BCE pays high price for smartphone growth

Top Canadian telecom company BCE Inc's quarterly adjusted earnings beat expectations on Thursday, helped by strength in its new media unit, but its wireless division paid heavily to grab customers in a cutthroat market.

The Montreal-based company, which operates primarily under the Bell Canada brand, said it added 94,309 net postpaid wireless subscribers in the second quarter -- down from the year-before quarter -- and lost 57,802 prepaid customers.

Its main rival and Canada's largest wireless company, Rogers Communications, said last week it added 135,000 net wireless subscribers, 108,000 of them postpaid, in the same period.

Carriers generally prefer postpaid customers, who sign long-term contracts, as they typically spend four times as much a month as those on prepaid deals.

No. 3 player Telus reports earnings on Friday.

Competition in wireless is intense, forcing Bell to spend more to retain customers even as average bills fall. It also takes an upfront hit by subsidizing expensive handsets such as Apple's iPhone and a broad lineup of high-end Android phones.

The company said new activations cost C$400 each in the second quarter, up 19.4 percent.

"While the company had a strong showing in terms of smartphone subscriber penetration, cost of acquisition and retention has escalated, putting pressure on margins," Desjardins analyst Maher Yaghi said in a note to clients.

Average bills for both postpaid and prepaid customers slipped, although the growing portion of more lucrative contract users meant blended revenue per user rose.

Shares in the company fell 2.4 percent in early trade.

Bell said its newly created Bell Media unit -- formed after last year's C$1.3 billion purchase of CTV, Canada's biggest private broadcaster -- benefited from strong advertising and subscriber revenues.

MOBILE CONTENT

Bell moved quickly to offer sports, news and entertainment content on its mobile devices after the acquisition and said 300,000 wireless customers had signed up for the services.

"The longer our competitors don't want to acquire our content, the happier we are from a subscriber wireless perspective, and when they want to put it on their handsets, then we'll be happy from the revenue perspective," Chief Executive George Cope told analysts on a conference call.

Bell said it made a net profit of C$590 million, or 76 Canadian cents a share, in the second quarter, down 2.5 percent from a year earlier due to a one-off payment to the telecom and broadcast regulator relating to the CTV purchase.

Its adjusted earnings were 86 Canadian cents a share, while revenue rose 11.6 percent to C$4.96 billion.

Analysts had on average expected Bell to earn an adjusted 81 Canadian cents a share on revenue of $4.89 billion, according to Thomson Reuters I/B/E/S.

Bell executives said they plan to push their Internet protocol-based (IPTV) Fibe TV product more aggressively in the second half of the year as the necessary infrastructure now covers most of Toronto and Montreal. The company added just 6,072 net new TV customers in the quarter.

"Wireless trends are worrying and Bell remains well behind when it comes to IPTV and its associated dilution," said Dvai Ghose from Canaccord Genuity, who said he prefers Telus and its more advanced rollout of a similar product.

Bell and Telus share an upgraded national wireless network that has helped them eat into Rogers' dominant wireless position, but all three are losing lower-value customers drawn to no-contract and unlimited talk and text plans from newcomers including Globalive's Wind Mobile, Mobilicity and Public Mobile.

BCE's shares fell by almost a dollar to C$35.74 on the Toronto Stock Exchange on Wednesday morning in a down day for stock markets. They had risen 3 percent so far this year before the results.

The company stuck to its full-year outlook for earnings per share of between C$2.95 and C$3.05, and said it was on track for revenue growth of between 9 and 11 percent.