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May 02, 2007

Another Great Quarter For Rogers

Rogers Communications (RG) reported another very strong quarter, continuing a string of positive news that has led to a double in the stock over the past year. EPS in US dollars looks like 23 cents vs. expectations for 18 cents. Revenues appear to be inline at $2 billion. I am hesitant about those numbers due to the fact the company reports in Canadian dollars.

Getting down to the segment level, it seems clear that the results are quite good. Wireless revenues were at the high end of expectations with dramatically higher margins than expected. Service revenue margin rose by 700 basis points well ahead of estimates that were looking for a still substantial 400 basis point expansion. Margin expansion likely emanates from a big jump in data revenue that led to much higher ARPU than expected. Minutes of use also grew rapidly and cost per gross add was stable. RG may have also benefited from a slight shortfall in net adds which came in at 86,000 vs. some analysts looking for 90,000 to 110,000. Fewer new customers typically helps EBITDA. Net adds were still up dramatically vs. a year ago indicating that growth in the Canadian wireless market continues. It is probable that RG focused on customer retention this quarter since wireless number portability just arrived in Canada. On the call, management said portability was not having any negative impact so far.

In Cable, RG performed very well with revenues rising 14.2% and EBITDA rising 14.9%. Subscriber additions were up vs. a year ago in all products. Telephony subs fell sequentially as RG focused on data and internet in the quarter. Management indicated that RG would refocus on telephony this quarter. Cable growth closely matched street expectations....

Among RG's other businesses the only item of note is the operating loss at Rogers Business Solution which is the company's large business telephone offering. Management has guided a barely above breakeven year for this segment. The 1Q loss does not appear to put the guidance at risk.

On guidance as a whole management said that "we have a generally positive bias toward meeting or exceeding certain full year guidance metrics" but that they preferred to wait until the 2Q report to officially revise guidance. I'd call that good news.

There was limited commentary on the call regarding the BCE Inc. (BCE) situation and whether it might make RG reconsider its own capital structure. For now, RG is using its free cash flow to paydown debt. The company recently received investment grade ratings. Pressure is building on management to do something with its riches and a midyear announcement still seems likely. The added pressure of the major private equity players being all over Canadian telecom should keep the "BCE premium" that has recently boosted RG shares intact.

Looking much further ahead, RG's base earnings power seems to have grown considerably. On the call management indicated that wireless margins have settled into a 45-50% range that should prove sustainable. They do not intend to let margins get much higher and will reinvest to maintain its industry leading competitive position. With the possibility of a subsidized fourth facilities based provider in Canada, RG is making a smart move to focus on its competitive position.

2008 and beyond wireless margins in analyst spreadsheets look too low. This represents the higher earnings power I alluded to above. At the same time, margin expansion built in beyond 2008 no longer seems likely. Fortunately, the Canadian wireless remains several years behind the US in terms of penetration so RG's long-term growth will continue off a higher base.

The bottom line is that RG remains an excellent story of the short and long-term. Any weakness should the BCE premium dwindle would be an excellent buying opportunity. I don’t expect that opportunity to present itself, however, as operations support the move to higher prices over the last month. I suspect my price targets of $38 in 2007 and $45 in 2008 are going higher.

Posted by Steve Birenberg at May 2, 2007 01:33 PM in RG