* Q3 adjusted EPS C$0.83 vs average estimate C$0.79
* Introduction of budget brand cuts average mobile bill
* Rogers sees "bias to higher end" of full-year guidance
* Shares down 5.6 percent in early trade
(In C$ unless noted)
By Alastair Sharp
TORONTO, Oct 26 (Reuters) - Rogers Communications (RCIb.TO) posted a 24 percent drop in profit on Tuesday as competition from budget wireless brands heated up, sending shares of Canada's biggest mobile phone provider down 5 percent.
Rogers paid heavily to subsidize more than half a million smartphone activations or upgrades in the third quarter, squeezing profit margins in its wireless segment.
The Toronto-based cable and telecommunications provider launched a budget wireless brand called chatr in July to fend off newcomers like Wind Mobile, Mobilicity and Public Mobile, which offer no-frills plans for cost-conscious customers.
Subsidies on smartphones such as Apple's (AAPL.O) iPhone 4, Research In Motion's BlackBerry RIM.TO and devices running Google's (GOOG.O) Android software pull down margins and raise costs in the short term.
But the extra expense implies a healthy consumer appetite that is likely to pay off in coming quarters, said Robert Bek, a CIBC World Markets analyst.
"This is part of the parcel: you help subsidize the razor and then you charge for the razor blades down the road," Bek said.
The stock tumbled even though Rogers said its "bias is to the higher end" of full-year guidance it had offered in February. At the time it said adjusted operating profit would climb 2 to 7 percent, and wireless network revenue would gain 3 to 6 percent.
In the three months ended Sept. 30. net income dropped to $370 million, or 64 Canadian cents a share, from $485 million, or 79 Canadian cents, a year earlier. On an adjusted basis, Rogers earned 83 Canadian cents a share.
Analysts on average expected the company to earn 79 Canadian cents a share, according to Thomson Reuters I/B/E/S.
The average wireless customer paid $64.80 a month, down from $66.45 a year earlier, while data revenue grew 28 percent.
The lower average bill was partly explained by strong growth in prepaid subscribers, at 86,000 net additions, buoyed by chatr customers and users of Apple's iPad.
Jeff Fan, an analyst at Scotia Capital, said a decent performance by the company's cable operations helped offset softness in wireless.
Rogers added 54,000 cable-based customers -- television, Internet and landline telephone -- in the quarter and increased profit margins at each. Still, the wireless business margin tightened to 48.3 percent from 51.4 percent.
Half of those additions were for Internet services, while the company also added 20,000 phone customers.
Adjusted operating profit at the cable arm increased by 13 percent while the media unit grew 6 percent.
Operating revenue rose to $3.12 billion from $3.04 billion. The wireless segment, which accounts for nearly 60 percent of overall operating revenue, rose 4 percent to $1.82 billion for the quarter.
Free cash flow was $607 million, a 24 percent increase on a year earlier once a 9 million share buyback was taken into account.
The company said it plans to introduce shortly a new dividend reinvestment program under which Rogers investors could automatically reinvest their quarterly dividends to purchase more Rogers class B common shares.
Rogers' class B shares have gained about 6 percent since the company launched a trial of so-called fourth generation, or 4G, wireless technology with Ericsson Canada earlier this month. [ID:nSGE6950MG]
The stock dropped more than 5 percent early Tuesday, sliding $2.31 to $39.00 the Toronto Stock Exchange. (Additional reporting by Isheeta Sanghi in Bangalore; Editing by Jarshad Kakkrakandy and Frank McGurty)