Rogers

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.

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.

Financials

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.

Conclusion

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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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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Prepaid’s declining relevance in Canada

Prepaid’s declining relevance in Canada

Looking at the last few years there have been some dramatic changes in prepaid in the Canadian market.   Canada might already have the lowest percentage of subscribers of any market we know.   The chart below shows how Bell, Rogers and TELUS compare with Vodafone operators in 21 countries.   This chart shows that only the UK, Spain and the Netherlands have less than 50% prepaid and Italy has 82.5% prepaid.

Prepaid as percentage of total subscribers Vodafone vs. Canada

Canada remains a postpaid market in a prepaid world

 

Trending lower

All of the incumbent carriers are shedding prepaid customers in favor of postpaid customers, while the new entrants engage in a price war for the bottom end of the market.   Bell has consistently being moving away from prepaid since Q3 2007 and only increased before this on the back of Virgin.  Rogers has been moving towards postpaid consistently until the introduction of their second fighter brand chat.r and TELUS increased their prepaid mix with the introduction of Koodo, but prepaid percentage has been declining for all incumbents recently.

Prepaid Net Adds for Canadian Incumbents

Incumbents look to be exiting the prepaid business. Bell has not had positive net adds in prepaid for 10 quarters, TELUS only once in 6 quarters.

ARPU & Churn

Since prepaid is becoming a less significant part of the overall customer base, it has positive impacts on two key metrics:  Churn and ARPU.  The recent success in the incumbent blended ARPU increases and blend churn declines can in part be attributed to a smaller base of prepaid subscribers.

 

Prepaid as percentage of total subscribers - low and trending down

All incumbents are shedding prepaid subscribers

Strategic

It seems like the incumbents have made a strategic decision to move away from prepaid.  They have managed to entice many more subscribers into expensive postpaid plans by offering great subsidies in return for a 3-year contract.   So fickle subscribers who might be switching prepaid SIMs in other counties are instead stuck with a carrier sponsored SIM-locked high-end device.  This has led to higher rates of smartphone adoption and our carriers offer some of the best network coverage, quality and speed on the planet, but at a price.  The incumbents have very cleverly isolated the price war to lower end devices, on slower networks with less coverage.  So the new entrants fight for fickle customers who will leave to save a few cents, while the incumbents have managed to keep healthy margins and maintain their already high price per minute and price per megabyte charges.

 

Conclusion

It seems hard to believe that Canada is so different in terms of the overall market structure, yet the incumbents are going from strength to strength by playing by a different set of rules to the new entrants.   Despite much help from our government, finance and knowledge from abroad, the new entrants have been unable to re-invent the Canadian wireless landscape.

 

 

 

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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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CEO performance measured by share price

CEO performance measured by share price

Sometimes new leaders can re-invigorate a business, find low nagging fruit and produce superior returns.  Sometimes financial performance improves, sometimes a new executive is just lucky on timing.  In the blog we will measure only one thing: Share price increase from the week before until now measured against peers and similar companies.  Below is the summary table which shows each company’s share prices percentage increase compared with the average of the four (Bell, Rogers, Shaw and Telus) during the tenure of the current CEO.  It also shows the company’s performance compared with the other companies during their tenure.

 

Difference from Cope Mohamed Brad Shaw Entwistle
Average

1.03%

-21.07%

-23.80%

9.45%

 
Bell

0.00%

-51.48%

-36.69%

-7.07%

Rogers

20.55%

0.00%

-12.06%

-29.26%

Shaw

16.36%

26.97%

0.00%

45.85%

TELUS

-32.81%

-59.76%

-46.46%

0.00%

For a more detailed look, we will go alphabetically by company:

BCE: George Cope

George Cope became CEO on July 4, 2008.   After 4 years, many acquisitions including Virgin, The Source, CTV, MLSE (1/2) and Astral Media.  Bell has also laid off thousands of employees, increased dividends many times and in total BCE has increased revenue from $17.7bn to $18bn over three years (CAGR 0.51%), all resulting in a share price increase of 15%.  By comparison, TELUS enjoyed a 48% increase in share price during the same period.  During the same period of time, Rogers had negative 5% increase in share price while Shaw was pretty much flat with a 1% decrease over the same period.    In the eyes of investors, BCE took value from Rogers and TELUS took value from all.  One might argue that BCE’s share price was high at the time he took the helm because of the pending closure of the privatization, but that did not happen.  If you measure George Cope from the point just after the privatization collapsed (Dec 19, 2008), the share price increase would be significantly better at nearly 100%, (TELUS 75%, Rogers 14% and Shaw at -8%), but then BCE did use unpaid dividends during the strategic review to increase dividends afterwards.

Bell Share price vs peers during Cope Tenure

Bell Share price performance vs peers during George Cope tenure

Rogers: Nadir Mohamed

Nadir Mohamed became CEO on April 4, 2009.  Since then he has restructured the cable and wireless businesses into one division, expanded media and acquire the other half of MSLE.  Under his leadership Rogers have taken fewer big bets, but have be consistent in delivering financial results if not subscriber results.  Recently Rogers started cost cutting, it seems to make Bay street happy, but even this has not allowed his share price to shine.  During his time in office, Rogers has increased it share price by a very reasonable 27.37%, which seems like a lot compared with Shaw who were again almost flat at 0.85% decrease.  But BCE had a stock increase of 68.34% and TELUS of 79.56%, over the same time period clearly marking a shift from cable company to telephony.  Note that from when Ted Rogers passed away to when Nadir Mohamed took the helm, the stock had already dropped 15%.

Rogers share price performance vs peers during Nadir Mohamed tenure as CEO

Rogers share price performance vs peers during Nadir Mohamed tenure as CEO

 

Shaw Communications:  Brad Shaw

Brad Shaw always had a tough act to follow, after his older brother Jim grew the business almost 10 fold during his tenure.  Brad Shaw cancelled wireless, instead focused on wifi and faster deployment of new set-up boxes.  During his relative short tenure, he has increased cable sales by 4% and profit by 2%.  There have also been a steady flow dividends, by increasing the payout ratio to around 85%.  Since Brad Shaw took the helm, the Shaw share price has declined 8.77%.  At the same time Rogers has increased their share price by 2.79% despite losing the wireless advantage to TELUS and Bell during this time frame.  BCE has increased 27.3% and TELUS has increased 37.82% showing a strong swing away from Shaw towards TELUS during Brad Shaw’s leadership.

Shaw share price performance vs peers during Brad Shaw tenure as CEO

Shaw share price performance vs peers during Brad Shaw tenure as CEO

TELUS: Darren Entwistle

In the 12 years that Darren Entwistle has led TELUS, much has changed.  Their wireless business has grown from strength to strength, their emerging TV business is easily taking back customers previously lost to Shaw and their acquisition strategy, unlike the others has been focused outside media.  In the last three years, they have acquired two healthcare related businesses in Emergis and more recently Wolf.  They also acquired Black’s to improve their wireless distribution.  There has been less focus on mass layoffs and cost cutting for the sake of it.  Revenue CAGR has been 4% in the last 7 years and EBITDA 2%, but most of this is organic growth rather than the acquisition fueled growth of Shaw, BCE and Rogers.  During Darren Entwistle’s time in office, the share price has increased a healthy 53.72%, but Rogers has increased nearly 83% in the same time frame.  Shaw grew 7.87% during this time.  (Note that BCE’s data only starts in 2006 for the purpose of this comparison.)

TELUS share price performance vs peers during Darren Entwistle tenure as CEO

TELUS share price performance vs peers during Darren Entwistle tenure as CEO

 

Conclusion

In terms of overall share price performance, Darren Entwistle is the clear leader, but then he has been in his role longer and there were times when his share price was under water.  On the other end of the spectrum, Brad Shaw is still struggling to find his feet in terms of share price performance versus peers.

Overall all these companies have increased their dividends significantly faster than the companies have grown or their profitability improvements.  While good for shareholders in the short term, we worry that none of them are investing enough in the future, while they reap the rewards of their predecessor’s investments (except Darren Entwistle, who made the original investments to reap today’s rewards).

 

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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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FiOS speed success impact on Canadian Cable Companies?

Will the FiOS speed success impact Canadian cablecos?

 

Verizon launched new Quantum speeds

With the new speeds, Verizon users will enjoy speeds true broadband download at 300Mbps.  At these rates, it will only take a couple of minutes to download an HD movie.  This currently takes about 30 minutes on average for the fastest cable-base internet speeds.  But the real advantage is not in the download speeds, but in the upload speeds.  For anyone who wants to do HD videoconferencing, wants to host a seminar or meeting using Web-Ex or GoToMeeting, you will know that the slow responses are not on the Audio quality, but rather the slow response times of relaying your presentation to your audience.

 

Impact on Canadian Telecoms?

We believe that the move to GPON is a smart one offering speeds and bandwidth that cablecos will not be able to replicate.  But the Canadian telecos have not invested in significant FTTP, but rather are more focused on FTTN.  While FTTN should give both more consistency and faster upload speeds, cablecos can still compete (albeit through significant node splits, which are not cheap).  Hopefully the success of FiOS and good results from the Bell trials in Quebec and Bell Aliant confirm that FTTP is the best short and long term investment strategy.

 

Impact for Canadian Cable companies?

In the short term, we can only see the negatives of FiOS success and increasing speeds for the Canadian telcos, but there might be some long term upside?  If the USA based cablecos all rally together to make DOCSIS 4.0 a reality (or significant feature upgrades to DOCSIS 3.0) or all invest in a fibre based solution that can compete with the telcos, this could have some upside for the Canadian telcos who could benefit from the USA cable companies collective investments in next generation broadband and TV.   But it is all negative in the short term:  with TELUS more aggressive on their footprint and happy to meet Shaw on price, we expect a significant swing towards TELUS.  Bell has been slower to rollout, but we are excited about what could be if their FTTP efforts in Quebec City offer a good return.  Rogers have been losing TV customers and Bell has not even turned up the heat yet.  Cogeco is losing to TELUS in Quebec and only Videotron (and probably Eastlink) are holding their own.

 

Conclusion

Even the modest improvements in user interface, combined with the advantages of a standards based solution versus the cable industry’s proprietary approach and decades-old UI have given IPTV the upper hand over CableTV.  Losing the speed war will widen the gap.  We expect high end customers who are reasonably close to a telco CO to flock to IPTV / FTTN ISP solutions while Canadian Cable companies will continue to lose customers to OTT and free-to-air antae providers on the lower end.  The squeeze is on for cable companies, but maybe the increased pressure in the USA will drive some innovation?

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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.

 

 

 

 

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