BCE Beats EPS, Misses Rev

Zacks

Canada’s largest telephone operator BCE Inc. (BCE) has reported second quarter 2012 adjusted earnings per share of C$1.02 ($1.01 per ADS), which strongly outpaced the Zacks Consensus Estimate of 81 cents.

Adjusted earnings per share increased 18.6% from 82 Canadian cents in the year-ago quarter, attributable to higher EBITDA and a lower tax rate.

Revenue slid 0.6% year over year to C$4.92 billion ($4.87 billion) and missed the Zacks Consensus Estimate of $4.93 billion. The decline was due to weak growth in Bell Canada, a 100% subsidiary of BCE, in particular Bell Wireline and continued feeble performance by Bell Alliant.

EBITDA grew 2.8% year over year to C$2.04 billion ($2.02 billion) in the reported quarter driven by strong contributions from Bell Wireless and Bell Media.

Revenue Segments

Bell Wireless: Revenue from Bell Wireless increased 6.7% year over year to C$1.36 billion ($1.35 billion) owing to higher service revenue (up 6.3%) that resulted from higher post-paid subscriber and wireless data revenue growth and product revenue (up 7.6%) that resulted from higher smartphones sales.

BCE added 47,208 net wireless subscribers during the reported quarter, bringing the total to 7.45 million, up 2.3% year over year. Post-paid net additions grew 8.2% to 102,607 while prepaid net losses slid 5.1% to 54,859 from the year-ago quarter. Blended ARPU (average revenue per user) rose 4.5% year over year to C$52.99 ($52.48) on the back of increasing data usage.

Churn rate (customer switch) improved to 1.7% from 2.0% in the year-ago quarter due to lower post-paid churn of 1.3% (down from 1.5% in the year-ago quarter). Prepaid churn remained stable at 3.7%.

Bell Wireline: Revenues from Bell Wireline fell 3.9% year over year to C$2.53 billion ($2.50 billion) due to lower local and access (down 8.4%), long distance (down 9.3%), and equipment and other revenues (down 11.1%) that offset growth in data revenues (up 0.1%).

Network access services (:NAS) fell 6.8% year over year to 5.89 million. 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 85,427 in the reported quarter from 83,473 in the year-ago quarter. Business NAS losses were 34,118 compared to 17,018 in the year-ago quarter.

BCE lost 664 high-speed Internet customers touching 2.1 million at the end of the second quarter, down 0.4% year over year. TV subscriber additions were 16,758, which more than doubled from the year-ago quarter. At the end of the second quarter, TV subscribers grew 3.8% year over year to 2.13 million.

Bell Media: Acquired in April 2011, Bell Media generated revenues of C$534 million ($528.8 million) on the back of strong advertising and subscriber revenues growth from specialty sports and non-sports TV channels.

Bell Aliant: Revenues from this segment inched down 0.7% year over year to C$687 million ($680 million).

Liquidity

The company’s operating cash flow and free cash flow increased 37.7% and 88.3% year over year to C$1,902 million and C$804 million, respectively, in the reported quarter. BCE invested C$952 million, up 19.0% year over year.

Dividend

Based on a strong first half performance, BCE raised its annual dividend to C$2.27 from C$2.17 per share. The quarterly increased dividend of C$0.5675 per share will be payable on October 15 to shareholders of record on September 14. This dividend hike represents the eighth increase and 55% total increase since the fourth quarter of 2008.

BCE expects dividend payout ratio to be 69% of adjusted earnings per share or free cash flow.

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 raised its fiscal 2012 guidance based on lower tax rates. BCE now expects adjusted earnings per share in the range of C$3.15–C$3.20 compared with C$3.13–C$3.18 projected previously. Free cash flow guidance remains unchanged at C$235–C$250 million.

Further, the company expects Bell Canada’s (excluding Bell Aliant) revenue to be at the lower end of the previous guidance of 3–5% due to weak wireline revenue performance in the first half of the year. However, EBITDA growth is expected to be at the higher end of the previous guidance of 2–4%. Capital expenditures are expected to be approximately 16% of Bell revenues.

Our Take

We are encouraged by management’s confidence about delivering strong results going forward, based on its substantial investments to expand broadband wireless and wireline footprint. In addition, the expected robust free cash flow trajectory and financial flexibility would underpin the company’s dividend growth further.

Nevertheless, continued investments in broadband network expansion could restrict the company’s profitability going forward. 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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