EUR 850.00 For Business Accounts Only

Morningstar | Numerous Strengths in Rogers' 2Q Outweigh Weak Revenue; FVE to CAD 65 From CAD 62

Several positive metrics stood out in narrow-moat Rogers Communications' second quarter, taking precedence over tepid top-line results that were impacted by less crucial sources. With positive trends in its wireless and Internet access customer bases, Rogers is positioning itself to remain an industry leader, something we've questioned after its wireless network fell behind some peers and BCE began improving its wireline network. We plan to raise our fair value estimate to CAD 65 from CAD 62 to reflect a slightly more positive long-term forecast.

Revenue grew less than 1% compared with last year's second quarter. However, the rate was pulled down by wireline phone revenue--which is not key to our long-term forecast--that was weaker than we expected and a 5% decline in wireless equipment revenue, which is volatile. More important measures like wireless service revenue and Internet access revenue were up 3% and 7%, respectively. In addition, the adjusted EBITDA margin expanded 330 basis points, a full percentage point better than we expected, and we estimate the accounting rule change to IFRS 16 accounted for only about one third of the expansion. In our view, efficiencies the firm is gaining with its unlimited wireless data plans and Ignite TV offering make the margin expansion sustainable.

The firm added 77,000 postpaid wireless subscribers in the quarter, a nice rebound from a weaker first quarter. Impressively, monthly postpaid churn was under 1% for the second straight quarter and average billings per user grew 4%. More importantly, we think the future is even brighter. In our view, Rogers has continued performing with a network that had fallen behind Telus and BCE. With more 600 MHz spectrum than any competitor and an unlimited data option, Rogers should maintain a first-rate offering.

Cable segment revenue grew less than 1% year over year, with phone weakness almost completely offsetting Internet strength; television revenue was virtually flat. After adding 22,000 Internet access subscribers in the quarter and with the seasonally strong second half yet to come, the firm is outpacing our full-year projection of 73,000 net additions. However, losses of television subscribers, which we expected to be modest in 2019, are likely to eclipse last year's total subscriber loss of 55,000 (the firm has lost 54,000 year to date). While our TV subscriber metrics have likely been too bullish, the firm is showing positive signs from its wider launch of Ignite TV. Average revenue per TV customer rose more than 4% year over year, the first time it has exceeded 2% growth in a quarter since 2014, as more customers add the higher-priced Ignite option (now 10% of all subscribers) and opt for higher levels of content. In addition, the cable segment EBITDA margin expanded 130 basis points from last year's second quarter, and we think segment margins will continue to climb. In addition to the revenue per customer growth, we expect Ignite TV to allow for cost reductions related to customer service and installations.

Media revenue, which accounts for less than 15% of total sales, was down 3% year over year, slightly better than we projected. The firm sold its publishing business in the quarter and realized lower revenue from the Blue Jays. We don't view this segment as a material contributor to revenue or profit growth long term.