The rush to smartphones isn't paying off for Canada's biggest wireless company.
Rogers Communications Inc. saw declines in virtually every aspect of its business in the past quarter, led by a surprisingly weak performance in its critical wireless business.
Although Rogers continues to add subscribers at a healthy clip as customers flock to iPhones and other sleek devices, they are increasingly becoming budget conscious and opting for lower-cost data plans. That led to a slowdown of its wireless data revenue growth rate.
The trend marks a serious challenge for Canada's largest mobile phone carrier at a time when the telecommunications industry is locked in a smartphone arms race, forcing wireless companies to heavily subsidize the sale of the popular gadgets in order to secure new customers. Rogers' overall profit fell far short of analyst expectations and raised questions about where the company can turn for growth in the future.
"The market expected poor results," Canaccord Genuity analyst Dvai Ghose wrote in a note to clients. "But these results were much worse than expected."
Wireless data has long been heralded as the catalyst to drive future growth in the industry as Canadians talk less on their mobile phones in favour of Web surfing, text messaging and social networking. But new wireless entrants are now substantially undercutting big companies such as Rogers on combined talk and data plans, hurting profit margins even as more consumers migrate to smartphones.
The Canadian mobile market is teeming with smartphone users, with at least 45 per cent of subscribers owning one of the trendy devices as of December, according to comScore Inc. Although Rogers activated and upgraded 642,000 smartphones during the quarter, the second-highest number of smartphones ever (including a 35 per cent spike in iPhone activations), it noted that a slowing wireless data revenue growth rate from previous quarters was resulting from a "growing portion" of new subscribers choosing its basic data plans and a decline in data roaming.
"We obviously have work under way aimed at helping to improve the trajectory of the wireless data growth," chief executive officer Nadir Mohamed said on a conference call with analysts.
Its average revenue per user – a key metric in the cellular industry – decreased by 2.26 per cent from a year ago to $57.65. The division posted an operating profit of $717-million, down 9 per cent from a year ago.
Many of the smartphones the company sells are heavily subsidized, something that the company said could change in the future as it offers different incentives based on a user's planned data consumption.
"How we will upgrade and what kind of subsidies we will offer to what kind of customer will be more of our approach to the market," Mr. Mohamed said. "In the early days of smartphones, we were getting customers with much higher [bills]than today, so the levels of subsidies were warranted."
The company said its consolidated revenue – which tracks the money coming into all of its divisions including cable, wireless and media– decreased by 1 per cent from the same quarter a year ago. It reported a profit of $356-million or 68 cents a share on revenue of $2.9-billion. Analysts had expected Rogers to earn 76 cents a share. The profit miss underscores the difficulty the company faces in its two most important business segments – wireless and cable.
Its cable division, meanwhile, lost some 7,000 subscribers in what Rogers termed a "seasonally slow and highly competitive quarter." The division posted a $354-million operating profit for the quarter, down 10 per cent from a year ago. Revenue increased 1 per cent.
Its media division posted a $21-million operating loss for the quarter, 40 per cent worse than a year ago. Revenue increased 4 per cent despite a soft ad market, largely due to increased subscriptions.
The company aggressively cut costs in the quarter, closing its video stores and laying off almost 300 employees. Mr. Mohamed said the company will continue to cut as needed to ensure it meets expectations for the rest of the year. The company could trim its professional services and is considering outsourcing some of its IT work.
"We accelerated cost reduction initiatives and took some decision action late in the first quarter and will continue to do so as required to protect margins and cash flow," he said. "I expect it to continue being a tough period, but I have no doubt in the strength of the franchise."