Shaw Communications Inc. (SJR) has declared its second quarter of fiscal 2011 financial results, which were almost in line with the Zacks Consensus Estimate. Although the company maintains its previously given financial outlook for fiscal 2011, it now anticipates that growing competition in the Canadian telecom market may result in lower than expected revenue.
Meanwhile, Shaw Communications also stated that ongoing cost cutting measures will enable the company to attain its targeted free cash flow in fiscal 2011. In the reported quarter, the company retrenched 550 employees of which 150 were in the managerial positions. Though this business restructuring process will cost between $25.6 million to $30.7 million, it will result in early cost savings of approximately $51 million.
Second Quarter Results in Details
Quarterly net income was $171 million or 38 cents per share compared with a net income of $142 million or 33 cents per share in the prior-year quarter. Excluding special items, the second quarter of fiscal 2011 adjusted EPS was also 38 cents, exactly in line with the Zacks Consensus Estimate.
Quarterly total revenue of approximately $1,223.3 million was up 28.8% year over year and in line with the Zacks Consensus Estimate of $1,221 million. The year-over-year improvement was primarily attributable to the acquisition of the Shaw Media coupled with customer growth and rate increases in the Cable and Satellite segments.
Quarterly operating income before amortization was $505.6 million, up 16.4% year over year. Quarterly operating margin was 41.3% compared with 45.7% in the prior-year quarter. In the second quarter of fiscal 2011, Shaw Communications generated $391.5 million of cash from operations compared with $366.2 million in the year-ago quarter. Free cash flow in the reported quarter was approximately $170.7 million compared with $132.4 million in the year-ago quarter.
At the end of the first half of fiscal 2011, Shaw Communications had $346.5 million of cash & cash equivalents on its balance sheet compared with $212.4 million at the end of fiscal 2010. At the end of the reported quarter, Shaw Communications had $5,777.7 million of outstanding debt on its balance sheet compared with $3,902.6 million at the end of fiscal 2010. Debt-to-capitalization ratio at the end of the first half of fiscal 2011 was 0.65 compared with 0.59 at the end of fiscal 2010.
Subscribers Statistics
At the end of the first half of fiscal 2011, Basic Cable customer base was 2,313,104, net reduction of 13,662 year over year. Digital customer base was 1,748,538, net addition of 35,403 year over year. Internet customer base was 1,848,390, net addition of 10,772 year over year. Digital phone lines were 1,178,660, net addition of 32,512 year over year. DTH customer base was 906,433, net reduction of 2,176 year over year.
Cable Segment
Quarterly revenue was $786.6 million, up 4.9% year over year. Subscriber growth and rate increases are the primary reasons for revenue growth. Quarterly operating income before amortization was $371.8 million, up 2.6% year over year. Quarterly operating margin was 47.3% compared with 48.3% in the prior-year quarter.
Satellite Segment
Quarterly total revenue of $208.5 million was up 1.8% year over year. Within this segment, DTH revenue was $188.3 million, up 2.5% year over year and Satellite Services revenue was $20.2 million, down 4.2% year over year. Quarterly operating income before amortization for the whole segment was $71.8 million, down 0.2% year over year. Quarterly operating margin was 34.4% compared with 35.1% in the year-ago quarter.
Media Segment
This is a new division after Shaw Communications acquired all of the broadcasting assets of Canwest Global. Quarterly total revenue was $249.4 million. Operating income before amortization was $67 million. Quarterly operating margin was 26.8%.
Future Financial Outlook
Management predicted that for fiscal 2011, free cash flow for the company’s core cable and satellite segment will be $550 million. The newly formed Media segment will generate $75 million of free cash flow. However, after adjusting the estimated 2011 CRTC benefit obligation cash funding, the consolidated free cash flow of Shaw Communications will be approximately $600 million in fiscal 2011.
Our Recommendation
Shaw Communications’ cable operation is facing significant threat from the IPTV offerings of Telus Corp. (TU). We maintain our long-term Neutral recommendation on Shaw Communications. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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