Cable turnaround comes at a cost for Shaw

Shaw Communications Inc. reported an annual gain in residential customers for the first time in five years thanks to strong internet and television products, but the turnaround came at a cost, as aggressive spending on marketing and promotions hurt profit margins in the most recent quarter.

The Calgary-based cable giant said Thursday its consumer business grew by 25,000 television, internet and telephone subscribers in the fiscal year ending Aug. 31, a massive reversal from the 170,000 residential subscribers lost in 2016.

This included a gain of 5,000 cable television subscribers in its fourth quarter, the second consecutive period of growth after seven years of cable TV losses amid cord cutting and heightened competition from Telus Corp.’s IPTV product. It credited renewed growth in part to BlueSky TV, a premium product using Comcast’s X1 platform that launched in early 2017.

Shaw’s net income jumped to $481 million from $154 million in the same period last year due to a $330-million gain on the sale of ViaWest.

But its quarterly operating income before restructuring and amortization costs fell nearly seven per cent to $479 million primarily due to elevated promotional activity and marketing investments. Shaw heavily discounted and aggressively advertised a bundled deal for BlueSky TV and WideOpen 150 internet.

“We decided that we were going to purposefully shift the (revenue generating unit) environment after many, many years of not having success in the marketplace,” Shaw president Jay Mehr said.

“We’re clear that we did what was required,” he said, also noting the increase in cost of goods sold. Shaw will take a “more balanced approach” next year, he said. While Shaw doesn’t necessarily expect to add video subscribers every quarter, Mehr said it expects to maintain or grow its market share.

“We’re super excited about where we are in the video space … you won’t see us over-chase (revenue generating units) at the expense of profitability.”

While the cable subscriber volumes were strong, analysts reacted negatively as Shaw’s financial results fell below their expectations.

Barclays analyst Phillip Huang called the cable financials a “blemish” in a note to clients, and Scotiabank analyst Jeff Fan said the results could be seen as a “slowdown in BlueSky momentum” after the positive surprise last quarter. Earlier this month, Fan downgraded Shaw to sector perform from sector outperform citing a need for patience for growth in the wireless division.

But there was better news from Shaw’s wireless division, Freedom Mobile. It beat analysts’ expectations with 41,000 subscriber additions and revenue of $172 million.

Critically, Shaw announced an agreement with Apple Inc. to start selling iPhones for the first time. Previous iPhone generations weren’t compatible with Shaw’s network, putting it at another disadvantage to the Big Three incumbents with their larger, faster, more reliable networks.