Canada’s largest telephone operator BCE Inc. (BCE) has reported third quarter 2011 adjusted earnings per share of 95 cents per ADS (93 Canadian cents), which breezed surpassed the Zacks Consensus Estimate of 74 cents.
Adjusted earnings climbed 14.8% from 60 Canadian cents in the year-ago quarter attributable to higher EBITDA, lower pension costs and gains related to the share-based compensation plan, partly offset by higher depreciation expense and lower tax adjustments as well as increased interest expense related to the CTV acquisition.
Consolidated revenue increased 8.7% year over year to C$4.91 billion ($5.04 billion) but missed the Zacks Consensus Estimate of $5.20 billion. The revenue growth was driven by the benefits of the CTV acquisition in terms of its contribution to the new Bell Media segment. Additionally, the year-over-year growth also registered from higher Bell revenues that largely offset Bell Aliant’s lower revenues.
Subscriber revenue also registered a growth attributable to rate increases in Bell Media specialty sports services and enhanced Mobile TV services that offer live and on-demand access to content.
EBITDA grew 5.4% year over year to C$1.94 billion ($1.98 billion) in the reported quarter driven by the acquisition of CTV that led to solid wireless, TV and residential Internet revenue growth and improvements in operating cost, partly offset by lower EBITDA at Bell Aliant.
Revenue Segments
Bell Wireless: Revenue from Bell Wireless increased 5.6% year over year to C$1.33 billion ($1.36 billion) in the reported quarter, owing to higher service revenue (up 6.1% year over year) that largely offset the decline in product revenue (up 1.0% year over year).
Growth in service revenue was attributable to higher post-paid subscriber and wireless data revenue growth. Despite healthy smartphone sales and strong subscriber addition product revenue showed a downtrend due to subsidized pricing on handsets and various value added offers to address the competitive market.
Net subscriber addition dropped 37.8% year over year to 85,749 bringing the wireless customer base to 7.369 million at the end of the third quarter (up 3.4% from the year-ago quarter). Post-paid net addition fell 20.5% to 126,845 from the year-ago quarter and prepaid net loss was 41,105 versus 174,263 subscribers lost in the year-ago quarter due to higher churn.
Blended ARPU (average revenue per user) rose 2.7% year over year to C$55.01 ($56.26). Post-paid ARPU remained flat at C$64.98 ($66.46). The lower voice ARPU as a result of competitive pricing and lower data usage was partly offset by higher data ARPU. Prepaid ARPU decreased to C$17.81 ($18.2) from C$18.85 due to competitive pricing on entry of new market players.
Churn upped to 2.0% from 1.9% in the year-ago quarter on modestly higher post-paid churn of 1.5% (from 1.4% in the year-ago quarter) and prepaid churn of 3.9% (from 3.4% in the year-ago quarter). Higher churn rate resulted from intense competitive pressure particularly from new entrants and increased unlimited usage rate plan offers.
Bell Wireline: Revenues from Bell Wireline declined 3.1% year over year to C$2.61 billion ($2.67 billion). Declines in local and access (down 6.5%), long distance (down 0.4%), equipment and other revenues (down 4.9%) were partially offset by data revenues (down 4.3%) and higher Video revenues (up 3.9%).
Network access services (NAS) lines losses were 110,629 in the third quarter, up from 92,169 losses in the year-ago quarter. High-speed Internet customers decreased by 101 versus an increase of 21,668 in the year-ago period and reached roughly 2.11 million at the end of the third quarter. TV subscribers grew 26,037 to reach roughly 2.06 million.
Bell Aliant: Revenues from this segment dipped 0.4% year over year to C$700 million ($715 million), largely due to persistent declines in local and access, long-distance, and equipment and other revenues, partly compensated by Internet, IP-based broadband, wireless and TV services revenues.
Liquidity and Dividend
The company’s cash flows from operating activities and free cash flow increased 23.5% year over year to C$1,916 million ($2,164.9 million) and 24.7% year over to C$1005 million ($708.3 million), respectively, in the reported quarter.
BCE invested C$814 million ($833 million), up 7.5% year over year in deployment of broadband fiber, upgrading of Bell’s core wireline broadband infrastructure to support commercial launch of IPTV service and construction of 4G LTE network.
BCE remains attractive for income-oriented investors based on healthy dividend payouts. On January 15, 2012, BCE will pay a quarterly dividend of C$0.5175 cents per share to shareholders as of December 15.
Outlook
For 2011, BCE reiterated its adjusted earnings estimate in the range of C$2.95–C$3.05 per share, reflecting a 6–9% increase year over year and free cash flow projection at C$2.2–C$2.3 billion. Bell Wireline and Bell Wireless as a combined entity maintained the previous guidance ranges of 9–11% for revenue growth and 8–10% for EBITDA growth.
Our Analysis
BCE continues to focus on its 5 strategic goals: improving customer Service, increasing wireless and wireline subscribers, investing in network and service upgrades and optimizing the cost structure. Further, the company remains benefited from the acquisition of CTV and the addition of the new Bell Media unit that resulted in upward earnings. On the flip side, BCE remains exposed to a highly competitive market with carriers like Telus Corporation (TU) and Rogers Communications inc. (RCI).
Therefore, we maintain a long-term Neutral recommendation on BCE supported by a Zacks #3 Rank (Hold).
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