Article: http://www.financialpost.com/Rogers+shares+earnings+miss/3727012/story.html
Summary:
According to Rogers Communications Inc.’s recent third quarter results, their shares fell more than 7% and a drop of 24% in profit. Not only had their shares dropped, they also missed the analysts’ expectations by $60-million. Although Rogers had increases in its adjusted operating profit from its cable operations and media lines, this increase was offset by a 3% decline in wireless. The slight decline in wireless network margins is a result of the significant increase in smartphone activations and upgrades. With the recent acquisition of some of the advanced phones in the mobile market, Rogers cost of equipment sales rose 25% and its marketing and sales expenses rose 13%. Due to the recent large upgrade cycle for iPhone customers, Rogers did not adjust their guidance figures because the iPhone 4 launch heavily weighed on margins. Even though there was a modest decline in wireless network margin, Rogers still managed to distribute significant amount of dividend and share buy backs.
Connection:
Rogers recent massive upgrade and activation of new mobiles heavily impacted the figures on their financial statements, especially the income statement which deals with revenue and expenses in particular. The upgrades and activations caused various expense accounts to increase, which includes the cost of goods sold (cost of equipment sales) and marketing expense. However, the inflated expenses also brought in more revenue as there are high demands for these newly anticipated mobiles. In addition, amortization expense also plays a role in this upgrade cycle. As updated mobiles pour into the inventory, the older versions must be depreciated to a reasonable value to attract consumers and make room for the new mobiles. Despite the increase in revenue, the wireless network profit margin ratio declined 3% from the previous year because the sudden upgrades and activations were overwhelming in comparison to the revenue generated. Aside from the income statement, the balance sheet is also affected by the return of dividend and share buybacks. After a series of voting by the board of directors and an official date of declaration is set, the dividends figure becomes a liability on the balance sheet under the dividends declared account to satisfy GAAP. Also, a decrease in retained earnings is followed in order to keep the accounting equation balanced.
Reflection:
I'm optimistic toward Rogers' upcoming fourth quarter results. I believe that the insubstantial decline in the wireless network margin is merely a result of the abrupt upgrades and activations of the new mobiles. The overwhelming expenses utilized to upgrade mobiles and to market the new mobiles is most accountable for the decline in margin. This is like renovating a restaurant and upgrading the quality and variety of the food to inflate the prices on the menu. Although there may not be any profit during the beginning stages after the upgrade because the revenue generated is insufficient to offset the upgrade expneses. However, in the long run, the revenue will eventually cover the upgrade expenses and therefore, increase the profit margin. Same concept applies to Rogers recent upgrades and activations, the profit margin will ultimately increase in the long run. Not to mention, the holiday season is fast approaching which will inflate the sales of mobiles.
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