Canada’s largest telephone operator BCE Inc. (BCE) has reported first quarter 2012 adjusted earnings per share of 75 Canadian cents (75 cents per ADS), which beat the Zacks Consensus Estimate by a penny.
Adjusted earnings per share increased 4.2% from 72 Canadian cents in the year-ago quarter. The growth can be attributed to higher EBITDA and lower tax rate that fully offset higher depreciation and interest expenses as well as the dilutive impact of the BCE shares on the CTV acquisition.
Revenue climbed 9.9% year over year to C$4.91 billion ($4.90 billion) but missed the Zacks Consensus Estimate of $4.98 billion. The year-over-year growth was attributable to continued strength in Bell Canada, a 100% subsidiary of BCE, particularly Bell Wireless and Bell Media segment.
EBITDA grew 5.1% year over year to C$1.9 billion ($1.9 billion) in the reported quarter driven by the CTV acquisition and strong growth at Bell Wireless.
Revenue Segments
Bell Wireless: Revenue from Bell Wireless increased 5.5% year over year to C$1.3 billion ($1.3 billion) owing to higher service revenue (up 6%) that resulted from higher post-paid subscriber and wireless data revenue growth. This largely offset the decline in product revenue (down 5.1%) resulted from lower volumes.
BCE lost 21,327 net wireless subscribers during the reported quarter, bringing the total to 7,406,155, which increased 2.2% year over year. Post-paid additions fell 22.4% to 62,576 while prepaid additions grew 11.3% to 83,903 from the year-ago quarter. Blended ARPU (average revenue per user) rose 4.2% year over year to C$53.84 ($53.73) on the back of increasing data usage.
Churn rate (customer switch) improved to 1.8% from 1.9% in the year-ago quarter despite the higher prepaid churn of 3.9% compared with 3.7% in the year-ago quarter. However, post-paid churn remained stable at 1.4%.
Bell Wireline: Revenues from Bell Wireline fell 3.5% year over year to C$2.58 billion ($2.57 billion) due to lower local and access (down 7%), long distance (down 9.4%), equipment and other revenues (down 12.3%), partly offset by the growth in data revenues (up 0.2%).
Network access services (:NAS) declined 6.4% year over year to 6,005,126. The decline was primarily due to increased competition from wireless and IP-based technologies that prompted Bell to reduce its access lines and digital circuits. Residential NAS losses increased to 71,119 in the reported quarter compared to 64,287 in the year-ago quarter. Similarly, business NAS losses were 25,411 versus a gain of 5,044 in the year-ago quarter.
BCE added 12,393 high-speed Internet customers reaching the base to 2,104,192 at the end of the first quarter, down 0.3% year over year. TV subscriber additions were 17,623, which more than doubled from the year-ago quarter. At the end of the first quarter, TV subscribers grew 3.3% year over year to 2,111,675.
Bell Media: Acquired in April 2011, Bell Media generated revenues of C$512 million ($511 million) on the back of strong advertising and subscriber revenues growth from specialty TV channels such as TSN and RDS, and digital online video and mobile TV services.
Bell Aliant: Revenues from this segment remained flat year over year at C$682 million ($681 million).
Liquidity
The company’s operating cash flow and free cash flow increased 1.6% and 23.4% year over year to C$1,198 million and C$327 million, respectively, in the reported quarter. BCE invested C$817 million, up 28.9% year over year.
Outlook
BCE Inc. continues to focus on five strategic areas including, investment in broadband network and services, accelerating wireless services, leveraging wireline momentum, improving customer service, and achieving a competitive cost structure.
The company reiterated its fiscal 2012 guidance. It expects adjusted earnings in the range of C$3.13–C$3.18 per share. Free cash flows are expected in the range of C$2,350–C$2,500 million. BCE also expects dividend payout ratio to be 69% of adjusted earnings per share or free cash flow.
Further, the company expects Bell Canada’s (exclude Bell Aliant) revenue and EBITDA growth in the range of 3–5% and 2–4%, respectively. Capital expenditures are expected to be 16% of Bell revenues.
Our Take
We are encouraged by management’s confidence of delivering strong results going forward, based on strong wireless growth, improving wireline trends and increased traction of media business. In addition, BCE remains committed to return maximum value to its investors through increased dividend payouts and share repurchases.
Nevertheless, continued investments in broadband network expansion on both the wireline and wireless fronts could restrict the company’s profitability going forward in the form of higher depreciation expenses. Further, stiff competition from national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI) and continued decline in network access services keep us cautious on the stock.
We are maintaining our long-term Neutral recommendation with a Zacks #3 (Hold) Rank on the stock.
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