BCE Tops, Lifts Guidance - Analyst Blog

BCE Inc. (BCE), Canada’s largest telephone operator, announced second-quarter 2010 adjusted earnings per share of 77 Canadian cents (75 cents per ADS), beating the Zacks Consensus Estimate of 72 cents per ADS. Earnings shot up 32.8% from 58 Canadian cents in the year-ago quarter. Adjusted earnings exclude restructuring charges and other gains or losses on investments.

Net income jumped 70.5% year-over-year to C$590 million ($574.3 million) or 78 Canadian cents per share (76 cents per ADS) due to lower restructuring and other costs.

Consolidated revenue increased 3.3% year-over-year to C$4.43 billion ($4.31 billion). Higher revenues from Bell Wireless and Bell Wireline were partially offset by lower revenue at Bell Aliant. EBITDA grew 2.1% year-over-year to C$1.82 billion ($1.77 billion) and operating income climbed 22% to C$1 billion ($0.97 billion) from the year-ago level.

Segments

Bell Wireless: Revenue from Bell Wireless increased 9.6% year-over-year to C$1.2 billion (1.17 billion), driven by higher service revenue (up 10.8% year over year) partially offset by lower produce revenue (down 4.5% year over year). Growth in service revenue is attributable to the subscriber growth, the acquisition of the remaining 50% stake in Virgin Mobile Canada (completed on July 1) and wireless data revenue growth.

Blended ARPU (average revenue per user) rose C$1.66 year-over-year to C$52.12 ($50.74) as data revenue growth more than offset the decline in voice ARPU, which was hit by increased customer adoption of richer rate plans. Post-paid ARPU increased to $63.66 ($61.97) and prepaid ARPU increased to C$18.35 ($17.86). Churn remained flat year-over-year at 1.8% with stable post-paid churn and slightly higher prepaid churn of 3.4% compared with 3.3% in the year-ago quarter.

Total net subscriber additions more than doubled year-over-year to 98,459 from 44,716 customers in the year-ago quarter, bringing the wireless customer base to 6.98 million (up 6.3% year over year). Net additions were boosted by high-end smartphones (including iPhone, BlackBerry and Android phones) and the launch of HSPA+ technology-based 3G wireless network in November 2009 in collaboration with its Canadian peer Telus Corp. (TU). Post-paid net additions increased 60.1% year-over-year to 102,754 customers while prepaid net additions decreased to 15,170 customers from 19,465 in the year-ago quarter.

Bell Wireline: Revenues from Bell Wireless Wireline increased 2.2% year-over-year to C$2.6 billion ($2.56 billion). Higher growth in product revenues (up 84%) from the acquisition of The Source as well as higher TV revenues (up 11.6%) partially offset the decline in local and access (down 4.8%), long distance (down 14%) and data revenues (down 1.1%).

Network access services (NAS) lines losses totaled 129,147 in the second quarter, reflecting an improvement of 2.6% compared with 132,595 in the year-ago quarter. High-speed Internet connections fell by 3,899 lines to reach roughly 2.06 million subscribers. TV subscribers grew by 9,775 to reach roughly 1.98 million due to higher churn (1.3% compared with 1.1% in the year-ago quarter) partly offset by higher wholesale activations.

Bell Aliant: Revenues from this segment dropped 4.1% year-over-year to C$753 million ($733 million), largely due to a persistent decline in local and access, long-distance and equipment as well as other revenues.

Dividend and Share Buyback

BCE remains attractive for income-oriented investors based on a healthy dividend yield and continued share repurchase initiatives. The company increased its annual dividend by 5% to C$1.83 per share. On Oct 15, 2010, BCE will pay an increased quarterly dividend of 45.75 Canadian cents per share to shareholders as of Sep 15. With this increase, the company’s annual dividend has increased by 25% since the fourth quarter of 2008.

Moreover, BCE repurchased 11.2 million shares worth C$329 million ($320.2 million) under its 2010 stock repurchase authorization as of Aug 4, 2010.

Cash Flow

Cash flows from operating activities fell 5.8% year-over-year to C$1,388 million while free cash flow spiked 8.8% year-over-year to C$566 million. Bell invested $538 million in the second quarter, down 20.8% from the comparable quarter last year. .

Outlook

BCE raised its outlook for 2010 based on the year-to-date results. The company expects adjusted EPS in the range of $2.75–$2.80 (up 10%–12% year over year), up from the prior outlook of $2.65–$2.75. Free cash flow is now expected to be at the higher end of the prior guidance of $2,000 million to $2,200 million.

For the Bell segment (includes Bell Wireline and Bell Wireless), BCE raised its outlook for revenue growth to 2%–3% from 1%–2%. The company expects EBITDA growth to be in the range of 2%–4%.

Our Take

BCE remains committed to return maximum value to its investors through increased dividend payouts and share repurchases. Going forward, expanded handset penetration (supported by the iPhones) coupled with the wireless network advancement is expected to boost operating results from the carrier’s wireless business.

However, the company faces a greater degree of risk as it is exposed to an intensely competitive environment due to the entry of additional wireless carriers. The company competes with two carriers Telus and Rogers Communications Inc. (RCI) in the Canadian wireless market.

We are currently maintaining our long-term Neutral recommendation on BCE.
 
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