Canadian multimedia giant Rogers Communications Inc. (RCI +0.30%) didn't connect well with investors this quarter. While revenue growth accelerated, profits slipped and came in below estimates. That being said, despite the weak quarter financially, the company is setting itself up for stronger results in the years ahead.
Dialing into results
Rogers reported $3.2 billion in revenue, which was 5% higher than the first quarter of 2014. Revenue also just beat analyst estimates by $20 million. This was clearly a team effort, as all four of Rogers' operating segments delivered stable or growing revenue. The fastest growing segment was its Media group, which increased revenue by $97 million, or 26%, over the first quarter of last year as a result of its NHL licensing agreement, as well as growth at Sportsnet Radio and Next Issue Canada. The next strongest segment was the company's Wireless segment, which dialed up $67 million in revenue growth, 4% higher than the prior year. Meanwhile, company's Cable segment delivered 1% revenue growth while the Business Solutions segment was flat.
But that's where the good news stops, as Rogers' profitability was another story. Overall, adjusted operating profit was down 3% to $1.1 billion. The Media segment had the biggest drop, losing $32 million in the quarter, which was $8 million, or 33%, more than the first quarter of 2014. However, the first quarter is traditionally Media's softest, and it was also affected by the timing of programing and production costs, which were seasonal in natural and mostly related to hockey. The other big drag on profitability was the Wireless segment, which saw its adjusted operating profit drop $25 million, or 3%. This was largely due to higher costs, as the company subsidized more smartphones, focusing on the early upgrading of subscribers in advance of an industrywide shift to two-year contracts this summer. Rogers wanted to ensure that it maintained these customers, and it invested to keep them.
That said, these investments came with a cost and caused Rogers' adjusted net income to slip by 19% to $275 million, while earnings per share slipped 20% to $0.53 per share. That was a dime less than analysts were expecting. Moreover, free cash flow plunged 25% to $266 million. However; that was primarily the result of a timing-related increase in cash income taxes. Further, that was more than enough free cash flow to cover the company's dividend, which it just raised 5% and equates to $235 million in cash that's flowing back out the door.
A look ahead
Rogers is making a lot of investments to improve its customer experience, which is intended to retain and grow its customer base. These investments, such as subsidizing smartphones and paying up for exclusive hockey access, are having a noticeable impact on profits over the short term. However, these investments are expected to pay off over the longer term as the company strengthens its brand in Canada. For example, the company activated 700,000 wireless smartphones during the quarter, of which 32% were new customers. These higher-value smartphone customers will be key to driving higher Wireless profits in the years ahead.
Investor takeaway
While investors don't like to see profits slip, in Rogers' case it does have a good reason for the decline. The company is being proactive to invest in improvements to its brand. It expects these investments to deliver meaningful growth in the years ahead, which should improve its free cash flow and lead to additional dividend increases.
