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Canada’s largest telephone operator BCE Inc. (BCE - Analyst Report) reported third-quarter 2012 adjusted earnings of 76 Canadian cents per share or (77 cents per ADS) missing the Zacks Consensus Estimate of 78 cents.

Adjusted earnings per share slipped 18.3% from 93 Canadian cents or 95 cents per share in the year-ago quarter, attributable to lower income tax expense.

Revenue rose 1.8% year over year to C$4.39 billion ($4.46 billion) but fell short of the Zacks Consensus Estimate of $4.98 billion. The revenue upside was mainly led by better performance of Bell Wireless and Bell Media segments, which generated 7.1% and 25.5% revenue growth, respectively. However, slightly offset by a 4% drop in revenue from Bell Wireline.

EBITDA grew 5.2% year over year to C$1.7 billion ($1.73 billion) in the reported quarter fueled by strong contributions from Bell Wireless and Bell Media.

Revenue Segments

Bell Wireless: Revenue from Bell Wireless increased 7.1% year over year to C$1.43 billion ($1.45 billion) owing to higher service revenue (up 6.4%) that resulted from higher post-paid subscriber and wireless data revenue growth and product revenue (up 10.8%) that resulted from higher smartphones sales.

BCE added 47,208 net wireless subscribers during the reported quarter, bringing the total to 7.58 million, up 2.8% year over year. Post-paid net additions increased by a massive 17.1% to 148,502, while prepaid net losses slid 23% to 118,122 from the year-ago quarter. Blended ARPU (average revenue per user) rose 4.2% year over year to C$57.30 ($58.26) on the back of higher postpaid smartphone usage resulting in increased data usage.

Churn rate (customer switch) improved to 1.6% from 2% in the year-ago quarter due to lower post-paid churn of 1.2% (down from 1.5% in the year-ago quarter). Prepaid churn improved to 3.3% against 3.9% in the year-ago quarter due to lower customer deactivations.

Bell Wireline: Revenues from Bell Wireline fell 4% year over year to C$2.51 billion ($2.55 billion) due to lower local and access (down 7.9%), long distance (down 13.9%) and equipment and other revenues (down 8%) that offset growth in data revenues (up 0.1%).

Network access services (NAS) fell 7% year over year to 5.77 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 84,540 in the reported quarter, down 11.3% in the year-ago quarter. Business NAS losses were 24,740 compared with 15,362 in the year-ago quarter.

BCE activated 13,416 high-speed Internet customers compared to a loss of 101 customers at the end of the third quarter of 2011. TV subscriber additions were 15,846 against 26,169 in the year-ago quarter. At the end of the third quarter, TV subscribers grew 2.9% year over year to 2.14 million.

Bell Media: Acquired in April 2011, Bell Media generated revenues of C$546 million ($555.1 million) on the back of strong advertising and subscriber revenues growth from specialty sports and non-sports TV channels coupled with the telecast of popular London Olympic Games.

Bell Aliant: Revenues from this segment inched down 0.3% year over year to C$698 million ($709.7 million).

Liquidity

During the quarter under review, the company’s operating cash flow and free cash flow plunged 17.1% and 31.9% year over year to C$1,589 million ($1615.5 million) and C$684 million ($695.4), respectively. Capital expenditure for BCE during the period was C$832 million ($845.9), up 2.2% year over year.

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 footprints. In addition, the expected robust free cash flow trajectory and financial flexibility would underpin the company’s dividend growth further going forward.

Nevertheless, continued investments in broadband network expansion could restrict the company’s profitability going forward. Furthermore, stiff competition from national carriers like Telus Corporation (TU - Analyst Report) and Rogers Communications Inc. (RCI - Analyst Report) and continued decline in network access services raises concern on the stock.

We are maintaining our long-term Neutral recommendation with Zacks #3 (Hold) Rank on the stock.

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