   2,255   2,255  
Current portion of lease liabilities 187   190    
Lease liabilities 1,371   1,355    
Cash and cash equivalents (264 ) (405 ) (405 )
       
Adjusted net debt 16,673   16,351   14,806  


  As at
March 31
  As at
January 1
  As at
December 31
 
(In millions of dollars, except ratios) 2019   2019   2018  
       
Adjusted net debt 16,673   16,351   14,806  
Divided by: trailing 12-month adjusted EBITDA 6,109   6,157   5,983  
       
Debt leverage ratio 2.7   2.7   2.5  

As a result of our adoption of IFRS 16 effective January 1, 2019, we have modified our definition of adjusted net debt such that it now includes the total of "current portion of lease liabilities" and "lease liabilities". We believe adding total lease liabilities to adjusted net debt is appropriate as they reflect payments to which we are contractually committed and the related payments have been removed from our calculation of adjusted EBITDA due to the accounting change.

Additionally, as we have not restated comparative periods prior to 2019 due to our transition method, we have calculated the debt leverage ratio as at March 31, 2019 using pro forma adjusted EBITDA for the nine months ended December 31, 2018 to remove rent expense as if we had adopted IFRS 16 retrospectively. Calculating debt leverage ratio as at January 1, 2019 using pro forma adjusted EBITDA for the full-year 2018 yields a ratio of 2.7, showing no change in the sequential period ended March 31, 2019. As the lease liabilities are included in adjusted net debt, we believe this adjustment provides a more meaningful and consistent basis on which to determine debt leverage ratio.

Rogers Communications Inc.
Interim Condensed Consolidated Statements of Income
(In millions of dollars, except per share amounts, unaudited)

  Three months ended March 31  
    2019     2018  
     
Revenue   3,587     3,633  
     
Operating expenses:    
Operating costs   2,252     2,295  
Depreciation and amortization   609     544  
Gain on disposition of property, plant and equipment       (11 )
Restructuring, acquisition and other   20     43  
Finance costs   189     219  
Other income   (13 )   (23 )
     
Income before income tax expense   530     566  
Income tax expense   139     141  
     
Net income for the period   391     425  
     
Earnings per share:    
Basic   $0.76     $0.83  
Diluted   $0.76     $0.80  


Rogers Communications Inc.
Interim Condensed Consolidated Statements of Financial Position 
(In millions of dollars, unaudited)

  As at March 31   As at January 1   As at December 31  
  2019   2019   2018  
       
Assets      
Current assets:      
Cash and cash equivalents 264   405   405  
Accounts receivable 2,088   2,259   2,259  
Inventories 462   466   466  
Current portion of contract assets 1,081   1,052   1,052  
Other current assets 411   413   436  
Current portion of derivative instruments 201   270   270  
Total current assets 4,507   4,865   4,888  
       
Property, plant and equipment 13,327   13,261   11,780  
Intangible assets 7,188   7,205   7,205  
Investments 2,458   2,134   2,134  
Derivative instruments 1,119   1,339   1,339  
Contract assets 515   535   535  
Other long-term assets 134   132   132  
Goodwill 3,905   3,905   3,905  
       
Total assets 33,153   33,376   31,918  
       
Liabilities and shareholders' equity      
Current liabilities:      
Short-term borrowings 2,648   2,255   2,255  
Accounts payable and accrued liabilities 2,693   2,997   3,052  
Income tax payable 193   177   177  
Other current liabilities 139   132   132  
Contract liabilities 282   233   233  
Current portion of long-term debt 500   900   900  
Current portion of derivative instruments 134   87   87  
Current portion of lease liabilities 187   190    
Total current liabilities 6,776   6,971   6,836  
       
Provisions 36   35   35  
Long-term debt 13,224   13,390   13,390  
Derivative instruments 87   22   22  
Lease liabilities 1,371   1,355    
Other long-term liabilities 529   546   546  
Deferred tax liabilities 2,863   2,901   2,910  
Total liabilities 24,886   25,220   23,739  
       
Shareholders' equity 8,267   8,156   8,179  
       
Total liabilities and shareholders' equity 33,153   33,376   31,918  


Rogers Communications Inc.
Interim Condensed Consolidated Statements of Cash Flows
(In millions of dollars, unaudited)

  Three months ended March 31  
  2019   2018  
Operating activities:    
Net income for the period 391   425  
Adjustments to reconcile net income to cash provided by operating activities:    
Depreciation and amortization 609   544  
Program rights amortization 19   14  
Finance costs 189   219  
Income tax expense 139   141  
Post-employment benefits contributions, net of expense 8   17  
Gain on disposition of property, plant and equipment   (11 )
Net change in contract asset balances (9 ) (69 )
Other 30   (26 )
Cash provided by operating activities before changes in non-cash working capital items, income 1,376   1,254  
taxes paid, and interest paid        
Change in non-cash operating working capital items (13 ) (21 )
Cash provided by operating activities before income taxes paid and interest paid 1,363   1,233  
Income taxes paid (145 ) (110 )
Interest paid (220 ) (238 )
     
Cash provided by operating activities 998   885  
     
Investing activities:    
Capital expenditures (617 ) (605 )
Additions to program rights (7 ) (6 )
Changes in non-cash working capital related to capital expenditures and intangible assets (107 ) (138 )
Other (3 ) 10  
     
Cash used in investing activities (734 ) (739 )
     
Financing activities:    
Net proceeds received (repayments) on short-term borrowings 430   (848 )
Net (repayment) issuance of long-term debt (400 ) 938  
Net payments on settlement of debt derivatives and forward contracts (11 ) (16 )
Principal payments of lease liabilities (41 )  
Transaction costs incurred   (16 )
Repurchase of Class B Non-Voting Shares (136 )  
Dividends paid (247 ) (247 )
     
Cash used in financing activities (405 ) (189 )
     
Change in cash and cash equivalents (141 ) (43 )
Cash and cash equivalents (bank advances), beginning of period 405   (6 )
     
Cash and cash equivalents (bank advances), end of period 264   (49 )

About Forward-Looking Information

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

Forward-looking information

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

Our forward-looking information includes forecasts and projections related to the following items, some of which are non-GAAP measures (see "Non-GAAP Measures"), among others:

  • revenue;
  • total service revenue;
  • adjusted EBITDA;
  • capital expenditures;
  • cash income tax payments;
  • free cash flow;
  • dividend payments;
  • the growth of new products and services;
  • expected growth in subscribers and the services to which they subscribe;
  • the cost of acquiring and retaining subscribers and deployment of new services;
  • continued cost reductions and efficiency improvements;
  • traction against our debt leverage ratio; and
  • all other statements that are not historical facts.

Our conclusions, forecasts, and projections are based on the following factors, among others:

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

Except as otherwise indicated, this earnings release and our forward-looking information do not reflect the potential impact of any non-recurring or other special items or of any dispositions, monetizations, mergers, acquisitions, other business combinations, or other transactions that may be considered or announced or may occur after the date on which the statement containing the forward-looking information is made.

Risks and uncertainties
Actual events and results can be substantially different from what is expressed or implied by forward-looking information as a result of risks, uncertainties, and other factors, many of which are beyond our control, including, but not limited to:

  • regulatory changes;
  • technological changes;
  • economic conditions;
  • unanticipated changes in content or equipment costs;
  • changing conditions in the entertainment, information, and communications industries;
  • the integration of acquisitions;
  • litigation and tax matters;
  • the level of competitive intensity;
  • the emergence of new opportunities; and
  • new interpretations and new accounting standards from accounting standards bodies.

These factors can also affect our objectives, strategies, and intentions. Many of these factors are beyond our control or our current expectations or knowledge. Should one or more of these risks, uncertainties, or other factors materialize, our objectives, strategies, or intentions change, or any other factors or assumptions underlying the forward-looking information prove incorrect, our actual results and our plans could vary significantly from what we currently foresee.

Accordingly, we warn investors to exercise caution when considering statements containing forward-looking information and caution them that it would be unreasonable to rely on such statements as creating legal rights regarding our future results or plans. We are under no obligation (and we expressly disclaim any such obligation) to update or alter any statements containing forward-looking information or the factors or assumptions underlying them, whether as a result of new information, future events, or otherwise, except as required by law. All of the forward-looking information in this earnings release is qualified by the cautionary statements herein.

Before making an investment decision
Before making any investment decisions and for a detailed discussion of the risks, uncertainties, and environment associated with our business, fully review the sections of our First Quarter 2019 MD&A entitled "Updates to Risks and Uncertainties" and "Regulatory Developments" and fully review the sections in our 2018 Annual MD&A entitled "Regulation in Our Industry" and "Governance and Risk Management", as well as our various other filings with Canadian and US securities regulators, which can be found at sedar.com and sec.gov, respectively. Information on or connected to our website is not part of or incorporated into this earnings release.