EUR 850.00 For Business Accounts Only

Morningstar | BCE Reports Excellent 2Q Wireless Adds but Disappoints on Revenue and Profit; Maintaining CAD 62 FVE

Consistent with what we have seen across the entire Canadian wireless industry over the past several quarters, narrow-moat BCE exhibited impressive strength in postpaid wireless subscriber growth and churn metrics. Even so, wireless revenue fell below our expectations, and consolidated revenue (up 2% year over year) and earnings missed consensus estimates. We attribute the revenue miss mostly to near-term noise rather than underlying long-term concerns about the health of BCE's business, which we think remains strong. The 2% decline in adjusted net income was due mostly to nonoperating expenses rather than EBITDA margin contraction. We maintain our CAD 62 fair value estimate and see the stock as undervalued.

In our view, the revenue miss was driven by the wireless and media segments. Despite wireless subscriber additions exceeding our expectations (including 394,000 net adds), average billings per user growth was under 1%. While ABPU growth was weaker than we project for the full year, we expected it to be tepid in 2018 due to a shift in subscriber base (we forecast 1.5% ABPU growth in 2018 for BCE, compared with 3% for Rogers and 2% for Telus). BCE is adding subscribers on the wireless government contract it won last year, and they are lower-ABPU customers. Additionally, BCE is making a more concerted effort to gain prepaid subscribers, whom the company finds valuable as a pipeline to future postpaid subscribers despite their dragging down ABPU too. Overall wireless revenue grew 5%, and we see the segment as healthy long term. Media revenue, which is derived largely from BCE's TV and radio stations, was down 0.6% and is facing structural headwinds as linear TV viewership is down and advertising revenue remains soft. We project about 1% media revenue growth each year over our five-year forecast, and while that may turn out to be optimistic for 2018, we think the segment can return to revenue growth as its CraveTV and other streaming products gain traction.

In wireline, we think BCE is executing on its path to better compete with cable companies, and the segment is tracking our full-year projections. While overall segment revenue was up less than 1% year over year (versus our 1.4% full-year projection), service revenue was up 3%, and the company saw strong increases in broadband and IPTV customers, which we see as most important to our long-term thesis. BCE added over 10,000 broadband customers and over 20,000 IPTV subscribers, which are both huge gains over last year and are evidence of what we think the company can do as it rolls out more fiber to the premises, which is now present in 4.2 million locations (up 800,000 from last year). We expect growth in broadband subscribers to average about 3% over the next five years and growth in IPTV subscribers to average about 5% during that period.

Consolidated EBITDA margin was 42%, ahead of our full-year projection of 41%, which is to be expected given that the fourth quarter is typically materially weaker than the other three quarters. Wireless and wireline saw margin expansion over last year, with wireless adjusted EBITDA growing 6.2% (versus 5% revenue growth, resulting in a 44% margin) and wireline adjusted EBITDA up 1.1% (versus 0.6% revenue growth, resulting in a 42% margin). Media adjusted EBITDA was down versus last year, as the segment saw higher costs due to World Cup broadcasting rights and CraveTV programming expansion, but the 26% margin still tracked ahead of the 23% we project for the year.