Shaw Communications Beats, Cuts Costs

Jun.29.11 | About: Shaw Communications (SJR)

Shaw Communications Inc. (NYSE:SJR) declared its third quarter 2011 financial results, which beat the Zacks Consensus Estimate.

In the reported quarter, the company laid off 550 employees including 150 managers. Although the business restructuring is estimated to cost between $29 million and $30.7 million, it will result in early cost savings of more than $50 million.

Second Quarter Results in Details

Net income in the reported quarter was $209.5 million or 46 cents per share compared with a net income of $163.5 million or 38 cents per share in the prior-year quarter. Earnings per share (EPS) of 46 cents comfortably beat the Zacks Consensus Estimate of 40 cents per share.

Quarterly total revenue of approximately $1,327.6 million was up 36.1% year over year and was above the Zacks Consensus Estimate of $1,290 million. The year-over-year improvement was primarily attributable to the acquisition of the Shaw Media coupled with customer growth and rate increases in the Cable and Satellite segments.

Quarterly operating income before amortization was $598.9 million, up 33% year over year. Quarterly operating margin was 45.1% compared with 46.2% in the prior-year quarter. In the third quarter of 2011, Shaw Communications generated $379.4 million in cash from operations compared with $339.5 million in the year-ago quarter. Free cash flow in the reported quarter was approximately $250.1 million versus $155.9 million in the year-ago quarter.

At the end of the third quarter of 2011, Shaw Communications had cash & cash equivalents of $654.1 million compared with $224.9 million at the end of fiscal 2010. At the end of the reported quarter, Shaw Communications had $5,760.4 million of outstanding debt compared with $4,114.7 million at the end of fiscal 2010. Debt-to-capitalization ratio in the third quarter of 2011 was 0.69 compared with 0.65 at the end of fiscal 2010.

Subscribers Statistics

At the end of the third quarter of fiscal 2011, Basic Cable customer base was 2,299,527, reflecting net reduction of 13,577 year over year. Digital customer base was 1,767,740, representing net addition of 19,202 year over year. Internet customer base stood at 1,859,555, reflecting net addition of 11,165 year over year. Digital phone lines were 1,210,064, reflecting year-over-year net addition of 31,404. DTH customer base was 908,077, representing net addition of 1,644 year over year.

Cable Segment

Quarterly revenue was $810.9 million, up 5.1% year over year. Strong revenue growth was attributable to subscriber addition and rate increases. Quarterly operating income before amortization was $400.6 million, up 6.8% year over year.

Satellite Segment

Quarterly total revenue of $216.7 million was up 3.5% year over year. Within this segment, DTH revenue was $194.6 million, up 3.5% year over year and Satellite Services revenue was $22.1 million, up 4% year over year. Quarterly operating income before amortization for the segment was $78.5 million, up 4% year over year.

Media Segment

Quarterly total revenue was $322.5 million, up 8% year over year. Operating income before amortization was $121.3 million.

Our Recommendation

Shaw Communicationsis facing stiff challenges from innovative bundled offerings of Telus Corp. (NYSE:TU) and the new entrants in the Canadian cable TV market. Although the company has decided to finally launch wireless services in mid-2012, we remain skeptical about its profitability as this sector is already over crowded.

We, thus, maintain our long-term Neutral recommendation for Shaw Communications.Currently, Shaw Communications has a Zacks #4 Rank, implying a short-term Sell rating on the stock.