Rogers stock drops as unlimited wireless plans hurt revenue

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Rogers Communications Inc.’s stock had its worst day in more than six years on Wednesday, after the company’s strategic shift to unlimited data plans led to a sharp drop in lucrative overage charges.

The results emphasized the pressures facing the entire telecom sector, including intense competition on fees, the shift to unlimited data pricing and the potential for government intervention in cutting cellphone bills.

Other Canadian telecom providers BCE Inc., Telus Corp. and Shaw Communications Inc., all of which have introduced unlimited data plans, each saw their stocks drop by more than 4 per cent in reaction to Rogers’ disappointing results.

The financial impact of Rogers’ unlimited data wireless plans was much higher than anticipated, with more than one million Canadians signing up under the new pricing model – three times what Rogers expected by this point.

As a result, its third-quarter financial results were hit with a $50-million reduction in overage fees, causing the quarter’s profits to miss analysts forecasts, and forcing Rogers to reduce its full-year revenue and earnings guidance.

The company’s stock fell by 8.1 per cent as a result, closing at $61 a share.

Rogers chief executive Joe Natale cautioned investors to expect more volatility in the quarters ahead, as part of a necessary transition away from relying on data overages as a revenue driver.

“This dynamic was both unsustainable and limiting to our future,” Mr. Natale said in a conference call with analysts. “Canadians had become increasingly afraid to use data given the evolution of overage rates in our industry.”

Unlimited data is quickly becoming the industry norm, after all three national carriers introduced plans eliminating overage fees in June.

With Canadians paying a total of $1.2-billion in 2017 for exceeding their data caps, hefty overage fees have long been maligned by consumer advocates and policy makers for contributing to the relatively high cost of mobile phone service in Canada.

In the latest federal election campaign, the Liberals vowed to reduce wireless bills by 25 per cent, while the NDP said it would cap cellphone prices at the global average.

It’s not clear how either campaign promise would be fulfilled, while the industry says that prices are coming down without intervention, largely by virtue of unlimited data plans.

“We’re … very much aligned on the topic of affordability,” Mr. Natale said. He pointed out that overage fees represent about 5 per cent of Rogers’ wireless service revenue, which is down by half over the past couple of years. By this time next year, overages are expected to have just a 1-per-cent share of the top line.

That kind of swift decline to an important piece of Rogers’ business, however, is proving a significant strain on financial performance.

The biggest impact in the third quarter was on revenue from wireless services, which declined by 1.6 per cent over the same quarter last year – “a rare result for a wireless incumbent,” Aravinda Galappatthige, an analyst at Canaccord Genuity, said in a note.

And since the industry’s transition seems to be unfolding far quicker than anticipated, Rogers was forced to reduce its forecast for 2019 sales growth to between a decline of 1 per cent and a gain of 1 per cent, a substantial cut from the previous target range of a gain of 3 per cent to 5 per cent.

“Wireless results are likely to get worse before they get better, and consensus expectations have to be reset,” Scotia Capital telecom analyst Jeff Fan wrote.

But there is a turning point in sight, Mr. Natale said, once the dwindling of overage revenue has been absorbed over the next four or five quarters.

About 60 per cent of customers migrating to unlimited data have actually upgraded from cheaper plans. And they are using an average of 50 per cent more data without the threat of overage charges.

And while charging for excess data usage may be waning, the company offers higher priced plans for faster speeds.

Additionally, the industry’s new pricing paradigm gives Rogers the chance to “collect a simplicity dividend,” Mr. Natale said.

“If you make things clear, simple and fair, customers will call less, have fewer billing disputes, they will spend less time when they do call, and will be more satisfied overall.”

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