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Canada’s leading telephone operator BCE Inc. (BCE - Analyst Report) reported second-quarter 2014 adjusted earnings of 82 Canadian cents per share (75 cents per ADS), missing the Zacks Consensus Estimate of 77 cents. Results, however, improved 6.5% year over year owing to a higher adjusted EBITDA growth at Bell.

Revenues came in at C$5.22 billion ($4.78 billion), in line with the Zacks Consensus Estimate but 4.4% higher year over year. Strong performances at the Wireless and Media segments were offset by a poor show at Bell Aliant.

EBITDA grew 3.8% year over year to C$2.14 billion ($1.96 billion) in the quarter fueled by strong contributions from Bell Wireless and Bell Media and lesser EBITDA decline at the Wireline segment.
Segments in Detail

Bell Wireless: Revenues from Bell Wireless increased 5.5% year over year to C$1.52 billion ($1.39 billion). Higher service revenues (up 5.7%) resulting from higher postpaid subscriber mix and better-blended ARPU (average revenue per user) boosted the results. Blended ARPU rose 4.6% year over year to C$59.49 ($54.53) on the back of higher data usage and improved rate plan pricing. Wireless data revenue leaped 21% while product revenues improved 6.1% in the second quarter.

BCE net wireless subscribers during the reported quarter totaled 7.80 million, up 1.1% year over year. Post-paid net additions decreased 13.3% from the year-ago quarter to 66,186.

Churn rate (customer switch) reduced to 1.47% from 1.64% in the year-ago quarter. Post-paid churn declined from 1.27% a year ago to 1.16%, while prepaid churn fell from 3.71% to 3.48% in the quarter.

Bell Wireline: Revenues from Bell Wireline fell 0.8% year over year to C$2.49 billion ($2.28 billion) due to lower local and access (down 6.7%), long distance (down 12.0%) and equipment and other revenues (down 9.1%), partially offset by higher internet and TV revenues.

Network access services (NAS) fell 7.2% year over year to 5.03 million. The decline was primarily due to competition from cable operators, business customer conversion from voice lines to IP-based services, and customer shift to high speed Internet from older technologies. Residential NAS losses during the quarter were 67,969 compared with 82,090 in the second quarter of 2013. Business NAS losses were 38,079 against 28,912 a year ago.

BCE activated 3,638 high-speed Internet customers compared with 3,952 in the year-ago period. At the end of the second quarter, TV subscribers grew 7.3% year over year to 2.32 million.

Bell Media: Bell Media generated revenues of C$761.0 million ($698 million), surging 36.1% year over year. The upsurge was attributable to strong advertising and high subscriber revenues from the Astral acquisition, higher rates for speciality TV services, higher revenues generated by Bell Media’s expanding array of TV Everywhere products and mobile subscription growth.

Bell Aliant: Revenues from this segment dropped 1.3% year over year to C$682.0 million ($625 million), as improvement in Internet and TV services were hurt by declines in local long distance and other revenues.

Liquidity

BCE exited the second quarter with C$1,850 million (approximately $1695.9 million) of cash from operating activities, down 1% from the previous-year quarter. Capital expenditure for BCE declined 12.9% year over year to C$937 million ($659 million).

Guidance

For 2014, BCE reaffirmed its financial guidance.

The company expects earnings per share of C$3.10–$3.20 while free cash flow growth will be around 3–7%. Annual dividend per share will be $2.47 reflecting a dividend payout policy of 65–75%.

Excluding Bell Alliant, revenue growth for Bell is expected around 2–4%, while EBITDA growth is estimated at around 3–5%. Capital intensity projection for Bell is around 16–17%.

Our Take

The company displays a robust wireless business model, improving wireline operations and expanding activities in the media sector. However, stiff competition from other players like TELUS Corporation (TU - Analyst Report) and Rogers Communications Inc. (RCI - Analyst Report), continued decline in network access services, constant need to invest in technology and union issues remain primary concerns for the company.

BCE currently retains a Zacks Rank #3 (Hold).

Another Stock

Another foreign company worth considering within this sector is Chunghwa Telecom Co Ltd. (CHT - Analyst Report), which carries a Zacks Rank #2 (Buy).

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