Rogers faces tough first quarter as soft wireless results hurt profits, revenues

TORONTO - A combination of fewer wireless customers switching carriers and a lack of flashy new smartphones were a drag on the wireless division of Rogers Communications Inc. (TSX:RCI.B), helping to pull down first-quarter results, the Canadian telecom giant said Monday.

Rogers reported that net income in the period dropped 13 per cent to $307 million or 57 cents per share from $353 million or 68 cents per share a year earlier.

On an adjusted basis, the results missed analyst expectations, coming in at 66 cents per share, four cents below the average estimate of 70 cents per share, according to a survey by Thomson Reuters.

Operating revenues were relatively steady at $3.02 billion, marginally below the $3.03 billion reported in the comparable year-earlier period.

Executives outlined several reasons for the stagnant growth.

"There were really no iconic devices," Rogers president Rob Bruce told analysts on a conference call.

"The (Samsung Galaxy S5) launch fell into the second quarter."

But that was only one factor contributing to weakness in the quarter, as the wireless division came under pressure from price changes in its phone packages.

On average, a Rogers customer paid a wireless bill of $57.63 a month in the latest period, about $2.05 less than a year earlier, mainly because of reworked monthly packages and lower-priced roaming charges.

Wireless revenues — by far the biggest part of its business — dropped by two per cent to $1.73 billion. The division has been stung by a move by the federal government to shorten the length of cellphone contracts to two years from three years.

Rogers reported 2,000 net additions to its post-paid wireless subscriber base in the quarter, which is thousands of subscribers lower than a typical quarter.

Chief financial officer Anthony Staffieri told reporters on a media call that, at least for now, regulatory changes for contracts have lowered the "churn" rate, an industry measurement of customers who cancel their services with a specific provider.

"We continue to get our fair share in what we believe in the short term is a smaller market," he said.

"What you see is less switching than you might've seen a year ago amongst all of us."

Rogers also faces challenges from its television division where it reported a net loss of 25,000 subscribers in the three months, which was a slower decline than a year earlier.

Chief executive Guy Laurence, who took the role in December after leading U.K.-based telecom Vodafone, plans to meet with the company's board in the coming weeks to lay out his priorities. He said many of his changes to improve the business' performance will be long-term plans.

"There is always low hanging fruit when you come into a company, but I think that it may be relatively modest," he told analysts.

"More of the upside will come from things that may take a longer period to change."

Rogers has been focused on strengthening the results of its wireless operations as competitors Bell (TSX:BCE) and Telus (TSX:T) grab a larger piece of the market.

Canada's largest cable TV and wireless operator has also been bulking up its sports entertainment assets to help differentiate itself from competitors.

Last fall, Rogers signed a $5.2-billion deal for the Canadian rights to all National Hockey League games, including the playoffs and Stanley Cup final, which it plans to offer on all its platforms in both English and French. The company also owns the Toronto Blue Jays.

Rogers also made a $3.3-billion purchase of wireless spectrum earlier this month, which it says will help it better handle increased traffic on its network from services like Netflix and allow users to stream video of NHL games on their mobile devices.

RBC Dominion Securities analysts Drew McReynolds and Haran Posner described the results as mixed, saying in a note that wireless EBITDA margins had been better than expected (45.7 per cent versus an expected 44.7 per cent) offset by lower cable margins (47.6 per cent versus 49.3 per cent).

Among their "key takeaways" from the company's conference call was that the payoff from implementing a new operational plan would only be realized over time, that the company is altering tactics and reducing the level of wireless promotional activity and that management is not interested in large merger or acquisition or international expansion as growth strategy.