Canada’s largest telephone operator BCE Inc. (BCE) has reported fourth quarter 2011 adjusted earnings per share of 62 Canadian cents (61 cents per ADS), which came below the Zacks Consensus Estimate of 65 cents.

Adjusted earnings climbed 5.1% from 59 Canadian cents in the year-ago quarter attributable to higher EBITDA growth along with lower pension costs and gains on derivative contracts, partly offset by higher depreciation expense and increased interest expense related to the CTV acquisition.

Adjusted earnings for the full year were C$3.13, up 12.2% year over year.

BCE’s operating revenue increased 10.4% year over year to C$5.2 billion ($5.08 billion) but missed the Zacks Consensus Estimate of $5.09 billion. The revenue growth was driven by Bell Wireless and the CTV acquisition in terms of its contribution to the new Bell Media segment. Operating revenue for the year increased 7.9% year over year to C$19.5 billion.

EBITDA grew 6.9% year over year to C$1.9 billion ($1.85 billion) in the reported quarter driven by strong growth in Bell, including Bell Media that compensated for lower EBITDA at Bell Aliant. EBITDA for fiscal 2011 increased 6.2% year over year to C$7.6 billion.

Revenue Segments

BellWireless: Revenue from Bell Wireless increased 5.9% year over year to C$1.4 billion ($1.37 billion) in the reported quarter, owing to higher service revenue (up 6.4% year over year) that largely compensated for the decline in product revenue (down 3.7% year over year).

Growth in service revenue was attributable to higher post-paid subscriber and wireless data revenue growth. Despite healthy smartphone sales and strong subscriber addition, product revenue showed a downtrend due to aggressively handset pricing during the holiday season.

Net subscriber addition plunged 50.4% year over year to 57,886 bringing the wireless customer base to 7,427,482 at the end of the fourth quarter (up 2.6% from the year-ago quarter). Post-paid net addition fell 15.8% to 131,986 subscribers from the year-ago quarter and prepaid net loss was 74,100 versus 39,926 subscribers lost in the year-ago quarter due to higher churn and migration to post paid.

Blended ARPU (average revenue per user) rose 4.1% year over year to C$54.50 ($56.26), representing the highest ARPU in 2011.

Churn increased to 2.1% from 2.0% in the year-ago quarter on higher prepaid churn of 4.2% (versus 3.6% in the year-ago quarter). Higher churn rate resulted from intense competitive pressure particularly from new entrants and increased unlimited usage rate plan offers. Post-paid churns remained flat year over year at 1.5%.

BellWireline: Revenues from Bell Wireline decreased 4% year over year to C$2.7 billion ($2.64 billion) on declines in local and access (down 6.6%), long distance (down 5.6%), equipment and other revenues (down 6.8%) as well as data revenues (down 4.1%).

Network access services lines were 6,101,656, in the fourth quarter, down from 6,475,705 in the year-ago quarter. 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.

High-speed Internet customer net additions were 1,091 versus an increase of 12,099 from the year-ago period to reach roughly 2.11 million at the end of the fourth quarter. TV subscribers grew 27,726 to reach roughly 2.08 million.

BellMedia: Acquired in April 2011, Bell Media generated revenues of C$578 million ($564.9 million) in the fourth quarter, representing subscriber fee revenues from specialty TV channels, digital online video and mobile TV services. EBITDA for the segment was $130 million given efficient cost control measures and top-line growth.

BellAliant: Revenues from this segment dipped 2.1% year over year to C$701 million ($685 million), largely due to persistent declines in local and access, long-distance, and equipment and other revenues, partly compensated by Internet, IP-based broadband, wireless and TV services revenues.

Liquidity and Dividend

The company’s cash flows from operating activities and free cash flow increased 11.5% year over year to C$4,869 million and 5.1% year over to C$ 1,511 million respectively, in fiscal 2011.

BCE invested C$1,008 million in 2011, down 2.5% year over year in deployment of broadband fiber, upgrade of Bell’s core wireline broadband infrastructure to support commercial launch of IPTV service and construction of 4G LTE network.

The company increased its quarterly dividend by 5% to 54.25 Canadian cents per share. The increased dividend will be paid on April 15, 2012 to shareholders of record March 15.

Outlook

For 2012, BCE expects adjusted earnings in the range of C$3.13-C$3.18 per share. Free cash flows are expected in the range of C$2,350-C$2,500 million. The company expects Bell’s (excluding Bell Aliant) revenue and EBITDA growth in the range of 3-5% and 2-4%, respectively. Capital expenditures are expected at 16% of operating revenues.

Our Analysis

BCE continues to deliver strong results backed by Bell’s line of businesses, primarily Wireless and the newly acquired Media. However, comparisons will get more difficult from the second quarter, when the Media business will have completed a full year with the company. In the near term, the company will benefit from the current growth trends in wireless, TV, Internet and media. Further, the company enjoys substantial liquidity that enables significant investment in broadband infrastructure and multi-media platforms that ultimately translate to higher returns for shareholders. However,the exposure to a highly competitive market with carriers likes Telus Corporation (TU) and Rogers Communications inc. (RCI) raises our concern.

Therefore, we maintain a long-term Neutral recommendation on BCE supported by a Zacks #3 Rank (Hold rating in the short term).

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