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Summary

  • Strategic investments to roll out Fibe TV and improve broadband capabilities will benefit company’s consolidated financial performance.
  • Integration of Astral will improve BCE’s operational base.
  • Company’s wireless segment will face competitive pressures in near term.

BCE Inc. (NYSE:BCE), one of the key players in the Canadian telecom sector, has been operating in a competitive market. The company has been consistently managing to grow its wireless revenues; however, in the short term, increase in competition might pressurize BCE's wireless segment's performance. BCE's media segment, with the recent acquisition of Astral, is supporting growth. Furthermore, with its initiatives to roll out FTTH-based IPTV service Fibe TV, BCE's wireline will back its overall revenue base in the long run.

The company is one of the leading telecommunication companies in Canada and holds a solid wireless market share of approximately 28%. The table below shows the wireless market share held by BCE, TELUS (NYSE:TU) and Rogers Communications (NYSE:RCI).

Companies

BCE

RCI

TU

Market Share

28%

35%

28.6%

BCE - Wireless

In the recent past, following the introduction of contract code, which allows customers to cancel their contract with the carrier after two years without any penalty, BCE, RCI and TU have been making aggressive efforts to retain subscribers. Also, the companies' subscriber bases have been pressurized as customers are relatively freer to switch between carriers. In 1Q14, gross wireless subscriber additions for BCE decreased 6.8% year-over-year, whereas RCI's gross wireless subscriber additions observed a decrease of 8.15% year-over-year. However, to support top line growth in the given environment, BCE, RCI and TU have responded to the contract code regulation by increasing prices. The price increases have helped BCE to support its top line growth; in 1Q14, BCE managed to increase its wireless revenues by approximately 4.5% year-on-year. The following graph shows the wireless revenue growth for BCE in recent quarters.
(click to enlarge)
Source: Company's Quarterly Earnings Report

As the three companies are dominating the market, the Canadian government is targeting to increase competition in the industry by promoting small companies. Also, the Canadian government has come up with price reduction policies in response to price increases by RCI, BCE and TU. Moreover, the government's plan is to allocate a major proportion, almost 60%, of the wireless spectrum to small players in upcoming spectrum auction. I believe this action will increase competition in the market. Due to the increase in competition, BCE will be forced to lower its prices, which will put pressure on the wireless segment's revenues in the near term. However, in the long term, I believe BCE's large operational scale will help it effectively address the competition and maintain its healthy market share.

Wireline

Recent secular changes, mainly the emerging demand of wireless services, have been pressurizing BCE's wireline revenues. However, with its focused approach on the Fibe TV roll out, the company is making efforts to support the wireline segment's results; cable and wireline revenues for the Canadian market are likely to grow by 1%-1.5% in the next ten years. The company's efforts to support the results of the wireline segment seem to be delivering results. Due to the rollout of its FTTH-based Fibe TV at a faster pace, the company's wireline segment's access line losses have been moderating in recent quarters, as shown in the chart below.
(click to enlarge)
Source: Company's Quarterly Earnings Report

Moreover, quality improvement and the expansion of Fibe TV are helping the company increase its high-speed internet subscriber base. BCE was recently declared number one in the broadband speed index race. Also, BCE outpaced its U.S. counterparts with its speed index of 3.19-3.10.

Until recently, the company had rolled out its fiber-based broadband services to over 827,000 sites throughout Atlantic Canada and Ontario. Going forward, the company plans to invest $70 million for the expansion of its fiber-based broadband services to 125,000 sites in Quebec. I believe the CAPEX burden, due to the company's investment in fiber, will pressurize the company's cash flows in the near term. But in the long run, the expansion of fiber-based services will add to the company's broadband subscriber base, which will also portend well to grow the wireline revenues.

Media

Since the acquisition of Astral, BCE's media segment is adding well towards the overall revenue growth of the company. In addition, the expansion of TSN content offerings with no extra charges is not only maintaining BCE's lead in sports coverage, but is also fueling the media segment's revenues. Moreover, BCE's media segment growth is outpacing its peer RCI. BCE posted a robust revenue growth of 40.7% year-over-year, whereas RCI's media revenues were up only 8% year-over-year in 1Q14. Moreover, BCE's media segment's EBITDA margins are also expanding constantly, as the operational synergies from Astral are effectively offsetting the impacts of increasing content costs and a soft advertising market. Going forward, as the company keeps on integrating Astral's assets, BCE's media segment will add to the cash flow base of the company. The following graph shows the media segment's revenue growth.
(click to enlarge)
Source: Company's Quarterly Earnings Report

The following chart shows the growth in the media segment's EBITDA margin YoY.
(click to enlarge)
Source: Company's Quarterly Earnings Report

Conclusion

BCE's wireless segment will face competitive pressures in the near term; however, I believe the company's large scale will help it address competition and maintain a healthy market share. Also, strategic investments to roll out Fibe TV and improve broadband capabilities will portend well for the company's consolidated financial performance. Moreover, the integration of Astral will improve its operational base.

Source: BCE's Long-Term Prospects And Market Share Remain Safe Despite Competitive Pressure