Stock Smarts: Telecoms Under Pressure
Ottawa’s attempt to create a fourth wireless carrier is bad news for the shares of Rogers, BCE, and Telus
It has not been a good year for Canada’s telecommunications sector.
As of the close of trading on Aug. 15, the S&P/TSX Capped Telecom Services Index was ahead only 2.3 per cent for the year – barely above break-even. That placed it in the unenviable position of being the worst performing sector on the Toronto Stock Exchange.
What’s happened? It’s not as if our telecom companies are going broke – in fact, in broad terms they’re performing reasonably well. Part of the problem is that investors don’t see a lot of upside potential in the shares right now. Much of the blame for that can be laid at the doorstep of the Conservative government in Ottawa. Its quixotic attempts to encourage the creation of a fourth major wireless provider in Canada have so far achieved nothing more than to raise a cloud of uncertainty over one of our most important industries.
The government’s latest manoeuvre is the plan to auction off more wireless spectrum on terms that are supposed to encourage a potential competitor to step forward. More than half of the 50 megahertz of AWS-3 wireless spectrum, which will be sold in early 2015, is being allocated to small companies. (AWS stands for advanced wireless spectrum.) Previous auctions were dominated by the Big Three of Rogers, BCE, and Telus, which control 95 per cent of the wireless market in Canada. Moreover, regulations will make it difficult for a smaller company to resell any spectrum it purchases to one of the Big Three at a later date.
Growth in the wireless sector is seen as the key to future profit gains for the telecoms, with traditional cable and wireline revenues under pressure as more customers cut the cord. If Ottawa somehow succeeds in its efforts to create a viable fourth player, investors and analysts believe the inevitable result will be to draw business away from the Big Three. Without strong wireless growth, they’ll stagnate.
Even without a fourth player, the Big Three are coming under pressure in the wireless sector, with Rogers Communications (TSX: RCI.B, NYSE: RCI) hurting the most. The company’s second-quarter results showed that operating revenue from wireless was down 1 per cent year-over-year. Net postpaid wireless additions (the most-watched statistic) were down 60 per cent for the quarter and 90 per cent for the first six months of fiscal 2014. The company blamed a previous government policy, the outlawing of three-year contracts, for the dramatic slowdown in growth.
BCE (TSX, NYSE: BCE) reported a 5.5 per cent increase in wireless operating revenue for the quarter to just over $1.5 billion. Postpaid net additions totalled 66,186 compared to 96,390 last year, down 31 per cent. Like Rogers, the company blamed the drop to “slower overall market growth resulting from the elimination of lower-priced 3-year contracts as mandated by the new federal Wireless Code of Conduct”.
Overall, the company’s second-quarter results continue to show strength. BCE reporting operating revenue of $4.22 billion, up 4.4 per cent from the same period in 2013. Net earnings attributable to common shareholders were $606 million ($0.78 per share), an improvement of 6.1 per cent from $571 million ($0.74 per share) a year ago.
I have a friend who runs down BCE stock every time we discuss the market. It’s a badly managed company, he insists, and its media operations are highly vulnerable to a downturn in advertising.
I agree about his comments relating to advertising and in fact Bell Media is in the process of severing 120 employees due to softness in the TV ad market. Despite this, Bell Media posted a revenue increase of 36.1 per cent to $761 million for the quarter, due mainly to last year’s acquisition of Astral Communications.
Telus reports financials
Telus (TSX: T, NYSE: TU) also had a good second quarter. Operating revenue was up 4.4 per cent to just under $3 billion, meeting analysts’ expectations. Adjusted net income, which strips out unusual costs and revenue, rose 9.3 per cent to $387 million ($0.63 per share). On an earnings per share basis, that was a 16.7 per cent improvement over the same period in 2013. Free cash flow was up 9.4 per cent to $210 million.
Wireless network revenues increased by $85 million (6.1 per cent) to $1.5 billion in the quarter. The growth was driven by continued subscriber base expansion, higher data usage as a result of a continued increase in smartphone adoption, the expansion of the company’s LTE network coverage, and increased data roaming.
However, like the other two majors, new wireless activations were down. Telus reported net additions of 58,000, compared to 79,000 a year ago, a decline of 27 per cent. The total wireless subscriber base was up by 170,000 from a year ago to 7.9 million, a 2.2 per cent increase. Higher-value postpaid subscribers represent 87 per cent of the total subscriber base.
Telus CEO Darren Entwistle didn’t comment directly on Ottawa’s policies in his remarks accompanying the financial results. But he reminded investors and, by extension, federal politicians of the huge investments the Big Three have made in creating a national telecom network.
“The Canadian telecommunications industry represents an intensely competitive and rapidly changing market where carriers are required to meet the evolving demands of our customers in respect of service excellence,” he said.
“Despite being challenged with a vast and tremendously diverse geographic landscape and dispersed population, our high quality networks have become the envy of the world owing to the fact that they have been built in a regulatory environment that requires meaningful facilities based investment. Telus alone has committed $111 billion in technology and operations since 2000 to bridge the digital divide by providing best-in-class technology and wireless coverage to 99 per cent of the Canadian population.”
The message may have been veiled but it was clear – we’ve spent billions setting up the network. Allowing a new competitor to piggyback on it now would be patently unfair.