Rogers Sees Sluggish Growth

Rogers Communications (RCI) recently reported second-quarter results with slower top-line growth but a double-digit growth in the bottom-line driven by cost efficiencies, lower effective tax rate (25.1% in the reported quarter vs. 33.7% in the prior-year quarter), and decline in share count. Quarterly EPS soared 14% to C$0.65, whereas on a reported basis, EPS jumped 25.5% to C$0.59.

Second-quarter revenue increased 3.1% year over year to C$2,891 million. The slower growth in the top-line was due to the economic turmoil and peaking product maturity that is threatening subscriber growth. Both Internet penetration (at 69% of basic cable subscriber base) and digital penetration (at 70% of basic cable households) are nearly stagnant. Management now expects total revenue in 2009 to be up by 2% to 4% as opposed to 5% to 9% previously anticipated.

Rogers is also feeling the brunt of the economic slowdown. The general softness in the Ontario economy has resulted in rising unemployment levels and lower new home construction, which in turn leads to lower net additions of most cable and Internet products. Ontario represents 90% of the cable market. Total cable revenue generating units’ net additions for the reported quarter was 6,000 (versus 65,000 in the year-ago quarter). Subscriber net additions include basic cable net losses: 19,000; Internet net losses: 4,000; digital cable household net additions: 8,000 and voice over cable telephony net additions: 21,000.

Rogers is experiencing a decline in roaming revenue due to a fall in business tours and drop in long-distance calling amid recession, which resulted in lower voice component of postpaid ARPU. Postpaid ARPU declined 3.1% to C$73.24, whereas monthly churn remains at a historic low of 1.00% (vs. 1.06% in the prior year quarter). Moreover, we expect some near-term softness in roaming revenue following the outbreak of swine flu.

The slowing economy has negatively impacted Rogers Media business (down 10.5% to C$366 million) due to weakness in advertising-related revenues in Publishing, Radio and Television and at The Shopping Channel reflecting general retail sales declines. Consequently, management expects Media revenue to fall by 4% to 10% in 2009.

Rogers Wireless operations, which account for more than half of the company’s revenue, is well positioned in the attractive Canadian market posting a revenue growth of 6.2% to C$1,616 million. Wireless subscriber net additions totaled 142,000, with post-paid net additions of 148,000 and pre-paid net subscriber losses of 6,000. Rogers Cable revenue increased 3.6% to C$972 million.

Management expects Wireless Network revenue and Cable Operation revenue to increase by 6% to 10% and 6% to 8%, respectively, in 2009. We maintain a Hold rating on the stock.

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