Rogers Communications: Q2 Earnings Disappoint Investors

Jul.31.08 | About: Rogers Communications (RCI)

Rogers Communications Inc. (NYSE:RCI) shares were punished on Tuesday following a less than inspiring second-quarter earnings report. Investors were hoping for a strong quarter and an upward guidance revision from the company in light Rogers’ exclusive July 11 launch of Apple Inc.’s (NASDAQ:AAPL) iPhone 3G.

They received neither, sending Rogers, which depends on its wireless division for roughly 70% of EBITDA, shares down 7%. For the quarter, the company added 92,000 new wireless subscribers, while average revenue per user [ARPU] grew by 4% to C$75.48 per month.

Both figures were below expectations and stoked concerns that the telecom giant faces a barrage of competitive challenges in the coming quarters. Current rival Telus Corp.’s (NYSE:TU) new discount-brand Koodo, as well Virgin Mobile (VM) are already eating into market share, said analyst Davi Ghose of Genuity Capital Markets, while BCE Inc. (NYSE:BCE) is expected to adopt new technology shortly that will challenge Rogers’ superior network. New entrants to the market via the wireless spectrum auction later this year are expected to further ratchet up pressure on Rogers’ margins.

The latest results prompted a bearish outlook from some analysts who foresee a sustained slowdown for Rogers Wireless into 2009. David Lambert of Canaccord Adams slashed his target price to C$35 from C$38 on Wednesday, while maintaining a ‘sell’ rating on the stock.

The gloomy outlook could be still be temporary, according to UBS analyst Jeffery Fan. Driven by strong iPhone sales in the present quarter as well as the introduction of smartphone rival the BlackBerry Bold next month, “data revenue growth will reaccelerate.” Mr. Fan reiterated a ‘buy’ recommendation with a target price of C$51.

Jonathan Allen of RBC Capital Markets is likewise optimistic, maintaining a ‘buy’ recommendation, although he trimmed his price target to C$55 from C$58. Rogers’ network superiority is expected last for a while, regardless of competitor rollouts of new technology, he wrote in a note to clients on Wednesday.

Mr. Allen wrote:

Lower-cost GSM devices will likely dominate retail shelves for many years – leaving Rogers with a key advantage as Canada’s only national GSM carrier.

Mr. Fan told clients:

Although the stock could remain volatile from news flow in the near term, we continue to believe the concern about wireless competition will be alleviated.