Last week, Rogers Communications Inc. hosted its Q4 2011 results call with the analyst community. With all three major players Bell, TELUS and Rogers results available for review, it is clear that telecommunications in Canada is finally becoming a competitive business.
The pressure is on for Rogers, as customers exercise their choice to switch wireless carriers. Metrics Rogers once dominated are now narrow leads as Bell and TELUS catch up to the red giant.
Before we get started, take a moment to look at the numbers.
Rogers, traditionally the leader in postpaid subscriber growth, was surpassed by its competitors this quarter on wireless postpaid subscriber growth. Rogers also saw its churn increase and its ARPU decrease, implying that these losses are being absorbed by incumbents such as Bell, TELUS, as well as new entrants.
Postpaid subscriber growth
Impact iPhone inventory has on telcos activation rates
Smartphone customer growth
Wireless data revenue growth
Focus on 4G LTE network expansion
Steady ARPU revenue
Double digit decline in voice ARPU
Heavy hardware (COA/COR) costs
Only thing we didn’t see was billion dollar losses posted. All three carriers posted profit with single digit consolidated revenue growth.
Where are the customers?
Rogers, traditionally the leader in postpaid subscriber growth only managed a mere 42K a 7% drop from Q4 2010. TELUS, the dark horse of the quarter, gained 3.5 times the sub growth as Rogers with 148K. Bell was not far behind, gaining 132K postpaid wireless subscribers. Rogers Communications Inc CEO, Nadir Mohamed stated the call that Rogers would have generated higher subscriber gross-adds if not constrained on supply of the iPhone 4S during the quarter. However, that didn’t stop Rogers from obtaining 34% quarterly share of the post-paid gross adds of the three large Canadian telcos.
2011 was the year of smartphones & data!
All three carriers are seeing more of their customer base activating high end smartphones like Android, BlackBerry, and in particular, iPhone. Bell reported that 48% of its postpaid customers are using smartphones, compared to 31% Q4 2010. TELUS is seeing the same trend with 53% of its postpaid customers using smartphones, compared to 33% Q4 2010. Rogers continues to lead the pack with 56% of its postpaid customers using smartphones, compared to 41% Q4 2010.
As we can see, the tide is turning for Rogers, which is now only a few steps ahead in the game. Fully aware of this pressure, Rogers Communications Inc. CEO, Nadir Mohamed made mention of market place competition in his opening remarks. The bitter sweet news for Rogers is that it has already weathered the storm by upgrading (subsidizing) more of their customer base onto smartphones. Therefore, it’s safe to assume it will continue to control costs associated to COA/COR in 2012, Whereas we may see Bell and TELUS struggle a bit longer in this area as they continue to catch up upgrading their customer base.
Due to the shift in smartphone activations, all carriers reported astonishing double digit growth to wireless revenue attributed from data. Rogers and Bell saw 37% and 25% respectively, while TELUS lagged a bit behind with 16% of their wireless revenue from data.
A push for 4G LTE
Given the increase in data revenue, it’s clear that customer behaviour is trending towards a need for what 4G LTE networks can offer. Jeff Fan from Scotia Capital Markets asked the Rogers management team the question weighing on everyone’s mind: when will customers and investors see incremental returns on costs associated to expanding 4G LTE technology? Rob Bruce, President of Communications asserted that “the LTE network delivers data a lot more cost-effectively than any of the past networks,” and also emphasized that smartphone costs have the potential to decrease with the increase volume of devices. This will likely help all carriers save costs associated to COA/COR, and not just Rogers.
Most carriers continue to report customers wanting to upgrade to iPhone. This also illustrated by Apple’s record setting iPhone sales and profit in 2011. To that comment, it is likely we won’t see Apple squeezing those profit margins anytime soon, 4G LTE and increase device sales or not. Therefore, unless telcos anticipate device price relief from a struggling RIM and competitive Android market I am resistant to expect any short term change in hardware costs. I suppose only time will tell.
It takes money to make money!
Bell and TELUS reported year over year increases to COA per subscriber $450 (up 9.5%) and $421 (up 8.5%) for Q4 2011 respectively. Rogers did not report on this metric; however we can assume its increases are in line with marketplace figures. As Nadir Mohamed reported, Rogers activated the highest number of smartphones ever in Q4 2011 totalling ~790K new and existing subscriber activations.
All carriers reported that their high end smartphone customers bring in ~1.8 times ARPU of a regular cell phone customer (we saw the same figure reported by Verizon and AT&T in the US), which is likely what help pad Bell and TELUS increase to a blended ARPU of $54.50 (up $0.95/4.1% from Q4 2010) and $59.08 (up $0.60/1% from Q4 2010), respectively. Rogers continues to pull in the highest prepaid ARPU at $68.63, however, this number is down $2.68 from Q4 2010. And although they saw a significant loss in prepaid subscribers (30k) and increase to churn (0.47%), Rogers also posted a prepaid ARPU increase of $0.76, sitting at $16.85. Lastly, all three carriers reported a 12% decrease in voice ARPU, but we can see that data revenues have more than cannibalized this loss.
Competition has arrived!
Generating billion dollar revenues may not be what every Canadian customer wants to hear. However, Q4 2011 results illustrate there is in fact competition in the Canadian telecommunications industry! Historically, we have seen 3 major players with one dominate national provider. However, the subscriber gains, losses and migration illustrated on Rogers Q4 2011 analyst call shows that change can and is happening!
Did it take new entrants to the Canadian telecommunication industry to wake the blue and green giants of Canadian telco? Maybe. But I think this is the start of good things to come for customers in getting what they want from their wireless service provider. When the CEO of the largest telecommunications provider addresses their increase to churn and agrees “work needs to be done” and that it will continue to be an area of focus from an execution perspective, it’s clear the days of big business taking profits and customer loyalty for granted are over.