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February 15, 2007

Rogers Communication 4Q06 Earnings Preview

Rogers Communications (RG) preannounced solid subscriber results that should be supportive of a good quarter when the company reports full EPS after the close on Thursday. There aren’t many estimates on RG and there could be some confusion relating to U.S vs. Canadian dollar numbers but with those caveats look for EPS of 9-11 cents on an 11% increase in revenues to $2.4 billion. EBITDA should be near $680 million, rising 33% vs. 2005, a similar growth rate to 3Q06.

Wireless telephony will represent a little over half of revenue. RG already announced subscriber results that showed slightly below par net adds but lower than expected churn. These results are similar to what has been reported by other leading wireless players in Canada and could be indicative of an environment that is favorable for margins. Wireless number portability is coming soon to Canada and it appears that operators are looking to lock down quality customers and focus on ARPU at the expense of subscriber counts. I think this is a good strategy, especially considering that at around 57%, wireless penetration in Canada trails pretty much every other major industrialized market. Penetration is closely tracking these other markets but just a few years behind so giving up a few subs now should not prove costly. For the quarter, RG should see wireless service revenues rise around 17% with sharply margin expansion that has been evident all year continuing and driving EBITDA up by 55%. Other wireless issues to keep on eye on are trends in data and roaming. RG is the only GSM in Canada which gives the company a competitive advantage on roaming minutes and for obtaining the best selection of handsets.

2007 guidance for wireless will be an important part of the RG earnings report....

I only have limited access to analyst models but I would hope for revenue growth of at least 13% and EBITDA growth of at least 18% implying continued margin expansion. Prepaid net adds should grow by around 500,000, down from almost 600,000 in 2006 but still driving solid double digit growth. Churn may tick up slightly due to number portability but given actions on the part of RG and its competitors in 2006, a big increase should not be expected.

RG's other big business, representing about 30% of revenue is cable. Cable trends in Canada closely mirror those in the United States. RG should report double digit growth in revenue and EBITDA as the triple play continues to drive the business. These trends should continue in 2007. One thing that will surely be addressed is the 2007 outlook for capital spending. Comcast has spooked investors with its increase in capital spending plans and it is possible that RG could announce capital spending plans in excess of street estimates. As long as subscriber growth is also better than expected, as it was at Comcast, I don’t see any problems for RG even it does boost its capital spending guidance.

Overall, I expect a strong quarter and good guidance from RG. Canadian wireless remains an excellent investment theme and RG is the best way to play it. Having a secondary business like cable with solid digit growth prospect further supports the story. If RG hits current 2007 analyst estimates, the shares should continue to work higher toward my target of $36.

RG has handily beaten estimates in 2006. This creates lots of extra upside if the trend continues in 2007 but has also raised the bar a bit if the company begins to merely meet estimates. I expect them to beat.

Posted by Steve Birenberg at February 15, 2007 07:49 AM in RG