Prepaid

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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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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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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Rogers Q1 2012 wireless Results

Rogers Q1 2012 wireless Results

Looking at the Q1 2012 Rogers wireless results, it is difficult to find any good news.   It seems that every single metric (with the exception of Data revenue) actually went in the wrong direction.

 

Churn

Overall churn was high for Rogers, with some 513,000 subscribers leaving Rogers during the quarter.  Bringing them very close to losing 2 million customers in the last 12 months (1,987,000).  That is a lot of customers to lose in one year!

Rogers Wireless Q1 2012 Prepaid Nets

Rogers Wireless Q1 2012 Prepaid Nets

Prepaid churn is cyclical and always high in Q1, but this time, Rogers lost a significant number of prepaid subscribers.  They had negative nets of 72,000 which is the biggest loss in the last 7 years.  This compares with a net loss of only 10,000 prepaid subscribers in Q1 2011.  We have yet to see what TELUS and Bell did in terms of losses in prepaid, but the signs are that the incumbents lost significant prepaid share to the new entrants.

Even postpaid churn was high.  While 1.26% is not significantly higher than the Q1 2011 number of 1.23%, it was definitely going in the wrong direction with 287,000 postpaid customers leaving (Q1 2011 was 271,000), despite upgrading 422,000 subscribers to smartphones (some of these were already on smartphones, but required a newer smartphone).

ARPU

ARPU has long been a Rogers strength, but no more, it is heading down quickly.  Voice ARPU declined in terms of both rate per minute (almost a whole cent) but the minutes of use declined also.  Together these suggest that there is not only a change in the Rogers mix (which means they are not getting their fair share of high value customers), but also some base reprice on the voice side.  Behavioral changes away from voice to messaging suggests that Rogers are not gaining the lost voice revenue in data revenue.  iPhones using iMessage, Blackberries using BBM and applications like whatsapp are also repricing text messaging.

For the second quarter in a row, postpaid ARPU was below the key $70 mark at $67.39.  Apart from Q4 2011, Rogers has had postpaid ARPU above $70 every quarter since Q1 2007!  Oops.  This is also nearly $3 down over Q1 2011 when postpaid ARPU was $70.18.

Prepaid ARPU was up, but only marginally at $14.99 (Q1 2011 was $14.32), but this is significantly below the reported ARPUs of Public Mobile, WIND and Mobilicity which all have ARPU around $30.

Gross

Even gross was down.  At 488,000 subscribers, Rogers was short of Q1 2011 by nearly 10K subscribers.  Some of this could have come from closing the video stores, except they said they kept the wireless parts of these stores open.  Assuming that they continued to expend their points of distribution, this means same store sales were significantly down.  They did mention saving some channels costs, but at what price – not getting your fair share?

 

EOP

Total subscribers went down for the first time in living memory, maybe the first time ever – we will have to check as our current data only goes back to Q1 2005.  This loss was driven by prepaid losses, which they point out only account for 5% of revenues, but still this might suggest that the three brand strategy is no longer working.

 

Revenue & EBITDA

Both Down.  Total wireless revenue was $1,706m down from $1,721m in Q1 2011.  This was driven by lower network and handset revenue, but more on the handset side.

EBITDA was down at $717m from $790m in Q1 2011.  On the conference call they were proud of their margin being 46%, but this was down from 48.9% in Q1 2011.  A closer look also shows that Operating profit (not adjusted Operating profit which excludes stock-based compensation expense and Integration) slipped more dramatically from 49% to 44% – that looks like a 5% margin decline!

Rogers Wireless Q1 2012 summary

Overall this was a poor quarter for Rogers, for their sake, one can only hope that Bell also struggled, because most signs suggest TELUS had a great quarter.

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Protected: Wireless Results Q4 2011

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Q3 2011 Churn

Q3 2011 Churn

Chart1:  Churn is becoming more of an issue for all of the incumbents.  Bell’s churn is significantly higher.  One can only assume that this is by design to clean up their base and improve profitability?  Note that Rogers only recently started reporting blended churn.

wireless churn blended Q3 2011

Q3 2011 Blended Churn - Wireless

Chart2: Postpaid Churn show worrying trends for Rogers and Bell.  In their call, TELUS reported Q3 2011 postpaid churn at 1.20% (adjusted for federal government account losses of 20K subs).  These all wen to Rogers, so their churn was actually worse and their nets were really just over 50K considering they will probably not make any profit from the federal government account.

Incumbent wireless postpaid churn Q3 2011

Incumbent wireless postpaid churn Q3 2011

Chart 3:  One can only think that Bell was trying to get rid of low margin prepaid customers?  We are really not sure what is happening at Rogers, but the chart surely looks like teeth.

Q32011 Wireless Prepaid Churn - incumbents

Q32011 Wireless Prepaid Churn - incumbents

Churn in Q3 2011 really started to change the wireless landscape in Canada

 

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