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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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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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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new iPad heats up race for 700MHz in Canada

new iPad heats up race for 700MHz in Canada

The new iPad

The new iPad came with many exciting features, but for Canadian operators it also came with more issues, possibly creating a game changing tussle for 700MHz in Canada.  Yes, the resolution, processor and camera are all amazing, but buried deep in the very exciting LTE wireless part of new iPad was a good reason to fight for 700MHz spectrum.

In the USA there are two versions:

  1. Wi-Fi + 4G for AT&T model: LTE (700, 2100 MHz)3; UMTS/HSPA/HSPA+/DC-HSDPA (850, 900, 1900, 2100 MHz); GSM/EDGE (850, 900, 1800, 1900 MHz)
  2. Wi-Fi + 4G for Verizon model: LTE (700 MHz)3; CDMA EV-DO Rev. A (800,1900 MHz); UMTS/HSPA/HSPA+/DC-HSDPA (850, 900, 1900, 2100 MHz); GSM/EDGE (850, 900, 1800, 1900 MHz)

Three things really stand out:

  • There is no HSPA in AWS, so without launching LTE, the new entrants cannot have iPad subscribers
  • The Verizon model has no LTE in AWS so LTE is ONLY in upper C block of 700MHz (band 13)
  • The AT&T model has LTE in lower B + lower C 700MHz blocks (band 17) and in AWS

700MHz Implications for Canadian New Entrants

Assuming there is no set-aside, the Canadian incumbents will get Lower B, Lower C and Upper C blocks in 700MHz, so new entrants will be relegated to second class 700MHz in Lower A at best.  Even the Upper C block was split into two parts, this will be an issues for new entrants.

700MHz Implications for Incumbents – Bell, Rogers and TELUS

Since all three Canadian operators will be deploying the AT&T version of the iPad, which only has lower B and C blocks in 700MHz, three operators will be bidding for two blocks.    This means that the customers of at least one of the incumbents will disappointed when they can never use their iPad in rural areas on 700MHz.  There are winners and losers, with no middle ground, as switching to the Verizon version would be pointless as it does not have LTE in AWS, making today’s LTE investment redundant for the losing Canadian operator.

So who will win the lower B and lower C blocks of 700MHz?

Historically Rogers has always won the best spectrum.  They have paid more and almost without exception paid whatever it takes to win the best spectrum.  As a result they have always enjoyed a spectrum rich environment and share a similar ecosystem to AT&T.

But in a make or break situation, where Bell and TELUS have more to gain by winning two blocks of continuous spectrum that they could share across chipsets and networks, one has got to believe they will not give in without a fight?  Bell and Rogers have enjoyed significantly lower capital intensity (10% and 11%) recently versus Rogers at 16% even while rolling out LTE.  So they have some extra cash sitting in their back pocket.

We hope that by raising dividends, that none of the incumbents have given back too much when they might need the extra funding in what now looks like a significantly more competitive 700MHz auction, even without special treatment for the new entrants.

The race for 700MHz really has had the heat turned up, by Apple’s new iPad no less. (c) Alphasynb

 

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Smartphone growth sparks investment call – FT.com

$800bn needed in next four years for LTE networks!  More mobile connections than people in the world.  Smartphone growth sparks investment call – FT.com.

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