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BCE results herald uncertainty

If BCE was expecting to win Astral Media's hand in marriage, its just-released Q3 earnings report was supposed to be the newly-hitched couple's coming-out party. Instead, Bell's been jilted at the altar thanks to a newly recalcitrant CRTC, and the company's mixed-bag financial numbers are already casting a shadow over what comes next.

On their own, the numbers aren't all doom and gloom. In fact, they represent notable improvements in critical areas of performance:

  • Operating revenue increased 1.5 per cent to $4.98 billion, just ahead of analyst estimates of $4.94 billion.
  • Net income slipped was $569 million, 11 per cent off of the $642 million recorded in the year-ago period. That quarter, however, was marked by a one-time tax recovery that positively affected the results.
  • Earnings before taxes, depreciation and amortization (EBITDA) increased by 15 per cent, which BCE says is its best Q3 performance in five years.
  • Post-paid subscribers grew by a healthy 17.1 per cent.
  • Average revenue per user, or ARPU, surged from $55.01 to $57.30 per month.
  • Subscriptions to the Bell Fibe television service grew to a modest 200,000, but the company increased its national footprint to 2.8 million households, setting the stage for additional growth.

Wireless subscriber makeup showed considerable improvement, with the proportion of post-paid customers using smartphones rising to 60 per cent from 43 per cent during the year-ago period. Post-paid customers are generally considered preferable to pre-paid because their revenue streams are more predictable, and ARPU, based on longer-term contracts, is typically higher. Bell added 148,502 such subscribers in the quarter, easily outpacing the 76,000 added by Rogers Communications. Much of that growth came from Western Canada, a payoff for BCE's focus on growing its retail presence there.

Setting the stage for future growth

The continued transition of existing customers from conventional feature phones to smartphones is expected to drive revenues in future quarters as Bell increasingly markets more data-rich services and features to a broader audience. Growing penetration of 3G and 4G-enabled tablets and laptops is another open-ended growth area for Bell. These trends drove data-based revenue ahead by 29.5 per cent. On the media side, its CTV subsidiary, fully acquired last year, booked solid revenue from its coverage of the London Summer Olympics.

The results slightly lagged analyst projections, with the reported $0.76 earnings per share just undercutting the analyst-expected 0.77 and well off the $0.93 EPS from Q3 2011. Landline phone and long distance services continued to show weakness as part of a broader industry trend away from these traditional offerings. Still, BCE guidance was for dividends to remain unchanged next quarter. While a successful Astral acquisition might have accelerated dividend growth in future quarters, shareholder won't flee for the exits if the company maintains current levels.

An uncertain post-Astral future

The somewhat lukewarm results highlight the challenge now facing BCE as it plots its first moves following the CRTC's rejection of its proposed $3.4 billion Astral buyout. It's already asked the federal cabinet to intervene, saying the CRTC violated its own rules in turning down the deal.

If, as widely expected, the government turns down the request, BCE could pursue the issue in court. The resulting legal process would take years to resolve. BCE doesn't have that kind of time to find new sources of accelerated growth. Investors shrugged off the latest results with a relatively minor 1.5 per cent selloff as the markets opened, but there's no guarantee they'll be as patient in future if organic growth in wireless fails to keep pace, and if declining performance by legacy businesses continues to drag on the bottom line. If Bell can't have Astral — or some piece of it — expect it to find some alternative acquisition-based track before long.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.