Canada’s largest telephone operator BCE Inc. (BCE) reported first quarter 2011 adjusted earnings per share of 73 cents per ADS (72 Canadian cents), which missed the Zacks Consensus Estimate by a penny.
Earnings climbed 18% from 61 Canadian cents in the year-ago quarter attributable to higher EBITDA, lower pension costs and higher favorable tax adjustment, partly offset by higher depreciation expense and increased interest expense.
Consolidated revenue inched up 0.7% year over year to C$4.466 billion ($4.53 billion) and surpassed the Zacks Consensus Estimate of $4.48 billion. Higher revenues from Bell Wireless and Bell Wireline were partially offset by lower revenue at Bell Aliant. EBITDA grew 6.4% year over year to C$1.505 billion ($1.53 billion) in the reported quarter, representing the best growth in eight years.
Revenue Segments
Bell Wireless: Revenue from Bell Wireless increased 9.2% year over year to C$1.25 billion ($1.27 billion) in the reported quarter, owing to higher service revenue (up 8.7% year over year) and product revenue (up 15.1% year over year). Growth in service revenue was attributable to subscriber and wireless data revenue growth while the improvement in product revenue could be credited to healthy smartphone sales and strong subscriber addition.
Net subscriber addition dropped 9.5% year over year to 5,292, bringing the wireless customer base to 7.247 million at the end of the first quarter (up 5.2% from the year-ago quarter). Post-paid net addition dipped 0.7% to 80,648 from the year-ago quarter and prepaid net loss was 75,356 versus 25,587 subscribers lost in the year-ago quarter due to higher churn.
Blended ARPU (average revenue per user) rose by C$1.61 year over year to C$51.68 ($52.40). Post-paid ARPU increased by C$0.79 to C$62.51 ($63.38) as data usage growth partially offset the competitive smartphone pricing. On the other hand, prepaid ARPU decreased by C$1.51 to C$15.36 ($15.57) due to the migration from prepaid to post-paid plans.
Churn upped to 1.9% from 1.8% in the year-ago quarter on modestly higher post-paid churn of 1.4% (from 1.2% in the year-ago quarter) and prepaid churn of 3.7% (from 3.4% in the year-ago quarter). Higher churn rate resulted from intense competitive pressure particularly from new entrants.
Bell Wireline: Revenues from Bell Wireline declined 2.7% year over year to C$2.67 billion ($2.71 billion). Declines in local and access (down 4.3%), long distance (down 0.8%), data revenues (down 5.9%), equipment and other revenues (down 3.5%) were partially offset by higher Video revenues (up 7.5%).
Network access services (NAS) lines losses improved significantly to 59,243 in the first quarter from 99,829 losses in the year-ago quarter. High-speed Internet customers increased 13,161 to reach roughly 2.11 million at the end of the first quarter. TV subscribers grew 7,663 to reach roughly 2.03 million and churn remained high at 1.4% compared with 1.1% in the year-ago quarter.
Bell Aliant: Revenues from this segment dipped 1% year over year to C$682 million ($691 million), largely due to persistent declines in local and access, long-distance, and equipment and other revenues.
Liquidity and Dividend
The company’s cash flows from operating activities and free cash flow plunged 26.9% year over year to C$734 million ($744 million) and 52.7% year over to C$265 million ($269 million), respectively, in the reported quarter. BCE invested C$515 million ($522 million), up 16.8% year over year.
BCE remains attractive for income-oriented investors based on healthy dividend payouts. On July 15, 2011, BCE will pay a quarterly dividend of fifty-one and three-fourth cents per share to shareholders as of June 15.
Outlook
The company revised its guidance to reflect the acquisition of CTV (slated to for completion in the second quarter) and the launch of a new business unit, Bell Media on April 1.
For 2011, BCE now expects adjusted earnings in the range of C$2.95–$3.05 per share, up from the previous expectation of C$2.90–$3.00. The new guidance reflects a 6–9% increase year over year.
Free cash flow guidance remains unchanged at $2.2–$2.3 billion, up 2–6% year over year. BCE also raised its annual dividend by 5% to C$2.07 per share, which represents a payout ratio of 65% to 75% of adjusted earnings per share.
Taken together, Bell Wireline and Bell Wireless are expected to post revenue growth of 9–11% and EBITDA growth of 8–10% for 2011, higher than the previous expectation of 1–2% revenue growth and 2–4% EBITDA growth.
Our Analysis
We believe the expected synergies derived from the CTV acquisition, the new Bell Media unit as well as increased dividends reflect management’s confidence to deliver strong results in 2011.
With the world-leading HSPA+ network, continued growth in smartphone adoption, and an expanding next-generation LTE wireless networkin certain Canadian markets in 2011 are expected to boost results for the wireless business. In the wireline front, BCE continues to benefit from improving NAS erosion, high-speed Fiber-To-The-Node (FTTN) and fiber-to-the-home (FTTH) network as well as the traction in both Fibe Internet and Fibe TV service. Hence, BCE retains a Zacks # 2 Rank, implying a short-term Buy rating.
On the other side, BCE operates in an environment crowded with new wireless carriers. The companycompetes against two other national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI).The wireline business also remains challenged by competition from cable companies and other alternative service providers. Accordingly, we are maintaining our long-term Neutral recommendation on the stock.
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