Shaw Q3 2012 Results

Shaw: Q3 2012 Results

Please note that reading this is subject to our terms and conditionsThis should in no way be considered financial advice.  This document is solely the opinion of the authors using only information from the public domain.

Overall Direction

During the Shaw Communications conference call and in the MD&A, it suggests that the executive team is happy with the recent results?  I guess the market does not agree.  We do not think they should be happy either.


With what the MD&A referred to as “disciplined execution”, one could have expected that the subscriber numbers were not going to be good and considering the level of discounting at the moment, we did not need to get the results to know that this would be the case.  But we would never have expected Shaw to lose so many internet customers.  Wasn’t this the key to “winning the home” a few quarters ago?  So if Shaw loses internet customers, does this mean they are losing the home?   But don’t worry because more market price discipline leads to better revenue…well except this quarter.  Total revenue was actually down compared with Q3 last year.


Revenue was particularly weak.  Give the supposed discipline surely one could have expected a healthy rise in revenue.  Cable revenue was up $9m over Q3 last year, Satellite up $1m, but Media was down $17m.  So what happened?  They put prices up, but revenue did not increase?   In the conference call all questions about prices were met with comments about how customers were upgrading and ARPU was increasing, but we are not sure the math says this is what happened during the quarter.  If you divide Cable Revenue by digital subscribers (a proxy for ARPU), monthly revenue dropped from $148 per digital subscriber per month to $137.

Shaw revenue and EBITDA per digital sub per month

Revenue and EBITDA per digital sub per month

If our math is correct, that is a 7% decrease in our ARPU proxy.  This is an ominous warning.  We think this puts Shaw in an interesting position:  When they drop prices, TELUS follows, which mean that existing Shaw customers (who are not on contracts) move to TELUS to get the better prices.  At the same time TELUS customers are in contracts and have been given hardware, so are still not likely to move to Shaw.  So when Shaw puts prices down, they continue to lose customers.  Oops.   What happens when they raise prices?  Well when they raise prices customers do not buy from them either.  Why not go to TELUS which has better technology, faster speeds (uplink and more consistent) and TELUS provide equipment including whole home PVR and Xbox, which Shaw customers have to pay for.

What about wireless?

Wireless is pretty key in the overall balance of power between TELUS and Shaw.  And to be fair, even if Shaw did have wireless, it would not be in Ontario, Quebec and the Atlantic provinces.  But as long as Shaw has no wireless, TELUS will win every price war.   Assuming TELUS and Shaw’s operations were equally efficient and well run, then if Shaw pushed their entire base’s prices down to cost (this is obviously unlikely to happen), then Shaw would be losing close to 80% of their EBITDA.  According to TELUS’s last conference call is TELUS did the same, they would still keep 80% of their EBITDA since most is made in wireless.  So combination of technology and wireless makes it impossible for Shaw to beat TELUS.  Even irrational pricing from Shaw would cause them more harm than TELUS.


Consumers should use Shaw’s incredibly weak strategic position and consider putting up with poor service, if necessary, if they can get good deal on their home telecom and entertainment.  Note that since TELUS has been matching Shaw’s prices, customers can benefit by either staying with Shaw and demanding their new rates or by jumping ship for a better product.

So what is supporting the share price?

Most analysts (7 out of 11) have the stock at a hold rating, while 3 have it as a strong buy and 1 a sell.  Interestingly no analysts have buy or underperform, indicating a particularly polarizing stock?  Some same that even though their results are the worst in the industry, below a certain price, they are a take out target for Rogers?  We are not so sure.  Not sure Rogers will overpay for their own former customers in the west and not sure the Shaw family really wants to sell (at any price)?

The last deal between Rogers and Shaw was amazing, but it took two of the best deal makers in the planet to make it happen, Jim Shaw and Ted Rogers.  Our understanding is that Jim and Ted had a very good relationship with a similar entrepreneurial zeal.  For deals like this to happen the stars really need to align, so a failing Shaw business is only one of the necessary, but not sufficient conditions for a successful takeover by another player.   One only needs to look at RIM to understand that even a business at a fraction of its previous value might not be cheap enough for a deal.  Beauty is in the eye of the beholder.  The final takeover point is how many companies are interested in Shaw?  Too big for foreign players, TELUS is out, the TELUS-Bell network share probably means Bell is out, Cogeco and Bragg are probably too small and MTS is not their biggest fan.  So how much premium would Rogers have to pay when they are the only horse in the race?

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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?


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.


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%.


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


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.


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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