Tech investment pays dividends

Triple-play bundle brings bottom-line success to Canadian cablers

Canadian cable operators' convergence bet is paying off. Big time.

As cablers Rogers Communications, Shaw Communications and Cogeco Cable reported profit and dividend hikes as part of the recent quarterly earnings season, their market edge over rival phone giants Bell Canada and Telus appears to be widening, with industry insiders citing the success of the triple-play bundle of video, broadband and telephony services.

Canadian cable companies' solid growth figures came in stark contrast to U.S. cable operators, which marked the second straight sluggish quarter in terms of basic subscriber momentum and high-speed Internet user gains, with management teams across the U.S. industry citing increased telecom competition and economic concerns.

Toronto-based Rogers, Canada's largest cable firm and wireless phone provider, posted a 75% rise in third-quarter earnings on higher customer growth and price increases.

Subscriber growth also led Montreal-based Cogeco to post a 7% increase in fiscal fourth-quarter earnings on revenue rising 40% after it acquired and integrated Portuguese cable giant Cabovisao.

Calgary-based Shaw was alone in posting lower quarterly earnings without the benefit of unusual items in its previous year.

But like its industry rivals, Shaw revealed the benefits of being able to raise prices and recruit and retain more triple-play subscribers with premium services, such as Internet and telephony, after years in which Canadian cablecasters mostly built out their operations and serviced debt.

Securing price increases has impressed observers as the Canadian cablers have had to match promotions from Telus and Bell Canada, and many predicted that they would attract more customers only with lower prices to justify capital costs to build out their digital telephone networks.

Meanwhile, U.S. cable market observers have increasingly wondered in recent weeks if the power of the bundle has been overstated as telecom firm Verizon in particular seems to have taken it to cable firms. And some U.S. cable operators like Comcast have signaled that they might in the near term compete more aggressively on price to boost subscriber momentum again.

Meanwhile in Canada, Rogers especially has outdone Telus and Bell Canada on their own turf in the wireless phone market. And its edge has come from using GSM, or global system for mobile communications technology, which enables a wealth of telecom features for its subscribers, and global roaming.

Vancouver-based Telus reported a third-quarter earnings gain to CAN$409.9 million ($434 million), compared with CAN$319.6 million a year ago. But, significantly, Telus reported a 1.3% year-over-year shortfall in its average revenue per user from its wireless division. Rogers, by contrast, reported a 7% quarterly upswing in ARPU.

Telus also forecast 2007 sales will fall from its CAN$9.18 billion guidance to CAN$9.13 billion.

"Until (Telus and Bell) finally learn the lesson of their past and convert over to GSM, they will not be able to match the speeds we have," Ted Rogers, chairman and controlling shareholder of Rogers Communications, told analysts in his latest earnings call.

Rogers and fellow Canadian cablers also continue to hold a speed lead over phone giants in the residential Internet market.

Shaw added 15,709 digital cable customers during the latest quarter to take its total to 763,140. Shaw also added 29,857 high-speed Internet customers to a base of 1.45 million and recruited 41,604 digital phone subscribers for a total of 385,357.

Canadian financial analysts rewarded the cable operators' convergence payoffs.

RBC Dominion Securities analyst Jonathan Allen rates Shaw "outperform" and forecast the stock to rise from CAN$28 ($26.65) to CAN$30. Allen also predicted additional dividend hikes for Shaw after it raised its dividend for the third time this year.

"With such a keen focus on returning capital to shareholders, we believe Shaw could increase the dividend another 10%" in the current year, he wrote in a report.

Desjardins Securities analysts Joseph MacKay raised his price target for Cogeco shares from CAN$48.50 ($45.75) to CAN$59. "Cogeco continues to trade below its peer group despite demonstrating above-average growth rates," MacKay said.

Georg Szalai in New York contributed to this report.
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