BCE Inc. (BCE), Canada’s largest telephone operator, reported third quarter adjusted earnings per share (EPS) of 82 Canadian cents (79 cents per ADS) beating the Zacks Consensus Estimate of 72 cents per ADS. Earnings slipped 2.4% from 84 Canadian cents in the year-ago quarter due to higher income tax expense partially offset by favorable impacts of higher EBITDA, lower interest and reduced restructuring and other expenses.

Consolidated revenue inched up 1.3% year over year to C$4.52 billion ($4.36 billion). Higher revenue from Bell Wireless was partially offset by lower revenue at Bell Aliant and Bell Wireline. EBITDA grew 1.7% year over year to C$1.83 billion ($1.77 billion) and operating income climbed 11.1% to C$869 million ($839 million) from the year-ago quarter.

Revenue Segments

Bell Wireless: Revenue from Bell Wireless increased 8.1% year over year to C$1.27 billion ($1.23 billion), driven by higher service revenue (up 9.8% year over year), partially offset by lower product revenue (down 2.8% year over year). Growth in service revenue is attributable to subscriber growth and wireless data revenue growth while depressed product revenue could be credited to competitive smartphone pricing.

Blended ARPU (average revenue per user) rose C$1.41 year over year to C$53.54 ($51.71) 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 C$65.04 ($62.82) and prepaid ARPU increased to C$18.85 ($18.21). Churn upped to 1.9% from 1.8% in the year-ago quarter with modestly higher post-paid churn of 1.4% (from 1.3% on a year-over-year basis) and slightly lower prepaid churn of 3.4% (from 3.5% on a year-over-year basis).

Total net subscriber additions increased 2.3% year over year to 137,880, bringing the wireless customer base to 7.12 million (up 6.2% year over year). Net additions were boosted by strong smartphones (including iPhone, BlackBerry and Android phones) penetration 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 31% year over year to 159,465 customers, marking a record third quarter performance and the highest quarterly performance since fourth quarter 2002. Prepaid net additions decreased to 21,585 customers from a gain of 13,045 subscribers in the year-ago quarter.

Bell Wireline: Revenues from Bell Wireline declined 0.9% year over year to C$2.6 billion ($2.51 billion). Declines in local and access (down 3.1%), long distance (down 14%), equipment and other revenues (down 4.1%) were partially offset by higher TV revenues (up 9.3%) and data revenues (up 0.9%).

Network access services lines losses totaled 92,169 in the third quarter, reflecting an improvement of 10.6% from 103,087 in the year-ago quarter. High-speed Internet connections increased 21,668 lines to reach roughly 2.085 million subscribers. TV subscribers grew by 18,538 to reach roughly 2 million attributable to higher churn (1.6% compared with 1.4% in the year-ago quarter), partly offset by higher wholesale activations.

Bell Aliant: Revenues from this segment dropped 3.1% year over year to C$762 million ($736 million), largely due to a persistent decline in local and access, and long-distance revenues.

Liquidity and Dividend

BCE Inc. maintains a strong balance sheet and liquidity position substantial cash balance of approximately C$1.2 billion ($1.16 billion) at the end of the third quarter. The company’s cash flows from operating activities rose 8.7% year over year to C$1,670 million ($1613 million) while free cash flow spiked 25.1% year over year to C$812 million ($784 million). BCE invested C$634 million ($612.3 million) in the reported quarter, up 7.6% from year-ago quarter.

The company remains attractive for income-oriented investors based on a healthy dividend yield and continued share repurchase initiatives. On January 15, 2011, BCE will pay a quarterly dividend of 45.75 cents per share to shareholders as of December 15. Moreover, BCE repurchased 12.6 million shares worth C$375 million ($362.2 million) under its 2010 stock repurchase authorization, which is currently 75% complete.

Outlook

BCE Inc. raised its outlook for 2010 based on the year-to-date results. The company expects adjusted EPS in the range of C$2.65–C$2.70 (up 6%–10% year over year), down from the prior outlook of C$2.75–C$2.80. The company continues to expect free cash flow in the range of C$2,000–C$2,200 million.

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

Our Analysis                                    

Going forward, expanded handset penetration (supported by the iPhones) coupled with wireless network advancement is expected to boost operating results from the carrier’s wireless business. In the wireline front, BCE Inc. continues to invest in expanding broadband deployments including high-speed fiber-to-the-node network infrastructure coverage, fiber-to-the-home network deployment in Québec City, and the launch of Bell Fiber IPTV (Internet protocol television) service. Further, the company remains committed to return maximum value to its investors through increased dividend payouts and share repurchases.

However, the company faces a greater degree of risk as it is exposed to an intensely competitive environment with the entry of additional wireless carriers. The company competes with two carriers – Telus and Rogers Communications Inc. (RCI) – in the Canadian wireless market. The wireline business also remains challenged by competition from cable companies and other alternative service providers.

We are currently maintaining our long-term Neutral recommendation. The company carries a Zacks #3 Rank (Hold) for the short term.

 
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