Competition hurting BCE's efforts to expand non-traditional product offerings

Stiff competition from cable-TV and wireless companies continue to hammer BCE Inc. (TSX:BCE - news), even though it claims to have passed a crucial threshold last year, when a majority of its revenues came from growth businesses.

"I think that's a game-changing event and sets the stage for a lift in performance levels that we've talked about in 2007 and puts the company on a different trajectory going forward," CEO Michael Sabia said in a conference call with reporters.

During 2006, BCE derived 51 per cent of its revenue from wireless, video and high-speed Internet, up from 40 per cent in 2004.

These segments are "generally growing at about 11 per cent while our legacy base is declining at around seven per cent," Sabia told analysts in an earlier call on Wednesday following the release of its fourth-quarter results.

Canada's largest telecommunications provider, which after simplifying its structure is changing its name to Bell Canada, reported fourth-quarter earnings of $699 million, 84 cents per share, up from year-earlier net income of $413 million, 44 cents per share.

Revenue was flat at $4.45 billion as a decline in hardware sales was offset by a move to higher-margin recurring services.

BCE also said Wednesday it is increasing its quarterly by dividend by 10.6 per cent to 36.5 cents per share, payable on April 15., up from the 33-cent dividend announced in November.

"Overall, we continue to make good progress, certainly great strides in improving our productivity, reducing our costs," Sabia told reporters.

BCE had $223 million in productivity improvements during the fourth quarter and $724 million for the year. It anticipates an additional $450 million in improvement this year.

During 2006, the company eliminated 3,300 jobs in its old businesses, while adding 500 to its growth segments for a net reduction of 2,800.

Sabia acknowledged that the Bell Mobility division remains problematic despite revenue growth and favourable churn numbers reflecting a reduced loss of customers.

"In wireless, our financials were quite good, very sound. I think we do have more work to do on getting our fair share of new additions in that market."

He blamed "a general softness, we think, in the customer markets around Christmas, some policy changes, some execution issues," while expressing confidence that the wireless business will improve in 2007.

The Montreal-based company said it is continuing to see some stabilization in access line losses as telephone customers defect to cable competitors.

Notwithstanding its comments, BCE faces a difficult year despite trying to migrate from legacy products to growth opportunities, analysts say.

"They can make a big deal out of the fact that 51 per cent of their revenues are coming from growth products. The problem is, that doesn't mean the legacy products aren't continuing to shrink," said an analyst who didn't want to be named.

"There is nothing that seems to be possible for them to do to make a major change to the outlook of the operations."

Although earnings per share were in line with market expectations, "subscriber growth results were very weak, particularly in new services," Glenn Campbell of Merrill Lynch wrote in a report.

He suggested BCE's position could be weakened by a deterioration in the competitive wireless conditions with the possible licensing of a fourth operator, faster market share loss in wireline demand, and softness from a weakened economy and slowing housing construction.

Videotron demonstrated the competitive environment by noting Wednesday that it has attracted more than 400,000 residential cable telephone subscribers since launching the service two years ago.

"By offering consumers an advantageous alternative to conventional telephone service, we became the first of Canada's four major cable providers to introduce competition to a market that was previously entirely dominated by the conventional telephone companies," Manon Brouillette, senior vice-president marketing, said in a news release.

BCE's latest quarter included restructuring and other charges of $66 million and net investment gains of $412 million arising from the sale, announced in December, of satellite services subsidiary Telesat Canada for $3.4 billion to the Public Sector Pension Investment Board and Loral Space & Communications Inc.

The Telesat deal, still awaiting regulatory approval, is "the final chapter in all the work that we've been doing to bring the company back to its roots," Sabia said.

The company hasn't indicated how it will use the proceeds.

Quarterly net earnings excluding non-recurring items were $353 million or 44 cents per share, down from $429 million or 46 cents per share a year ago.

Analysts on average were expecting 42 cents per share, according to Thomson Financial.

Full-year net income was $1.94 billion, $2.25 a share, up from $1.89 billion or $2.04 per share in 2005. Bell Canada's full-year revenue was up 0.7 per cent to $17.35 billion.

It also saw a turnaround in its pension-plan situation which now has a $100-million solvency surplus, and lower pension expense is expected to be worth four cents per share this year.

For 2007, management foresees revenue growth of three to five per cent, with earnings per share up by between four and seven per cent excluding one-time items.

Late Tuesday, BCE announced it will continue buying back shares, intending to cancel as much as five per cent of its stock at an anticipated cost of $1.2 billion.

BCE shares lost $1 to $30.30 in trading Wednesday on the Toronto Stock Exchange.