T:CC - Rogers Communications: Wait For A Plan Of Action Possibly With Google

• Rogers Communications' network suffered from 19 hours of outage in the second week of July.
• The financial impact is estimated at $150 million, but more investments have to be made for resiliency purposes.
• The telco's share price suffered with some doubts also being cast as to its inorganic growth strategy.
• The management has a $10 billion plan to remediate things, and in this respect, I elaborate on potential solutions, with one of them being to partner with Google.
• The stock is more of a hold currently, but avoid any dip buying till a clear plan of action has been presented to investors.

As depicted by the blue circle in the chart below, Rogers Communications Inc. ( RCI ) suffered from nearly 5% drop after its network suffered from an outage on July 8. The stock has partly recovered since, but if the telecom operator (telco) does not address the underlying cause, there may be further downside.

The aim of this thesis is not to paint a bearish picture, but rather to realistically examine the risks amid the competition, as well as elaborate on the solutions, one of which is a partnership with Alphabet (NASDAQ: GOOG , GOOGL )

First, I start by assessing the financial impact.

The Financial Impact

First, to give non-Canadian investors who have not suffered from the glitch a feel about the miseries caused to Roger's customers, about 10 million wireless and 2.25 million retail Internet subscribers suffered for nearly 19 hours as critical services ranging from airplane flights to banking were disrupted.

Now, according to the management, the financial impact of the outage will be around $150 million and will impact third-quarter results. With quarterly operating income averaging about $722 million during the last four quarters as per the table below, profitability may suffer by about 20%, which is considerable.

However, there is more.

Capital expenses will also be required to bring improvements to the network, with $10 billion of spending scheduled over three years, or 12 quarters. This comes to about $800 million per quarter. To get an idea of the scale, consider that the company spent $604 million on Capex during the last quarter (Q2), and, thus, network-strengthening investments will imply a reprioritization of projects.

These can also add debt to the balance sheet.

For this purpose, the company has reduced its debt leverage ratio to 3.2x in the second quarter from 3.4x as of the end of 2021. Equally important, the weighted average term to maturity is now 12.3 years compared to 11.6 years previously. These measures go towards improving the balance sheet, but they include the debt financing exercise introduced in March 2022 to fund the Shaw Communications ( SJR ) transaction, for which regulatory approval is being sought.

In this respect, Rogers has extended the completion date for the acquisition to the end of this year and, according to its CEO, the extension is needed to obtain sufficient time to address regulatory concerns. However, the timing of the extension together with one information source both suggest that there is pressure from the Canadian authorities for Rogers to provide further clarification as to the resiliency of its networks before it obtains approval for the deal.

Such a deal being in jeopardy could pose risks to Rogers' growth ambitions.

Competition and Risks

Canada's telecommunications sector is dominated by three major carriers, Rogers, Bell ( BCE ), and Telus ( TU ), and their hold on the industry has already been flagged as a concern by industry experts, who have repeatedly called on regulators to increase competition for mobile and internet services in Canada. However, to justify M&As, the telcos point to the rising costs of implementing new technologies and strive to comply with the requirements of the competition commission in that country. One example is Rogers' planned sale of the Freedom Mobile business to Quebecor.

For investors, Freedom Mobile is a wireless service provider owned by Shaw Communications, while Quebecor is a diversified media and more of a regional telco.

Taking a glance at the stock price action reveals that Telus gained during the last month, while Shaw's underperforming more than Rogers itself possibly hints to investors putting less faith in the $26 billion acquisition deal.

Interestingly, Rogers has underperformed despite its operating income jumping by 32% in Q2 when compared to the same period last year after gaining 122,000 new mobile customers. This shows that upbeat financial results are not a panacea for technical glitches.

Consequently, there may be an immediate threat to Rogers' inorganic growth strategy. Furthermore, due to key services ranging from 911 to public transit being impacted, it also faces the risk of customers switching providers.

Going one step further, due to the mission-critical nature of impacted services, corporations that build vertically integrated services on top of Rogers' networks may be forced to reconsider contractual agreements. To this end, applications like Industry 4.0, IoT (Internet of Things), and autonomous driving rely on low-latency, not to mention resilient underlying network infrastructures.

The Solution

Now, I am not going to the point of saying that the telco's network is outdated or that it needs a complete overhaul. As evidenced by the ability to add 50K more wireless subscribers than last year, Rogers already has a well-built networking infrastructure that includes leading-edge wireless technology, while not forgetting the opportunities offered by one of North America's largest spectrum portfolio and tower sites.

On the other hand, there is definitely room for improvement, considering that in April last year its network suffered from another massive outage lasting for hours and which impacted the whole country. That time, the culprit was a software update with the downtime again inducing volatility in the stock.

Here, some of the areas I have in mind are the reliability of its network, with a particular focus on factors like "oversight", which would enable its engineers to take preemptive actions rapidly in case issues are detected. This in turn requires the use of analytics and machine language tools. In this case, for telcos where 24/7 service is essential all around the year, one solution for rapidly carrying out remedial actions without disrupting the existing setup is to continually analyze the vast amount of data generated by its routers and monitoring equipment.

Here, companies that come to mind are Alphabet (or Google), and Microsoft (NASDAQ: MSFT ).

Now, Rogers already has a partnership with Microsoft, but this is aimed more at enhancing the digital experiences of its enterprise segment customers, namely through the Azure cloud.

On the other hand, Google in addition to its search engine and advertising business specializes in analytics-led problem-solving. For this purpose, it has already partnered with Vodafone ( VOD ) in May and Deutsche Telekom ( DTEGY ) in July this year with the objective of building an analytics platform comprising ML and AI tools which will permit both telcos to get a deeper understanding of their network infrastructures. Some specifics relevant to Rogers' woes, as encircled in red in the extract below, are " gaining an even deeper understanding of its network."

In an operational environment where teams have differing priorities relating to their areas of responsibility, there can be a lack of cohesion regarding items like anomaly detection in one segment of the network impacting the other. This is precisely the sort of problems Google addresses through its GCP (Google Cloud Platform) and cloud-native approach.

As a matter of fact, aware that up to 75% of outages and performance issues can be caused by misconfigurations, Google has introduced a Network Intelligence Center for monitoring and optimization purposes. Consequently, in addition to existing service agreements, the Canadian telco has more innovative options to choose from, with an analytics-based approach likely to be less costly than conventional methods.

Conclusion, Including Investors' Take

More than just a major disappointment to Rogers, the network outage puts into question quality and reliability especially when considering that there have been two such events in the last two years. Thus, the company should rapidly come up with a plan as to how it is addressing the root cause of the problem including some of the changes which are already underway, in order to regain its position as an industry leader.

At the same time, it is important that from the competition standpoint, remedial investments in the network infrastructure are done after considering all options including the application of automation techniques, in addition to supplier-led solutions. In this case, a report has shown that those investing in cloud and data-driven solutions can boost revenue growth up to 53% faster than competitors. Thus, Rogers could convert its current weakness into strength.

Finally, equipped with cash of $516.6 million as of the end of the last reported quarter and not hemorrhaging customers, while operating in a telecom market that is not as tough as the U.S. where the two main carriers are under margin pressure, Rogers is more of a hold currently. This said, avoid any dip buying till a clear plan of action has been presented to investors, as I was not able to find relevant information in the presentation accompanying the second quarter's results.

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