Bell vs Rogers Q3 2012

Bell vs Rogers Q3 2012

Bell and Rogers had very different wireless results.

Gross Adds

Overall gross was down y/y for both companies, but this appears to be a strategic shift away from lower value prepaid subscribers.  Postpaid gross was marginally up for both Bell 373k ( y/y growth 0.1%) and Rogers 386k (y/y growth 1.6%) for the third quarter, but the big difference came in postpaid nets.

Net Adds

Bell’s postpaid nets adds grew 17.1% y/y to hit 148.5k for the quarter.  This was almost double Rogers at 76k postpaid nets (growth of 2.7%) despite higher gross.  Much of this was on the back of much improved churn.


Rogers postpaid churn improved 2bps to 1.34% for the quarter but Bell’s improved a whopping 30bps to 1.2%.  This meant that postpaid churn volume for Bell dropped 14k to 231 in the quarter, while Rogers postpaid churn volume was flat at 306k postpaid churners.  This is the most significant churn improvement we have seen in any carrier in North America for Q3.

In the investor call, George Cope credited John Watson with improvements in customer service for the dramatic change in churn.  He also said that they are getting more share of enterprise customers who also churn less.    We also notice a 20% y/y increase in retention spend and a flawless iPhone 5 launch.  (TELUS and Rogers both struggled to activate iPhone 5s, although George Cope dismissed this as not significant).   Whatever you did keep doing it.


Bell also blew the lights out on the financial results.  While they still trail Rogers in terms of Revenue, EBITDA and margins, they showed a significant improved y/y, closing this gap quicker than expected.   Bell’s service revenue grew 6.4% to $1,307m while Rogers grew 2.2% to $1,744m.  Bell’s EBITDA margin grew 322bps to 42.4% to deliver $554m EBITDA while Rogers Adjusted Operating Profit margin grew 0.71% to a record 48.3% producing $843m AOP.


Fantastic quarter for Bell’s wireless division, they invested more CAPEX, loaded more postpaid smartphones, saved more churners and improved margins.  Rogers have a bit more work cut out for them.

More detailed analysis after TELUS has reported.

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Wireless: Verizon vs. AT&T

Wireless: Verizon vs. AT&T

Verizon wireless and AT&T wireless just posted very different Q3 2012 results.  Both companies pointed to many metrics to show improvements, but some of this is the overall market.  What matters to me is their relative performance over time.  Let’s explore some key comparisons before concluding who actually won the quarter:


Gross Adds

For gross adds, we have focused on postpaid retail numbers only.  This is the profit engine and the proving ground for sales and marketing success.  Our calculations suggest that Verizon wireless loaded 4 million gross postpaid retail subscriber to AT&T’s 2.4 million.  While Verizon needs to load more gross to stay flat, since it has a larger retail postpaid base, this certainly is a decisive win for Verizon.


Postpaid Gross Adds – Calculated

Listening to the AT&T quarterly call, we believe this was in part due to AT&T’s decision to keep all the iPhone 5 stock for existing customers.  This shows in their postpaid churn which improved significantly over Q3 2011 despite the earlier launch of the iPhone.



Churn is traditionally measured as a percentage of the base on this metric, Verizon came in with a stellar 0.91% postpaid churn while AT&T also improved to deliver 1.08% postpaid churn.


Postpaid Churn

This means that Verizon lost approximately 2.4m postpaid subscribers in Q3 to AT&T’s loss of 2.2m postpaid subscribers in Q3.   For AT&T this was around 100k fewer losses versus Q3 2011 while for Verizon this was in fact more than 30k more subscribers lost.  The second learning we get from this is that while AT&T could have achieved their entire gross from Verizon losses, the converse it not possible.  This leads us to believe that Sprint and T-Mobile continue to lose significant customers who signed up at Verizon.


Postpaid Churn Volume – Calculated

Together gross adds and churn provide us with what looks like a very unbalanced quarter in terms of net adds.


Net Adds

Again we will focus our analysis on postpaid retail.  Here Verizon added 1.5m postpaid subscribers, more than the last 2 quarters put together and nearly double last Q3.  AT&T on the other hand added a dismal 150K postpaid retail subscribers.  It looks like they really did keep all the iPhones for existing customers!


Postpaid Net Share




The smartphone numbers were particularly interesting.  Both had record loads for smartphones, Verizon loaded 6.8m smartphones in the quarter to AT&Ts 6.1m.  Considering AT&T’s gross was approximately 2.4m this is over 4m (and close to 6% of base) that were upgraded to smartphones.  Verizon on the other hand did approximately 3.6m smartphone upgrades which was less than 4% of their base.  The second point of interest in smartphones was the iPhone.  Verizon loaded 3.1m iPhones of which 650k (or 21%) were iPhone 5.  AT&T on the other hand loaded 4.7m iPhones of which 1.3m (or 28%) were iPhone 5.   This has two impacts:  Firstly operators have to subsidize iPhones more than Android and other smartphones, costing precious EBITDA in the short term, but secondly iPhone customer generate higher ARPU and are more loyal.  So short term loss for AT&T, but long term win.




Verizon stopped reporting ARPU, so our analysis only includes a calculated ARPU which is not accurate, but is probably directionally appropriate.  Our calculations suggest that despite being approximately $10 per subscriber higher on ARPU, that AT&T had a postpaid ARPU increase of 2.37% to Verizon’s (our estimate) postpaid ARPU increase of 2.59%.  We concur with the executives of both companies that the data share plans will be accretive, especially if they can attract customers away from value destroying unlimited plans.


Postpaid ARPU




We were very impressed with AT&T’s network numbers.  It is about time they invested in a big way and we believe that network superiority is a necessary (but not sufficient) condition to attract and retain the best customers.  Well done.



Both enjoyed improved margins and higher revenue.  Where most operators around the world are struggling to maintain ARPU, both Verizon and AT&T have enjoyed data growth faster than voice melt.  If they can continue to manage the transition from voice to data, they are already better than most operators globally.



While AT&Ts quarter was not as good as the headlines suggested or Verizon’s, it was a good foundation for future quarters.  Verizon continues to be the clear winner and we cannot see any amount of M&A or foreign investment changing this in the short or medium term.   If AT&T can use their new LTE network to deliver the speed and consistency of Verizon’s they could alter the balance of power while Verizon goes through a more complicated migration from EVDO to LTE.



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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.


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 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.


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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