Weak subscriber growth hits Rogers

Facing steep new wireless competition, Rogers Communications Inc. (RCI.B-T) reported a weak third quarter, posting a 24-percent profit drop and a huge fall in new subscribers that sailed below analysts expectations.

Canada’s largest wireless company, which saw profit of $370 million or 64 cents per share, compared to $485 million or 79 cents a year earlier, is staring down an unprecedented level of brash competitors including Wind Mobile, Mobilicity and Public Mobile.

"Despite an increasingly competitive market we continue to deliver solid growth," Rogers chief executive officer Nadir Mohamed said on a conference call with analysts. "I’m confident we’re well positioned going forward."

However, part of the profit drop can be attributed to what the company called "significant" smart phone activations and upgrades of 529,000 – either new customers buying expensive new smart phones that are heavily subsidized by the company, or customers with basic cellphones upgrading to smart phones and signing up for wireless data packages. Some analysts say that smart phone upgrades, as opposed to pure subscriber growth, is a more important indicator of success in the industry as wireless data revenue – which was up 28 percent in the quarter – becomes more important than revenues from voice services.

Total revenue was up 3 percent, to $3.1 billion from $3 billion last year, but net additions of new wireless subscribers was down 42 percent year-over-year. That means while Rogers added 167,000 new customers during this period last year, it only added 125,000 in the past quarter.

Rogers blamed the weak subscriber growth in part on intense competition in the market place, and also because some higher-paying customers were signing up for cheaper service, likely the company’s new discount Chatr Wireless brand, which was a competitive response to new wireless competitors. These companies have come into the market with deep discounts on wireless cellphone pricing, and large incumbent providers like Rogers, BCE Inc. and Telus Corp. have responded by dropping some prices and bringing out new unlimited plans.

Rogers also said it incurred a 13-percent rise in sales and marketing costs related to the launch of its new Chatr service, which offers unlimited voice plans for $35 and talk-and-text plans for $45 in certain urban areas, far below the prices it charges for its flagship Rogers Wireless brand. The company also posted a higher "churn" rate, measured by how many customers leave, and a lower monthly average bill.

"We reiterate our fear that we may be seeing a bubble develop in Canadian telecom stocks that has been driven by an indiscriminate thirst for yield," wrote Dvai Ghose, a telecom analyst with Canaccord Genuity, in a research note earlier this month. "In our view, the market is ignoring reprice pressure in Canadian wireless, both from new entrants and incumbents."