Earnings preview: Telecoms dial 'S' for sweet spot

By Jamie Sturgeon | Financial Post - Stockhouse.com | Oct. 23, 2010

Make no mistake, there are seismic changes percolating just below the surface of the telecommunications industry.

New wireless competition, major acquisitions that hold the potential to sharply tilt the balance of power as well as new regulatory concerns threaten to drag on earnings for Rogers Communication Inc., BCE Inc. and Telus Corp.

Year to date, none have — while investors have poured funds into the three blue chip stocks in search of stability and yield. The S&P/TSX Telecom index is up 25% since Jan. 1, led by Telus’s 41% rise. Rogers is trading 25% higher and Bell up almost 22%.

The trio have been quintessential market darlings in 2010, a year that was supposed to be defined by instability for the big telecoms. New mobile startups were suppose to be winning over anxious customers in droves. In part as a result, incumbents were suppose to be at each others’ throats (even more-so) to guard not just wireless, but home-phone, broadband and TV subscriptions from rivals stepping up their attack.

The majority of these feuds have not emerged the way some thought, at least not yet, and the stocks show it.

To be sure, the three firms have benefited from a flight to defensive, yield-focused equities, but also from impressive operating results led by — big surprise here — wireless, where competitive threats appear to be largely mitigated.

As reporting season gets underway this week, most analysts agree the stocks hold the strong potential for yet more upside. “We believe all three large wireless incumbents are positioned to report better-than-expected results,” Jeff Fan said in a recent note clients.

Even with vast wireline businesses, it is no secret the major engines behind the profitability for all three incumbents are wireless earnings.

That is why shares in all three suffered a momentary shock last December when Globalive Wireless Management Corp. was given the green-light from Ottawa to launch Wind Mobile. Wind was joined by smaller urban-focused providers Mobilicity and Public Mobile in May, and Videotron Ltee. in Quebec on Sept. 9.

But the last 11 months have shown the new entrant threat to be inconsequential so far. Incumbents have effectively blunted the impact with new products like Rogers unlimited talk-and-text brand Chat, Bell’s matching Solo plans and Telus’s response to re-pricing in Quebec.

“Apart from Videotron’s launch in Quebec, wireless competition remained stable this quarter,” said Jonathan Allen at RBC Capital Markets. “New entrants did not appear to have much of an impact — indeed they have begun slashing prices and offering larger sign-up subsidies — a possible sign that growth is proving challenging.”

For Rogers, an area that will be closely watched is profit margin. CEO Nadir Mohamed warned investors on the last quarterly call that it could face substantial subsidy costs in upgrading its huge iPhone subscriber base to the newest iPhone 4. That threat has also likely been overstated, analysts say, given the short supply of the iconic device since its July 30 Canadian launch.

Rogers, which is expected to report earnings per share of 79 cents and consolidated revenues of $3.187-billion on Tuesday, faced potentially far bigger subsidies expenses owing to its large lead in smartphone penetration relative to Bell and Telus, who each hold about half the base that Rogers does.

But supply constraints mean Rogers margins will be spared, at least until next quarter.

Rogers’ considerable smartphone base stems from a network advantage it held between until last November. It has been almost 12 months to the day that the Bell and Telus activated their joint “3.5G” network, allowing them to sell the iPhone and other advanced smartphones that Rogers provided exclusively until then. The pair have been gaining on Rogers lead since, and are expected to show a further even of share distribution when Bell reports on Nov. 4 and Telus on Nov. 5.

“We forecast the incumbents adding roughly equal ... market share this quarter,” Mr. Allen said. He expects the firms to gain between 120-130,000 new customers apiece — a far cry from a few years ago when wireless was booming, but perhaps an achievement in 2010.

Price, though, has been sacrificed to get growth among those harder-to-find market segments (as one can see with Chatr’s unlimited plans). Analysts see flat to negative trends on average revenue collected per subscriber again this quarter, even as more people convert to smartphones and rack up data charges.

“With data substitution and competition in voice services intensifying, we estimate voice revenue decline continued to accelerate,” Phillip Huang at UBS said in an Oct. 14 note.

Mobile repricing — contained to voice services for now — underscores how new competitive threats are changing market conditions, as well the relative maturity of the wireless industry. Flat to lower revenue trends are now forcing Rogers, Bell and Telus to ramp up efforts to grow home broadband and TV subscriptions.

Bell, which is expected to report earnings of 74 cents a share on $4.496-billion in revenue, introduced its Fibe TV and Internet packages in Toronto and Montreal in the quarter, preceded by the launch of the Optik bundle by Telus in June. Both firms are banking on the bundles to offset wireless pressure going forward and analysts will be looking for an indication on how the new products are being received.

“We will be looking at Telus’s TV additions again this quarter to gauge whether the Optik IPTV offering is gaining momentum,” Maher Yaghi at Desjardins Securities said.

Mr. Yaghi estimates that about 30,000 subscribers were won by Telus (EPS of 73 cents on revenue of $2.469-billion) in the quarter, in line with the pace of acquisitions this year. It means chief Western Canada rival Shaw Communications Inc. will see a modest 2,000 reduction in its cable base, he and other analysts believe.

Bell just began selling Fibe in Rogers’ home market of Toronto in September, but may have had an impact its cable foe already, RBC’s Mr. Allen said.

“Our checks have found that Rogers has been actively contacting customers and offering large discounts,” he said. “It’s motivation is likely a desire to secure its customer base against Bell’s IPTV.”

These small-scale chess moves have had little influence over share values though, nor are they expected to after Rogers, Bell or Telus reports. With strong wireless performances and investors growing thirst for stable dividends, “we expect the recent moment in the stocks to continue for the rest of the year,” Mr. Yaghi said.

There are more bearish takes though.

“Canadian telco stocks are amongst the most expensive in the world,” Dvai Ghose at Canaccord Genuity wrote in a note this week. “We reiterate our fear that that we may be seeing a bubble develop ... that has been driven by an indiscriminate thirst for yield.”

He sees significant challenges that have perhaps gone undetected by the market, not least “unprecedented” discounting on wireless in recent months. Regulatory risks remain as well, with a review of foreign ownership rules now underway within Industry Canada that could hand new entrants big advantages in accessing foreign capital.

Whatever the impacts of the underlying shift will be, analysts say Canadian incumbents seem to be enjoying a relative sweet spot. The same can be said for their investors.

Financial Post
jasturgeon@nationalpost.com

Telecom: BCE chief warns Ottawa to tread carefully on foreign-ownership reforms

By Jamie Sturgeon | National Post - CBC.ca | May 18, 2010

George Cope, chief executive of BCE Inc., cautioned yesterday that government should carefully weigh a decision to change or scrap foreign-ownership restrictions in the telecommunications sector, an area of the economy he says is already flush with investment.

This follows comments last week from Industry Minister Tony Clement further suggesting Ottawa is moving toward a policy shift to promote competition.

At a lunch speech in Toronto, the CEO of the country’s largest communications company said the Canadian market has become highly competitive in the two years since he took over, forcing BCE’s Bell Canada to pump $6-billion into new wireless and wireline upgrades through 2010 to stay ahead.

He pointed to Bell’s new, multibillion-dollar 3G+ wireless network jointly built with rival Telus Corp. as an example of how domestic needs are being met, and warned that allowing in firms from the U.S. and elsewhere may hinder future advancements.

“Do you think Summerside, P.E.I., would come up before Chicago? Not going to happen,” he said. “It happened in this case. So let’s be very, very careful about what we’re trying to solve in Canadian telecom rules because the investment is actually working.”

The network blankets 93% of the country.

Mr. Clement told a special parliamentary committee last week that restrictions could be lifted on the telecom sector by allowing key content assets owned by the biggest providers like Bell and Rogers Communications Inc. to remain in Canadian hands, while opening up distribution and network assets to foreign ownership.

The comments follow a pledge in the Throne Speech in March to liberalize the sector. “Our government will open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need,” Gov. Gen. Michaëlle Jean said at the time.

Ottawa’s move stems from two federal blue-ribbon reports completed in 2006 and 2008, that call for a relaxing of the rules as a way to spur more investment in economically important communications service.

This year however has seen three new entrants into the wireless market, in Wind Mobile, Mobilicity and Public Mobile, with cable giants Videotron Ltee. and Shaw Communications Inc. are on their way with wireless in Quebec and Western Canada.

Competition in broadband is also heating up as Bell and Telus Corp. invest billions this year overlaying copper networks with fibre, bringing alternatives to rival services provided by Rogers and Shaw. “What problems are we trying to solve, what’s the objective?” Mr. Cope said.

Still, the industry, especially in wireless, remains dominated by Bell, Rogers and Telus.

Some analysts suggest that without consolidation or access to more foreign capital (through a change in policy), the young startups face near-certain failure and a retrenchment in services in the market.

jasturgeon@nationalpost.com

Telecom: Wireless leads way as Bell keeps getting better

By J. Sturgeon | National Post | May 6, 2010

TORONTO -- As BCE Inc.'s marketing slogan suggests, it just keeps getting better.

The Montreal-based telecommunications giant reported a 61% rise in profit for the first quarter Thursday in the clearest sign yet that its "five strategic imperatives" campaign is yielding positive results. But perhaps most impressive, Bell, whose ad pitch is that "Today just got better," is sustaining healthy growth in its wireless business when many say the market is ripe for a slowdown.

Bell Canada, the operating entity of BCE, added an industry-best 55,625 new wireless customers during the period, helping the firm to better-than-expected financial results.

A big reason: Bell ballooned its retail presence by 750 stores in January when it began selling services through The Source, the consumer-electronics retail chain it acquired last year. The move delivered a one-two punch to competitor Rogers Communications Inc., which had been selling its phones through the chain until then.

Another reason was the ubiquitous marketing presence Bell held across the country in February. As the premier sponsor of the Vancouver Games, hardly an event went by without some reference to the Montreal-based company.

"No doubt there had to be some benefit from the Olympics," added George Cope, chief executive, on a morning call with analysts. "The addition of the The Source as a new distribution channel and significant Winter Olympics advertising" likely helped BCE gain customers, Jeff Fan, Scotia Capital analyst said.

Bell has been looking to gain wireless share to offset declines in its traditional phone service, making it a top priority among its so-called "five strategic imperatives." Bell is the second-largest wireless carrier in the country with about 30% of the market, just ahead of Telus. Rogers is the market leader controlling about 37% of the market.

The assault was stepped up late last year when the company hit the switch on a new multibillion-dollar HSPA network, breaking Rogers' exclusive hold on the immensely popular iPhone. The move provided a company record 163,000 rise in net new wireless additions in the fourth quarter. Since taking over two years ago, Mr. Cope has moved aggressively on five fronts -- improving customer service; accelerating wireless sales; using its legacy wireline presence to advantage; while investing in broadband and cutting out costs. There was "clear progress" on all five in the quarter, the CEO said.

But competitive headwinds are gathering -- the very forces that the initiatives are broadly designed to counter: greater competition amid slower growth across the industry.

This summer, regional cable provider Vidéotron Ltée. will introduce wireless in Quebec, squaring its offerings with Bell's. Meanwhile, three new independent wireless entrants -- WIND Mobile, Mobilicity and Public Mobile -- will compete for customers in key markets.

Of the new threats, perhaps the biggest is posed by Vidéotron. The Quebecor Inc. subsidiary plans to wrap cellphones into its existing cable, home-phone and Internet services, and offer all four under a single, discounted bundle. It will be a potent offering that will tempt wireless customers from all three major carriers to switch, analysts say.

But it could be particularly painful for Bell, which counts Quebec as one of its most important markets. Here too, though, the five-point plan is at work. Bell invested $431-million last quarter in pushing fibre deeper into neighborhoods and in some cases, directly to the home.

All told, Bell is spending a good portion of $2.55-billion on replacing copper with fibre in core markets. Importantly, the upgrades will support an IP version of Bell TV, a product designed to thwart cable products from Videotron and Rogers.

"Wireline continues to exhibit an organic decline. However, BCE is undertaking investment to stem overall customer losses by focusing on IPTV, which could bring back some needed revenue growth," said Maher Yaghi, analyst a Desjardins Securities.

For the quarter ended March 31, BCE said it earned 65 cents a share, compared with 57 cents in the same period a year ago. Analysts expected earnings per share of 63 cents.

Financial Post

jasturgeon@nationalpost.com

Telecom: Virgin Mobile boldy moving up market to ward off new threats

By J. Sturgeon | Financial Post | 12.21.2009

Competition will be the watchword for Canada's wireless industry next year, as established players face off against a cast of new entrants poised to steal market share.

While the current operators are talking tough, questioning whether any of the new startups have the right strategy or wherewithal to challenge meaningfully, a shakeup of the entire sector looms.

Nowhere are the crosshairs of the new players trained more closely than on the lower end of the market -- existing cellphone users who merely want inexpensive voice and text-messaging services or Canadians who own no mobile phone because they find current prices prohibitive.

It means the discount or "flanker" brands of Canada's big three wireless firms -- Fido, owned by Rogers Communications Inc., Koodo, owned by Telus Corp., as well as Solo and Virgin Mobile Canada, owned by BCE Inc. -- will face the fiercest competition.

For one of them, the threat is affecting a reinvention, says its president.

"Early next year, we'll be in the first phases of a very different Virgin," said Robert Blumenthal, the head of Virgin Mobile Canada.

What that means is unclear -- Mr. Blumenthal is mum on details. But he did reveal that Virgin will begin selling Apple Inc.'s iPhone.

It is a move, he says, that signifies a transition at Virgin from a discount sibling to BCE's Bell Canada, which fully acquired it this spring, to a full-weight partner, offering a complete suite of services for consumers who are increasingly demanding faster and more sophisticated devices.

"You'll see a great expansion in our portfolio and us being able to offer higher-value devices and services," he said in an interview last week. "Where we had been traditionally lower down in the marketplace, we'll be expanding to realize our true potential."

In the new year, Public Mobile Inc., DAVE Wireless Inc. and Videotron ltee will all launch, joining WIND Mobile, which began offering services last week in Toronto and Calgary. DAVE and Videotron have been quiet on their plans, but Public Mobile has stated repeatedly it will offer cheap, flat-rate voice and text services for perhaps $40 a month across its coverage areas between Windsor, Ont., and southern Quebec -- the most populous region in the country.

Mr. Blumenthal says the threat is overstated, but admits that pricing pressure will be a theme for next year and that Virgin is "considering everything."

One thing is for certain: He wants Virgin to get simple.

As it stands, Virgin offers dozens of prepaid and contract plans, not to mention several "add-on" options. "The easier you can make the decision, the easier to sell, the easier to buy. It helps sales and it helps the consumer make choice," he said.

Virgin Mobile, a subsidiary of the U.K. conglomerate, originally entered Canada four years ago with its celebrity CEO Sir Richard Branson partnering with Bell. The Montreal firm supported Virgin with its network in exchange for shared revenues.

In May, Bell acquired Mr. Branson's half for $143-million while agreeing to continue paying licensing fees. It was then that Mr. Blumenthal, a former Telus executive, joined Virgin.

The division has become a key driver of wireless growth for Bell. Analysts suggest Virgin now occupies as much as 15% of the telecommunication giant's wireless base.

However, if it is to maintain momentum, Mr. Blumenthal says Virgin must leverage Bell's new network upgrade to capture higher-margin smartphone users, which make up the fastest-growing market segment.

"Over time, I have a belief that as more people become wireless users and their wireless usage becomes more of a necessity than a luxury ... people tend to move up."

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Telecom: Bell poised to begin offering iPhone

By J. Sturgeon | Financial Post | 10.05. 2009

Bell Canada has cleared the way to begin offering the vaunted iPhone, announcing yesterday it has completed a long-awaited overhaul of its wireless network that will enable the carrier to support perhaps the most iconic handset in the history of the cellphone and smash the de facto exclusivity chief rival Rogers Communications Inc. has held over the device.

For years, both BCE Inc.' s Bell Canada and Telus Corp., the nation's second-and third-largest cellphone companies, respectively, have trailed Rogers, largely because of network superiority. Since its acquisition of Microcell in 2004, Rogers has used next-generation gear called high-speed packet access (HSPA), while the other two relied on CDMA, or code-division multiple access.

A primary advantage of HSPA is the favour it has gained with handset makers as it has overtaken CDMA technology with cellphone carriers around the globe.

Among the HSPA users is Cupertino, Calif.-based Apple Inc., which designed its smash-hit iPhone expressly for HSPA networks.

Having the the only compatible network in Canada, Rogers has been able to offer the iPhone while Bell and Telus watched from the sidelines.

That competitive handicap was dissolved yesterday as Bell announced it has completed a year-long transition to HSPA and will introduce service next month. "The new network will be ready to roll in November, quickly notching up competition and wireless choice for consumers and businesses across the country," said George Cope, chief executive of Bell.

In an interview, Wade Oosterman, president of Bell Mobility would not confirm whether Bell and Apple were in talks to bring the iPhone to Bell in light of the move, but said he anticipated making a new handset announcement soon. Sources suggested both Bell and Telus, which declined to comment on when it would introduce its HSPA upgrade, were close to securing a deal with Apple.

Bell's move, made months ahead of schedule, comes as Bell, Telus and Rogers brace for the arrival of new entrants analysts predict will steal market share from all three.

Three new players in Globalive Wireless, Public Mobile and DAVE Wireless are expected to launch services in major markets this year or early next year. Globalive, which is undergoing a review of its ownership structure by Canadian regulators, has vowed to launch in Toronto and Calgary before the year is out.

"[With] the coming arrival of new wireless brands and networks, Bell will be ready to compete," the Montreal-based company said.

The iPhone, like other smart-phones such as the BlackBerry, nets higher monthly revenue per user on average versus traditional cellphones that do not offer the same level of Web services and cannot be charged higher data fees, although analysts aren't sold yet on whether the hefty upfront subsidies carriers pay for the iPhone are worth it for them.

Both Bell and Telus announced last fall they had begun pouring millions into the network transition ahead of the 201 0 Olympic Games in Vancouver, which will see tourists from around the world converge on B.C., netting the companies lucrative revenues from international roaming fees.

Bell also recently announced an agreement with U.S. giant AT&T that will lock up roaming payments from U.S. customers travelling within Canada.

The earlier rollout will see Bell widen its handset offering for the holiday season as all three incumbents face pressure to capture as many customers as they can ahead of the market shakeup.

The move, which overlays HSPA gear on Bell's existing network, also means Bell can offer devices for both network standards. Bell is already the exclusive carrier of the Pre. Made by Palm, the CDMA-only handset is considered a chief rival to the iPhone.