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UPDATE 2-Canada's Shaw Commun posts profit, but loses more TV customers

Alastair Sharp
Tuesday, 14 Jan 2014 | 5:10 PM ET

TORONTO, Jan 14 (Reuters) - Western Canada-focused Shaw Communications Inc posted a 4 percent rise in first-quarter profit on Tuesday, but it continued to lose customers in its main cable television business, sending its shares almost 2 percent lower.

The Calgary, Alberta-based cable company, which is facing tough competition for TV and Internet customers from telecom rival Telus Corp and a burgeoning threat from online alternatives such as Netflix Inc, said it lost 29,619 cable-TV subscribers and 9,323 satellite TV customers.

It added 2,746 Internet subscribers and 1,351 landline telephone subscribers in the quarter, which ended on Nov 30.

The subscriber numbers missed or barely met analyst expectations, while Shaw said it was more focused on raising prices for its services than growing its subscriber base.

"Customers have choices," Shaw's Chief Operating Officer Jay Mehr told analysts on a conference call. "I'm not sure we would use that word (cord-cutting) but for sure, some of our voice customers are staying with us and disconnecting their voice, and for sure some of our video customers are staying with us on Internet and moving to other ways to receive video."

Shaw, with 2.9 million TV customers, has sought to hold back on steep discounting to counter the threats, instead upgrading the speed and quality of its broadband and adding other features to its TV product.

"Our performance was driven by growth in our commercial business, discipline around customer acquisition, and strength in our Internet business," CEO Brad Shaw said in a statement.

RBC Capital Markets analyst Drew McReynolds said higher programming costs and employee bonuses pressured Shaw's cable earnings margin, which fell almost a full percentage point, while acquisitions and divestitures added to margin variance.

PAYOUT CONCERN

The company raised its dividend payout by 8 percent to C$1.10 per non-voting share at its annual meeting later on Tuesday. However, Canaccord Genuity analyst Dvai Ghose said investors should be concerned that an unrealistically high payout, funded in part by a dividend reinvestment plan, is diluting Shaw's stock.

"We continue to believe that the stock is overvalued and that (these) results highlight our key concerns," he wrote.

Shaw said its net income was C$245 million, or 51 Canadian cents a share, compared with C$235 million, or 50 Canadian cents a share, a year earlier. Revenue was up 3 percent at C$1.36 billion.

Shaw said revenue in its cable division grew 4 percent, mostly due to higher rates and fewer promotions.

Shaw is seen by analysts as most exposed to the broadcast regulator's moves to force television distributors to offer more flexibility in their channel packages.

Free cash flow dipped to C$157 million in the quarter from C$244 million a year ago as Shaw spent more on capital investment and paid higher taxes. It expects cash flow to range between C$625 million and C$650 million in 2014.

Shaw is trying to sell an asset - wireless airwave licenses bought in a 2008 auction - that the federal government does not want to see fall into the hands of the country's biggest operators. Another major auction of airwaves began on Tuesday.

It has agreed to give Rogers Communications, Canada's largest wireless company, the option to acquire the spectrum. If the sale is ultimately blocked it would hurt Shaw's free cash flow.

Shaw nixed its own plan to build a wireless network in 2011, instead focusing on creating what is now Canada's largest WiFi network with Internet connections in over 30,000 locations such as coffee shops, transportation hubs and offices.

CEO Brad Shaw said on the call that the WiFi offering, free for Shaw's customers, had helped to limit the number of people dropping other services.

The company reiterated a forecast for 2014 revenue growth of between 2 and 4 percent it first made in October.

Its shares ended down 1.7 percent at C$24.88 on the Toronto Stock Exchange, their sharpest one-day decline since Dec. 11.