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Rogers disappoints the Street

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Rogers Communications (RCI.B-T), the country's largest wireless carrier, has seen better days.

A number of analysts lowered their price targets for the company after it reported first-quarter earnings that missed expectations and highlighted the competitive pressures that will weigh on the company moving forward.

Rogers reported a 1.1-percent decline in revenue to $2.95 billion compared to $2.99 a year earlier, while adjusted earnings per share (EPS) came in at 67 cents -- well below estimates for 75 cents.

The biggest surprise came at its cable division, where it reported a loss of 21,000 subscribers in the quarter -- its worst quarterly performance ever, according to Canaccord Genuity analyst David Ghose. Profit for the cable segment also missed expectations of $414 million, coming in at $393 million.

And the company's rush into the smartphone market, where customers pay for more expensive data plans, is becoming a much harder slog than it anticipated.

The Average Revenue Per User (ARPU) -- a key metric for wireless providers that measures how much money they bring in for each subscriber -- fell 3.8 percent to $57.65, as competition in the sector heats up.

One of the biggest problems for Rogers continues to be the subsidies it offers to subscribers to entice them to upgrade to smartphones, particularly Apple's iPhone. Subsidies for devices increased more than 17 percent from last year, which analysts highlight as the leading driver in eroding margins.

"Investors are increasingly concerned about the economics of smartphones for carriers," Canccord's Ghose said in a note to clients. "Consequently, if subsidies are rising, but postpaid ARPU is declining and churn [customers leaving for other providers] is rising, the market is wondering whether the smart phone strategy at Rogers is actually adding value."

"In spite of rising smart phone penetration, Rogers Wireless has now reported seven successive quarters of year-over-year wireless ARPU and EBITDA decline. Unlike at TELUS Mobility, where ARPU has increased, margins have been stable and churn has decreased since its iPhone launch in fourth quarter of 2009, it is not at all clear if the iPhone has added value to Rogers Wireless," he writes.

Ghose says the problems at Rogers' wireless division are expected to continue.

"We expect further ARPU declines for Rogers over the medium-term as it continues to lose higher end postpaid market share and share of voice and data roaming revenue to its telco competitors," he says. Ghose lowered his price target to $37 and maintained his "hold" recommendation.

Other analysts say the competitive threats against Rogers are not just limited to it wireless division.

"Rogers' results highlighted the competitively intense landscape in both the wireless and wireline markets, with EBITDA declines in all segments and soft subscriber additions," TD's Vince Valentini said in a note to clients. "As Bell continues to roll out its fibre footprint and the new entrants continue to jockey for position, we do not believe that relief is likely to materialize anytime soon. Although we continue to like the company's asset mix, we believe that caution is warranted with regards to the purchase of Rogers shares at this time."

Valentini lowered his price target to $41 and maintained his "hold" recommendation.

UBS' Phillip Huang adds that the company is faced with an important decision: lower prices to retain customers or suffer subscriber losses.

"We believe the intensely competitive environment for both the wireless and cable businesses is largely beyond management's control and the company will inevitably need to trade-off some financial growth to retain its customers in the

near term," he said in a note to clients. "This leads us to take a more conservative position in our estimate assumptions."

Huang is maintaining both his $38 price target and "hold" recommendation.

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