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BCE defends its spending spree on fibre-optic services

George Cope, President and CEO of BCE Inc., speaks during the 2017 annual general shareholders meeting in Ottawa on Wednesday, April 26, 2017.

Justin Tang/THE CANADIAN PRESS

BCE Inc.'s spending spree on fibre-optic services hasn't yet produced a wave of new Internet and television customers, but as the company draws closer to completing upgrades in the key Toronto market, it insists it is on the right path.

Canada's largest communications company has been investing in a multiyear program to bring fibre-to-the-home (FTTH) service to major swaths of its coverage area in a bid to better compete with its cable-company rivals, which can offer higher-speed Internet service than BCE in areas where it hasn't fully upgraded its legacy telephone copper network. It is spending more than $1-billion on upgrades to the city of Toronto alone.

But its second-quarter results announced on Thursday show it attracted fewer than expected broadband and Internet protocol television (IPTV) subscribers – 1,400 and 16,000, respectively, both down from the same time last year – as it faced what it called "highly aggressive" promotions from its cable competitors.

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Read more: BCE reports wireless strength as IPTV, Internet subscribers slow

Now, despite some construction delays caused by wet spring weather, BCE says it will have connected most homes and businesses in Toronto by early 2018 and is on track to complete 40 per cent of its long-term FTTH build by the end of this year. That's important, because the company sees better results on Internet and TV where it has made those upgrades; it said this quarter that it added 17,000 new Internet clients in areas served by FTTH, a measurement it had not previously disclosed. That proves the case for spending the money, argues chief executive officer George Cope.

"I think the results show we've got to make the investment in fibre," he said in an interview, adding, "Where we have fibre, we're doing extremely well. Where we don't, we need to get at covering over with fibre so we can meet the consumer demand."

In the meantime, BCE is riding a wave of new wireless subscribers, providing a boost to revenue and EBITDA growth as the company added 88,611 new contract wireless customers in the second quarter, outpacing analyst estimates in the range of 70,000.

Macquarie Capital Markets analyst Greg MacDonald said BCE's second-quarter numbers "underscore key industry and company themes: namely that wireline remains a growth challenge for the company but that postpaid wireless growth is still propping up both Bell and the industry."

Profit at the company declined by 2.3 per cent in the period to $762-million, which BCE attributed to higher depreciation and amortization expenses related to its acquisition of Manitoba Telecom Services Inc. On an adjusted basis, the company reported earnings of 88 cents a share, edging out average analyst estimates of 87 cents.

Revenue increased 6.7 per cent to $5.7-billion in the second quarter and adjusted EBITDA grew 5 per cent to $2.38-billion (EBITDA is earnings before interest, taxes, depreciation and amortization). Both were boosted by the acquisition of MTS.

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BCE has developed a reputation of using acquisitions to boost revenue and profit growth and support its dividend payout. Now that MTS has closed and with few obvious takeover targets left, Mr. Cope says, "our growth has to come from the broadband investments we're making in wireline and in wireless."

He said the company has to respond to customer demand with products such as Alt TV, the app-based TV service aimed at cord cutters it launched in May.

Revenue at the wireless division was up 12.9 per cent to $1.96-billion in the second quarter as BCE attracted – and kept – more customers, who spent more on higher-value service plans with bigger mobile-data caps. Average revenue per user (ARPU) increased by 4.6 per cent to $67.28 and BCE's rate of contract customer turnover – known as churn – declined to 1.08 per cent, its lowest quarterly churn rate in 11 years.

That came at a cost as the company spent $75-million more on retention and acquisition spending compared with the same quarter last year. Mr. Cope says customers are keeping devices for longer before upgrading to the latest smartphone, but when they are ready to make a move, the company has to be prepared to spend on handset subsidies to ensure they don't leave.

"We're spending as much or more on a quarterly basis on retention than we would actually on getting new clients, which is an interesting crossover point for industry," he said.

BCE's wireline division – which includes Internet and TV for both residential and business customers and is the company's largest business line – reported revenue growth of 4.8 per cent to $3.12-billion.

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About the Author
Telecom Reporter

Christine Dobby covers the Canadian telecom industry for The Globe and Mail. Before joining the Globe in May 2014 she reported for the Financial Post for three years, most recently writing about telecom and media. She has also reported for the Toronto Star and New Brunswick Telegraph-Journal. More

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