Results

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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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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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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