RIM not looking good

RIM is not looking good.  Not much more to say.  Pretty sad.  Note that RIM’s percentage is of top 11 handset OEMs.  Together the top 11 account for 80% of overall market.

RIM shrinks

RIM is not looking good

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Disappearing Canadian Landlines

Disappearing Canadian Landlines

 

Substitution?

Churning landline customers are leaving telcos, but they are not going to cable

For the last 14 consecutive quarters, the telecoms companies of Canada have lost more subscribers than the cable companies have gained.   This had happened a few times in the past, but was put down to timing like moves in Quebec.  The real driver for telecoms landline losses was cable.  Not anymore.  In Q2 2012, Bell, TELUS, MTS and Bell Aliant lost nearly 188,000 landline subscribers between them.  In the same period, Rogers, Shaw, Videotron and Cogeco only added 56,000 cable telephony subscribers.  Note that MTS actually added landline customers, something that has happened every Q2 for the last six years.

Canadian landline subscribers

Telcos are declining and cablecos increasing, but not at the same rate

Fixed wireless substitution

In previous quarters telecoms executive have put this down to customers increasing reliance on wireless.  This makes sense with improved wireless coverage and speeds for wireless data (since many took a landline because they needed the internet anyway and cable companies offered landline for as little as $10 extra if you took a bundle), but it is not supported by the data.  The last CRTC published number of 13% wireless only households in 2010 was significantly below the USA equivalent at 25% at the same time.  We also have not seen an uptick in incumbent postpaid subscribers that one would associate with wireless only households.

 

Anatomy of a wireless only household

Why would we expect the wireless only subscribers to be postpaid and with incumbents? If you only have one phone, firstly it would need to work at your home with good in-building coverage.   New entrants WIND and Mobilicity have less coverage and weaker indoor signals due to less effective AWS spectrum.  If we further assume that many wireless only households will also be in condos as this demographic is more likely to be comfortable relying on wireless, they would probably have to sign up with an incumbent to get coverage above the 5th floor in a concrete and steel structure.  So why postpaid rather than prepaid?  Well assuming this demographic wants a smartphone that will serve all their household needs, they will want the handset subsidy and voice/data plans that can support all their needs.

 

The numbers

As you can see from the chart the telcos continue to shed customers in business and consumer.  At the same time, the cablcos are not growing their cable telephony bases.  If they are not going to wireless, we can only assume that they are going to smaller VoIP providers.

Landline net adds

The telcos continue to shed customers, but they are not all going to cable companies

 VoIP providers

There is a growing number of small CLEC and VoIP providers.  Many of these offer very reasonable termination rates, Long Distance at the same price as local and significantly lower MRC.  In addition all of the features like voicemail, caller ID and 3-way calling come standard.  Starting a CLEC or VoIP provider has never been easier and the low capital requirements mean many can offer services at much lower rates, but customer acquisition is still a problem.  Particularly in an industry where the same telcos and cablecos dominate the media which is required to advertise your services and create a new brand.  Even reasonably well funded wireless new entrants have struggled to create a proposition where you can acquire a new customer at an investment that makes sense.  It might make sense for a company like Bell to acquire a new wireless customer at $400 since they will make this back in the year and have financing at a cost of capital less than 3%.  For a new VoIP company to make a return the acquisition costs per customer need to be significantly lower, probably less the $20 per customer.  But $20 per customer does not even get you the first page of a Google search, which relegates them to word of mouth, radio and affordable outdoor advertising.   But these media also have a self selection problem, so they attract the wrong customers, who they never make any money from.

 

Conclusions

Telcos and eventually cablecos will continue to lose customers to wireless and better VoIP providers.  According to the CRTC there are 605 licensed VoIP providers that must establish brands and this probably means significant consolidation to get economies of scale.  Ironically VoIP providers need very little scale to provide a service, in fact this is one of their competitive advantages against the ageing technology of the landline.  But they do need scale to achieve customer acquisition at a reasonable investment.

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Bell Q2 2012 Results

Bell Q2 2012 Results

Wow, another great quarter from Bell.  They really seem to be executing at a new level.  I bet the private equity firms who were going to buy BCE are kicking themselves right now?

Gross Adds

Gross adds were good for Q2, although down 10% Y/Y and down 4% for postpaid gross, but so were Rogers (down 14% and down 7%postpaid) and TELUS (down 12% and down 8% postpaid).

 

Net Adds

Overall Nets were up a healthy 29% up at 47,208 which was significantly better than Rogers and TELUS who both has lower nets Y/Y.  But one should take into account that Postpaid Nets were only up 8% at 102,067 and that the lower net losses on prepaid drove most of the overall net growth.  Bell has now had 10 consecutive quarters of negative nets in prepaid.  In fact the prepaid base is shrinking so quickly, it is improving blended churn and blended ARPU metrics.  By comparison, Rogers was down 70% Y/Y for overall nets and down 19% for postpaid nets, from 108,000 to 87,000.   A solid adds quarter for Bell considering the market.

 

Churn

Blended churn improved dramatically from 2.0% last Q2 to 1.7%, the lowest since Q2 09, or 12 quarters!  This is a very good result, but before we celebrate too much, both Rogers and TELUS (Q2-11:1.67% down to Q2-12:1.39%) also enjoyed good churn improvements, suggesting that there might be more than meets the eye.  Firstly since Bell has a much small base of prepaid subscribers, their impact on blended churn is less.  Or calculations suggest that as much as 25bps of blended churn can be attributed to the shrinking prepaid base.  Secondly and more significantly, we believe there were few churners in many carriers, including Verizon and AT&T who had their best churn numbers in many years.  We think this is the iPhone 5 effect.  Despite enormous success, many Androidphiles waited for the prices to drop on the Samsung Galaxy S III, which is probably the best phone ever made…so far.  At $700 without a contract and over $200 on a three year contract, the Samsung Galaxy S III is still a very expensive Android device.  A recent survey showed that up to 90% of current iPhone users intend to upgrade to an iPhone 5.  So anyone who has an Apple device did not move carrier this quarter.  The same goes for RIM, where loyal RIM users see no reason to change carriers until a new RIM device emerges.  We suspect they will wait for BB10 before moving.  If we assume that Apple has about 30% market share a year ago and RIM 40%, at least 70% of smartphone users are playing a waiting game.  So we believe that all the smartphone churn was probably subscribers leaving RIM to go to Android?

Blended Churn Share Incumbents Bell

Bell’s share of blended churn increase sequentially but was down y/y

In a quarter where all carriers move in the same direction, share is often the best way to determine the winners and losers.  From a share of churn perspective, Bell and TELUS were down Y/Y but only Bell was up sequentially over Q1.  The pattern is the same, but more dramatic in postpaid churn.  Bell’s share of postpaid churn was up to 34.1% (Q2-11 was 32.8% and Q1-12 was 32.4%).  While Rogers still lost the most postpaid customers, they have a larger base.  See the charts.

Postpaid Churn Share Incumbents

Bells share of postpaid churn increases

 

 

ARPU

Blended ARPU was up a healthy 4.5% of blended ARPU growth.  Bell says a combination of lower voice and higher data revenue growth of 31.1% pushed the Blended ARPU higher.  While we are impressed with the data growth, the voice declines are not good news especially considering that Bell had an unusually good quarter in terms of MoU improvement of 7% Y/Y bringing this metric North of 300 for the first time since Q3 2009.  As with churn, some of the Blended ARPU improvement can be attributed to a smaller prepaid base.  We have not done the math yet, but will update once we have.  Either way, ARPU growth is always a good thing especially when Rogers is experiencing ARPU declines in the same market conditions.

 

Revenue and EBITDA

Revenue was up 6.7%, mainly due to more subscribers, more smartphones and more data usage.  Bell’s wireless EBITDA grew a huge 20.9% to $556m.  This is a fantastic result.  Bell says it is the best since Q1-07, but this might actually be the best ever?  Don’t forget that this was on the back of lower gross and churn, improving both COA and COR spend.  COA per subscriber was also lower and Bell has been working hard at their costs.  A great result, well done.

Conclusion

A great quarter, difficult to find anything wrong with it.  Well done.

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Rogers Wireless Q2 2012

Rogers Wireless Q2 2012

(first draft – no graphs yet either)

Too much cash?

Before we get into the wireless results, Rogers paid back dividends of $207m and repurchased 9.6m shares for $350m returning a total of $557m in the quarter.  Incredible. To put this is perspective, this is more cash returned to shareholders than Shaw Communications will create this whole year (Shaw’s revised guidance is $450 free cash flow for the FY 2012).

CAPEX

Although they give good reasons for investing less in pp&e than Q2 2011, we don’t see a good reason for them to be investing less than Bell and TELUS. Assuming you agree with us that the Bell-TELUS network is larger and superior, we believe that now is a good time to out invest its collaborating competitors.  There must be opportunities to increase the LTE footprint and improve back haul to these sites, particularly in the West.

Gross

Postpaid gross adds were impressive.  This is before the Samsung Galaxy S III launch in Q3 and  before back to school, which is traditionally Bell’s quarter to shine.  Gross was down significantly, but we would be interested to see the other incumbents results before passing judgment.  Rogers was significantly down in both postpaid and prepaid gross loading.  They struggled to load new prepaid customers in a quarter where new entrants focused on price to hold their share.  We believe it was sensible to forego the share and keep prices at a reasonable level. Good call.

Churn

Postpaid Churn was much lower at a impressive 1.15% which improved both sequentially and year or year for the quarter. While some of this was driven by their innovative FLEXtab, allowing a more flexible upgrade path, we believe that the timing of the blockbuster devices Samsung Galaxy S III which launched in Q3 and the iPhone 5 which will almost certainly launch in Q4, had a big impact on churn and we should see similar impacts at Bell and TELUS.  While not at Verizon (0.84%) or AT&T (0.97%) levels, this is a good result.   Prepaid churn at over 4% was ugly, driven by uncompetitive prepaid plans. But if you are going to lose any customers, it is better to lose he price sensitive low end prepaid customers.

Nets

Postpaid nets were good on he back of lower churn.  Prepaid poor on the back of low gross and high churn.

ARPU

ARPU declined less than expected in postpaid on the back of strong data revenue growth.  His was mostly driven by an increase in he mix with more smartphone than ever.  It remains a concern that with a huge increase in smartphone base, hat the data revenue is growing at a much slower rate, suggesting reprice. There is also significant reprice in voice, where MOU increased, but lice ARPU decreased. With a relatively small gross quarter this suggests that it might be a result of base reprice rather than LTOs offered to entice new customers.  Base reprice while you are upgrading to smartphones is not a good thing.   Interestingly AT&T who also released results today, improved their postpaid ARPU by 1.7% for the quarter.

Revenue and operating income

Revenue increased modestly and operating income improvements were appealing based on cost cutting and productivity improvements. But profit is always going to be good in a low gross quarter.

Conclusion

Overall a good quarter to generate some cash while customers wait for he big devices of the year.  Well executed.

 

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Verizon Wireless Q2 2012 results

Verizon Wireless Q2 2012 results

This last quarter Verizon Wireless really blew the lights out.  This shows what a combination of a good strategy and good execution can achieve.  If in any doubt as to who is winning in the market, look at the charts.

Revenue Growth

Retail Service Revenue grew 8.6% y/y to $15.2Bn on the back of Retail postpaid revenue growth of 8.3% and retail prepaid revenue growth of 27.2% y/y.  Data revenue was up 18.5% y/y to $6.9Bn.  Data revenue now accounts for 43.6% of service revenues.  Considering the overall economy in the USA, these growth rates are fantastic.

USA wireless quarterly revenue

Verizon Q2 2012

Net Adds

While retail net adds were down to 1,178k from 1,318 in Q2 2011, retail connections still grew 4.9% y/y on the back of very impressive churn numbers.

They added 888k retail postpaid nets and 290k retail prepaid adds, resulting in an increase in retail prepaid base from 5% to 5.6% y/y.

Churn

Retail postpaid churn dropped to a very impressive 0.84%, which was down sequentially from 0.96% and from 0.89% y/y.  This was the lowest retail postpaid churn in 4 years.  Only 7% of retail postpaid base upgraded during the quarter, we suspect this is the iPhone 5 waiting game?

USA wireless postpaid churn

Verizon continues to win on the churn front

 

Smartphones

Retail Smartphones grew 13.8% to reach 50% of the base.  5.9m smartphones were sold in Q2 and 73% of postpaid phone sales were smartphones.  41% of smartphone upgrades came from phones, rather than other smartphones.  Low churn and more smartphones together drove ARPU improvements.  There were 3.2m 4G LTE devices sold in the quarter, bringing the total to 10.9m devices reaching 12.2% of retail postpaid connections.

ARPU

Retail Postpaid ARPU grew 3.7% y/y to $56.13 while overall phone ARPU grew 4.9%.  Retail postpaid data ARPU was up 15.4% y/y to $24.53.

USA ARPU

Even in this market Verizon managed to improve ARPU

Profit

EBITDBA Service margin reached an impressive 49% on the back of $2bn in expense reduction target in 2012.

 

Conclusion

Great quarter.  We assume the iPhone 5 launch will cause significant upgrades and new additions once launched.

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Shaw Q3 2012 Results

Shaw: Q3 2012 Results

Please note that reading this is subject to our terms and conditionsThis should in no way be considered financial advice.  This document is solely the opinion of the authors using only information from the public domain.

Overall Direction

During the Shaw Communications conference call and in the MD&A, it suggests that the executive team is happy with the recent results?  I guess the market does not agree.  We do not think they should be happy either.

Subscribers

With what the MD&A referred to as “disciplined execution”, one could have expected that the subscriber numbers were not going to be good and considering the level of discounting at the moment, we did not need to get the results to know that this would be the case.  But we would never have expected Shaw to lose so many internet customers.  Wasn’t this the key to “winning the home” a few quarters ago?  So if Shaw loses internet customers, does this mean they are losing the home?   But don’t worry because more market price discipline leads to better revenue…well except this quarter.  Total revenue was actually down compared with Q3 last year.

Revenue

Revenue was particularly weak.  Give the supposed discipline surely one could have expected a healthy rise in revenue.  Cable revenue was up $9m over Q3 last year, Satellite up $1m, but Media was down $17m.  So what happened?  They put prices up, but revenue did not increase?   In the conference call all questions about prices were met with comments about how customers were upgrading and ARPU was increasing, but we are not sure the math says this is what happened during the quarter.  If you divide Cable Revenue by digital subscribers (a proxy for ARPU), monthly revenue dropped from $148 per digital subscriber per month to $137.

Shaw revenue and EBITDA per digital sub per month

Revenue and EBITDA per digital sub per month

If our math is correct, that is a 7% decrease in our ARPU proxy.  This is an ominous warning.  We think this puts Shaw in an interesting position:  When they drop prices, TELUS follows, which mean that existing Shaw customers (who are not on contracts) move to TELUS to get the better prices.  At the same time TELUS customers are in contracts and have been given hardware, so are still not likely to move to Shaw.  So when Shaw puts prices down, they continue to lose customers.  Oops.   What happens when they raise prices?  Well when they raise prices customers do not buy from them either.  Why not go to TELUS which has better technology, faster speeds (uplink and more consistent) and TELUS provide equipment including whole home PVR and Xbox, which Shaw customers have to pay for.

What about wireless?

Wireless is pretty key in the overall balance of power between TELUS and Shaw.  And to be fair, even if Shaw did have wireless, it would not be in Ontario, Quebec and the Atlantic provinces.  But as long as Shaw has no wireless, TELUS will win every price war.   Assuming TELUS and Shaw’s operations were equally efficient and well run, then if Shaw pushed their entire base’s prices down to cost (this is obviously unlikely to happen), then Shaw would be losing close to 80% of their EBITDA.  According to TELUS’s last conference call is TELUS did the same, they would still keep 80% of their EBITDA since most is made in wireless.  So combination of technology and wireless makes it impossible for Shaw to beat TELUS.  Even irrational pricing from Shaw would cause them more harm than TELUS.

Conclusion

Consumers should use Shaw’s incredibly weak strategic position and consider putting up with poor service, if necessary, if they can get good deal on their home telecom and entertainment.  Note that since TELUS has been matching Shaw’s prices, customers can benefit by either staying with Shaw and demanding their new rates or by jumping ship for a better product.

So what is supporting the share price?

Most analysts (7 out of 11) have the stock at a hold rating, while 3 have it as a strong buy and 1 a sell.  Interestingly no analysts have buy or underperform, indicating a particularly polarizing stock?  Some same that even though their results are the worst in the industry, below a certain price, they are a take out target for Rogers?  We are not so sure.  Not sure Rogers will overpay for their own former customers in the west and not sure the Shaw family really wants to sell (at any price)?

The last deal between Rogers and Shaw was amazing, but it took two of the best deal makers in the planet to make it happen, Jim Shaw and Ted Rogers.  Our understanding is that Jim and Ted had a very good relationship with a similar entrepreneurial zeal.  For deals like this to happen the stars really need to align, so a failing Shaw business is only one of the necessary, but not sufficient conditions for a successful takeover by another player.   One only needs to look at RIM to understand that even a business at a fraction of its previous value might not be cheap enough for a deal.  Beauty is in the eye of the beholder.  The final takeover point is how many companies are interested in Shaw?  Too big for foreign players, TELUS is out, the TELUS-Bell network share probably means Bell is out, Cogeco and Bragg are probably too small and MTS is not their biggest fan.  So how much premium would Rogers have to pay when they are the only horse in the race?

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Rogers: Do headcount reductions make financial sense?

Rogers:  Do headcount reductions make financial sense?

Many of our Canadian telecoms and cable companies have all done significant headcount reductions in the past few years.  Does this improve their margins?  Is it indeed better for the businesses?  Is it better for the economy?  Is this the best way to improve productivity?

 

The numbers

We will work on this, but think the numbers will show that there was no improvement in the numbers of any company that has let a lot of employees go.  To be updated.

 

Where does the work go?

Even if we could get the numbers to work, which we will not, when you lay people off where does the work go?  Either the work has to be done by existing employees or it has to be done by someone outside of your organization.   It the job cuts were poorly executed (and we have yet to see well orchestrated job cuts) then managers and executives will look to the remaining employees to pick up the slack.  This can be done by existing employees working more efficiently or longer hours.  Since most front line employees are effectively paid an hourly rate, working longer equates to overtime, which can actually end up costing organizations more.  So can employees suddenly faced with an incremental work load and no new tools suddenly improve their productivity?  Maybe some people.  Some seem to flourish under pressure and get creative, find new ways to tackle age old problems.  But we believe that in survival mode, which is the automatic fight or flight response of employees left behind when some of their colleagues and friends are let go, most employees do not improve their productivity.

So this leaves other companies to do the work that was once done by the employees you let go.  This can be a proactive decision like outsourcing the work, or a negotiation with suppliers or you can download the work to your customers.  In our experience outsourcers generally do not do a better job than any companies own employees.  They can however do it cheaper.  But cheaper often has a downside.  The jobs are moved overseas (not good for the overall country or regional economy), or the outsourced employees are trained less (creates potential customer aggravation) or paid less (paying less can be in the contract length, the hourly rate or in fewer benefits).  Paying less for employees usually means that you are not getting the same quality of employee or you have unhappy employees that have no loyalty and will move at the first possible opportunity.   When a company outsources work, the new employer now has to make a margin on the employee, because this employee has moved from a cost center to a profit center.  To achieve this, the outsource company needs to have some cost advantages.   This makes sense when there are many small companies who have similar needs like an alarm monitoring center, where the outsource provider can offer scale to the many small home security providers, but who has better scale than our telecom and cable companies?  India.  So the only way for an outsourcer to make money is for them to pay domestic employees less, train them less or send the jobs abroad.

The impact on the organizations

We have not seen any situations where job cuts are seen positively by employees.  Neither those who lose their jobs nor those who are left behind benefit.  Moral always gets worse.  Bad news travels fast.  When morale is poor within an organization, the front line feels it immediately.  But these are the employees that are selling, supporting and talking to your customers everyday.  They are the face of the organization.  When they are worried about their jobs and taking on the additional burden of the employees work that you let go, their stress levels increase and probably do not have the time or inclination to treat your customer better.  They do not have the time to get to the route of the problems, the time to design products and services as well, the internal feedback loops to ensure and improve quality.  All organizations have many processes, procedures and learnings that undocumented.  Even the best run organizations have much of the inertia and organizational memory in the employees.   When you let employees go en mass, you lose learnings, processes, understanding and relationships.  Relationships with suppliers, partners and customers not only leave your organization, but will frequently go to competitors.   Having to form new relationships is expensive in terms of time and money.  Friction costs between suppliers and partners increases.  With organizational memory gone, company make the same mistake that they had previously learned from and their overall risk increases.

The impact on the communities

When large organizations let many people go all at once they can impact the local community in many ways.  Firstly if a whole call center were closed, for example, then the local community might lose one of their biggest employers.  Employees have to travel to alternative work, and local businesses suffer from the dual impacts of lower consumer spending and fewer local customers.  Finally this impacts a company’s customers.  When a family’s breadwinner works at Rogers, you can bet that their friends, immediate family and neighbors all have Rogers services.  After being let go, a former employee is unlikely to recommend their former employer, in fact they might even switch all their services to a competitor.  This has seriously negative ramifications for the company, who used to enjoy a small army of advocates, who now at best say nothing and worse if they could have negative experiences to share.   We already know that it takes almost 10 times as many positive recommendations to net out a single negative comment from consumers, so letting 500 people go could lead to 5,000 negative comments, which would take 50,000 positive experiences to net out!

The impact on the economy

Perhaps the biggest unknown is the impact on the economy.  This has already become a big issue in the USA and we believe will impact Canada sooner rather than later.    When large organizations downsize or cut jobs to improve margins (and those margins are already in the high 40% range!) this is actually a transfer in wealth from one group of stakeholders to another.  It is a wealth transfer from employees to executives and shareholders.  At the very least this is immoral, but worse, we think it could become a contributing factor in overall economic decline.  The biggest problem is that the companies are not paying the very customers who would buy their services.  Assuming all these people find new work, but not immediately or at a lower wage, total middle income declines.  Without wage growth in the middle income wage earners overall (both lower employment and lower wages per employee), there is less disposable income to buy the very products and services that these companies produce.  So sales erodes, which causes belt tightening in companies, which in turn means companies spend less, which means they do not hire and so the decline spirals.  In fact for our economy to recover we need the companies to invest more and hire more people.

Getting back to the immoral part, we could probably find many at least one example from each of our telecoms and cable giants where they had laid off workers to improve financial performance.  For fear of retaliation, we would not like to single anyone out, but suspect that the executives leading these companies might have also been paid a bonus in the same time period that the lay-off occurred.  This seems counter intuitive at a human level, but it also fails an economic test.  Let’s say for example that 1,000 workers are let go and the savings are $50m but the executives get paid an extra $20m in bonuses and the shareholders get the benefit of the remaining $20m (assumes all savings go to free cash flow and the is a payout ratio, dividend increase or share buyback returning 2/3 of savings not paid to executives).  The incremental earnings to shareholders are so insignificant that the savings alone will not impact their investment, although the sentiment might change if investors think you are a cost conscious organization.   And what do the executives do with the bonuses?  They save it or invest it, but they do not spend it.  Employees would have spent most of their wages.  A thousand employees will limit their discretionary spending, so water, heating, air conditioning, food, gas and entertainment spending all go down.  Yes the executives might take an extra trip, but this does not make up for the thousand employees who did not spend.  So the economy shrinks.  The public sector economy also shrinks.   A marginal $50m in payroll results in significant income and spending taxes for our federal and provincial governments.  The same dollars in executives and shareholders hands is invested in ‘tax saving’ plans or in lower taxed dividends or in more equity.  No matter what the government coffers are reduced when payroll declines and profits increase.

In terms of the fundamentals of economics of capitalism, yes businesses should be created and run for a profit motive, but mass layoffs from all companies would certainly ensure self-inflected destructions.   Without a large and growing middle income group of earners, there is nobody to buy our products and services.

Time for companies to consider other stakeholders?

We think most shareholders want to invest in companies that will continue to survive, grow and prosper, but do not believe that smart investors are interested in short term cost cutting that will injure the business, the community and economy in the long run.  We believe that despite lagging on productivity in some areas, our Canadian businesses are pretty well run.  We can envision a Canada where other key stakeholders like employees, suppliers, communities and the economy itself are considered.  Good companies should strive to increase their average payroll per employee, raising our country’s disposable income and driving an employment driven recovery.  Employment led in terms of both rates and headcount.  We are not recommending hiring employees for the sake of it, but we should be intolerant of layoffs, especially when they are designed just to cut costs.  We have been closely watching the UK, where there has been significant shareholder activism and new regulation giving shareholders a say on executive pay.  Maybe here in Canada we can say that executives should have no bonuses in a year that even a single employee is let go.  And maybe large telecoms and cable companies that have enjoyed limited global competition and local duopolies should look in turn to commit to high levels of employment and higher than average wages as a responsibility to our country.   If all large employers in Canada committed to this, we could probably lead our country into growth with an improvement in Europe, the oil price or a USA presidential election?

Conclusion

We understand that a declining business needs to reduce costs to remain profitable, but with margins in the 30%-50%, it is not clear that these businesses are about to fail.  We also believe that there are other ways to reduce your costs, without mass layoffs.  Even if you need to reduce employee related costs in a business unit to make it profitable, employees leave, retire and change roles all the time.  This is part of the natural evolution of employment.  We are not suggesting jobs for life or union protection to include management, but mass-layoffs are destructive however we look at this.  There is lots of opportunity to innovate, offer new services, retire old businesses gracefully and move into new growth areas without destructive ill considered layoffs that do not actually create value.  We would like to appeal to the press, investors, analysts and pension funds who are the unwittingly encouraging companies to focus on the short term.   We should not invest more in a company that focuses on employee layoffs to improve already inflated margins, but rather those businesses that contribute to the overall growth of our employment, communities and indeed our economy.

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WIND Canada Q1 2012 Results

WIND Canada Q1 2012 Results

After a fairly strong Q4, we were expecting strong results from WIND, who with the some momentum were poised to make significant customer gains in a quarter where incumbent usually lose lots of subscribers.  Well the incumbents did lose a lot of subscribers, more than ever and for the first time, both Bell and Rogers had negative nets.  So we assumed that this would mean a blow out quarter for the new entrants.  Videotron underwhelmed so we assumed the incumbent losses were not in Quebec.  But now that WIND has released their numbers, we are concerned on two fronts.  Nets and ARPU.

Nets

Yes, nets grew by nearly 12,500 subscribers, but in a quarter where incumbents lost nearly 200,000 prepaid subscribers and lost nearly 25,000 total subscribers, we thought that all of this could be picked up by the new entrants.  And in their conference call, Bell talked about increasing fixed-wireless substitution and Bell and TELUS lost over 150,000 wireline subscribers.  If we assume that a third of the landline losses went to VoIP providers (they did not go to cable), then the other 66% went to wireless-fixed substitution.  Then there should have been a total of 125,000-300,000 subscribers up for grabs in the quarter, but WIND and Videotron only account for 35,000 of these?  We would be very surprised if Mobilicity and Public made up the difference.  We think Mobilicity blew out the lights in Q4 in the hope of raising additional finance on these results, so they had no dry powder for another big quarter.   Public Mobile did not noticeably lift their game either.

EOP

So assuming Mobilicity gains 10k and Public 20k new net customers, this means that the new entrants will still have less than 5% of the overall market despite huge subscriber losses at Bell and Rogers.

ARPU

Our second worry is ARPU.  WIND’s ARPU was up 2.2% from $26.7 to $27.3 or a whopping 60 cents per subscriber.   But TELUS was up 1.7% and Bell up over 4% (although much based on mix changes from losing so many low ARPU prepaid subscribers).  In fact TELUS enjoyed nearly and extra $1 per subscriber across nearly 7.5m subscribers, whereas the poultry $0.60c increase across 415k subscribers if not nearly as significant.   With ARPU of less than half of the incumbents, WIND and Mobilicity have a fundamental problem with their business model.  So it might be a good thing they did not acquire too many new customers?

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Wireless results summary – Canada – Q1 2012

Wireless results summary – Canada – Q1 2012

Well, now that all of the incumbents have reported, it is worth looking at how they did against each other.  Who won the quarter?  TELUS, followed by Bell with Rogers a distant third.  But that is just our opinion, it really depends how you measure.

The chart below is a summary of the last 5 quarters.  Although this is just a snap-shot and these metrics are not really equal in weight, these are the main metrics that the street and executives focus on in determining how they are doing compared with both the past and each other.

Rogers Bell TELUS key metrics summary

Key metrics summary

At first glance Rogers still rules the roost with 5/9 first places, but TELUS has started to win where it counts, Postpaid Nets, Churn, ARPU and EBITDA Margin.  We were pretty concerned when we saw that Rogers loaded 334K Gross Postpaid, but only grew their postpaid base by 47K subscribers.  Seems like a pretty uneconomical way of growing compared with TELUS who came in third with only 257 Postpaid Gross, but the highest postpaid nets at 63K.

 

So let’s look behind the superficial numbers to see what is going on and why the incumbents are going in different directions:

Gross

With more points of presence and no longer struggling for iPhone 4Ss, Rogers blew the lights out with 33k Gross Postpaid and 154K Gross Prepaid.  Rogers has more points of presence, probably close to 1,500 with third party, specialists, Wireless Wave, dealers and corporate stores.  TELUS on the other hand has few points of presence and does not benefit from wireless wave, which in our humble opinion is the best of the specialist channels.

Wireless Gross Share Bell Rogers TELUS Q1 2012

Wireless Gross Share Q1 2012 (Incumbents)

Nets

With a relatively modest gross numbers and high churn, both Rogers and Bell had negative nets.   We have tracked the incumbents quarterly since the beginning of 2005, but our data goes back more than another ten years and we have not seen negative nets for any incumbent let alone two.  This was admittedly driven by prepaid losses and Q1 has been net negative for the incumbents since 2007.  But with significantly smaller prepaid bases than postpaid, it is unusal to lose so many prepaid subs that it impacts your overall number.

wireless prepaid incumbent nets Q1

wireless prepaid incumbent nets Q1

Also the fighter brands of chatr, Koodo and Virgin have breathed new life into prepaid, so this certainly looks like a big win for the AWS new entrants.  Since Videotrons numbers were not crazy high at 22k nets, and WIND was much lower than expected at 12K nets, assuming that Mobilicity was also around 10K, this means that the total nets of the new entrants beat the total nets of the incumbents, albeit mainly on the back of significantly lower ARPU customers.

Incumbent wireless net share

Incumbent wireless net share

 

Postpaid nets were positive, but flat compared with last Q1 while the overall industry grew.  Note that Bell dropped from 81K in Q1 2011 to 63K in Q1 2012.   Rogers was flat year over year and TELUS grew by 11K in postpaid nets.  Some of this is by design, as it is dangerous to try to get Q1 volume by extending the Christmas discounts into Q1.  This should be a good quarter to keep your powder dry on COA and bank some EBITDA.

wireless postpaid nets share incumbents Q1 2012

wireless postpaid nets share incumbents Q1 2012

 

Churn

Churn was the divisive metric this quarter.   Rogers was ghastly – Blended churn moving from 1.71% a year ago to 1.83% and in the process moving from the best of the incumbents to worst churn in 5 quarters.   Bell was modestly better, improving from 1.9% to 1.84%, but some of this was driven by having so few prepaid subscribers left.  Bell’s postpaid churn also improved, from 1.4% to 1.35%, but since their base has grown, this still meant more actual postpaid subscriber churning, up from 219K in Q1 2011 to 231K this quarter.  TELUS enjoyed a marked improvement in churn, where blended churn came down from 1.7% to 1.55% year over year.

Wireless percentage churn Q1 2012

Wireless percentage churn Q1 2012

In postpaid absolute churners reduced from 220K (same as Bell) to 194K.  These are great churn numbers and we did not see a commensurate pickup in retention to achieve this – retention spend for TELUS was down 6% at $138m.

Churn numbers by volume

Churn numbers by volume

Smartphones

Smartphones continued in a phenomenal way, although we did hear some tempered comments on the conference calls, in particular, Rogers seemed to have slipped from ARPU of 2X non-smartphone to 1.9X and now to 1.8X.  At the same time the non-smartphone ARPU for Rogers has also been declining.   They suggested in the past that they expected cheaper smartphones that would reduce their requirement for the huge COA investment, but this has not happened.  What has happened is that lower end smartphones are unsurprisingly attracting lower end subscribers, who are more likely to be price sensitive, spend less and have a higher propensity to churn.   The smartphone share chart show the decline of Rogers and the rise of Bell and TELUS following from a level playing field in handsets and the significantly better network coverage and quality that the Bell/TELUS network partnership offers.

 

EOP

EOP was largely unchanged mainly because of the Bell and Rogers negative nets.  There were share changes though.   In EOP postpaid market share, Rogers dropped to the lowest (38.5%) since Q4 2005.  TELUS and Bell both gained share.

Postpaid total subscribers share

Postpaid total subscribers share

ARPU

All three incumbents have had declining voice ARPU for some time.  This is partly due to re-price, which has been more relevant at Rogers, partly due to Smartphone LTOs resulting for a more competitive market, but also from a reduction in voice minutes.  The reduction is voice minutes is partly behavior changes – customers spending more time communicating via email, text, IM and so many other social media platforms, but also a change in demographics, where younger customers are more likely to have a high end smartphone, but can’t afford the high end voice plan.

blended ARPU wireless incumbents

Blended ARPU wireless incumbents

 

Rogers average price per minute dropped suddenly with the introduction of chatr.  Bell and TELUS have trended down, but not at the same rate.

The text-voice substitution is marked as the smartphone penetration rates increase, voice revenue declines.  Although we have not read anything about VoIP using the carriers networks, there are many solutions that offer this and the 3/4G networks are more than capable of offering high quality calls over the data network at a fraction of the price.  We expect significantly more pressure on voice in the foreseeable future.  TELUS had another quarter (6 consecutive quarters) of ARPU growth to $58.87.  Voice decreased 10%, but data grew 29% resulting in an overall growth of 1.7%.

WIND reported a 2.2% increase in ARPU, but at $27.30, this still significantly lower than where it should be in our opinion.  This is less than half the incumbent ARPU, which does not sound sustainable.

Revenue and EBITDA

Overall Incumbent service revenue grew nearly 4%, Rogers was down marginally, Bell was up 6% and TELUS up 7%.   But all were well below the average of over 7.5% year over year growth average from 2007-present.  There was an overall decline in hardware revenue of 9% based on lower handset sales, this is normal for Q1.

Incumbents share of industry EBITDA

Incumbents share of industry EBITDA

 

Bell and TELUS grew their EBITDA at 13%, while Rogers EBITDA declined 9%, giving an incumbent average of just of 3% in EBITDA growth.   EBITDA share for Rogers declined to 2006 levels.

Summary

We really thought Bell had a good quarter, until we saw the TELUS results.  TELUS seems to be operating at a level of detail that is absent from the others.   Rogers had a very poor quarter and the new entrants failed to capitalize on incumbent weaknesses in gross loading and churn.

 

 

 

 

Comments (1)

TELUS Wireless Results Q1 2012

TELUS Wireless Results Q1 2012

This was an exceptional quarter for wireless at TELUS.  We were very impressed with Bell’s wireless numbers, but it seems like TELUS has trumped them on almost every number.  To really understand how well the companies are doing, we find comparing them with each other more useful than comparing themselves with previous quarters, which is the tradition.   This assumes the past is a predictor of the future, which it is not.

Gross Adds

Gross adds were down for TELUS y/y but despite significantly less distribution still delivered 363k which is respectable for a first quarter, which is always lower in gross.  This was 6% lower than the previous year. Gross Postpaid at 257K also declined, by 5.5%.  TELUS share of gross in the incumbents was 29.3% vs. last year’s Q1 at 29.6%.

Net Adds

Overall Net Adds were down 31% to 22k on the back of a 105% increase in prepaid losses.  All incumbents lost prepaid subscribers, which is a seasonal effect.

wireless prepaid nets Rogers Bell TELUS Q1 2012

Prepaid Nets Q1 2012

TELUS has had negative nets in prepaid for the last 3 first quarters.  Postpaid Net Adds were up a healthy 21% on the back of very good retention and churn numbers.   Interestingly TELUS spent 6% less on retention than a year ago, suggesting that their networks, brand and customer service are keeping customers without the need to purchase their loyalty.  With Bell and Rogers having negative nets, TELUS was the only incumbent that grew its subscriber base in the quarter, suggesting a big quarter for the new entrants.  Perhaps we can see WIND and Public beat 100K nets and Mobilicity beat 50K?

Smartphones

TELUS had a great quarter for smartphones, loading 19% more smartphones or 175k over the previous Q1 at 147k.  This brings the total smartphone base to 56% of postpaid subscribers.

Churn

Blended churn was 1.55% down from 1.70% a year ago.  This is a tremendous achievement considering how the other incumbents have experienced more pressure.  While the absolute number of postpaid subscribers increased close to 6% for Bell and Rogers, TELUS reduced the number of postpaid churns by nearly 12%.

EOP

TELUS grew it EOP by a modest .3%, but this was better than the subscriber losses of Bell and Rogers.  Postpaid EOP was up just over 1% sequentially.

Postpaid Canada incumbent subscriber growth

Growth starts to slow for the incumbents

ARPU

TELUS Blended ARPU grew, while Rogers declined, keeping TELUS at the top of the ARPU leaderboard for the second straight quarter.  AT $58.87, this is industry leading ARPU with a significant $22.83 coming from data.  Clearly TELUS is attracting the high end smartphone subscribers that the incumbents all say they are getting and we can see the impact in their accretive ARPU.

Revenue and EBITDA

Network revenue was up 7% at $1.288bn, a great Q1 performance.  Margins grew over 5% or 2.5pts to deliver industry leading EBITDA of $622m.

Summary

This was a fantastic quarter for TELUS.  They have showed that despite fewer points of distribution, that better execution can turn fewer gross into more nets, delivering better in quarter EBITDA without having to invest incremental COA in new customers or having to invest more in retention spend to prevent churn.  A lower gross, lower churn, higher nets model will reward them with significantly better financial results to come.

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