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Bell Canada Enterprises reports third quarter results
(All figures are in Cdn$, unless otherwise indicated)
MONTREAL, Qc, Nov. 2 2005 -- For the third quarter of 2005, BCE
Inc. (TSX, NYSE: BCE) reported revenues of $5.0 billion, up 3.6% from the same
period last year. Operating income for the quarter increased to $957 million,
from $25 million in the third quarter of 2004(1), due primarily to
restructuring charges recognized in 2004 for the company's employee departure
program. Earnings per share (EPS) were $0.48 cents, up from $0.09 the previous
year. EBITDA(2) was $1.9 billion, down 1.9% from the same period last year.
EPS before restructuring and other items and net gains on investments(3) were
$0.50 as compared to $0.52 the previous year. Cash from operating activities
was $1.7 billion in the quarter, down 7.8% from the third quarter of 2004,
while free cash flow(4) was $344 million, compared to $673 million for the
same period last year.
Bell Canada achieved solid revenue performance in the quarter with video,
wireless, Internet and the Business segment all contributing to revenue growth
that more than offset the declines from the company's legacy business.
Operating costs were impacted by decisions taken by the company to invest the
necessary resources to clear up the backlog from the Entourage strike quickly
and to invest in customer service. In addition, to maintain a clear focus on
these priorities certain planned cost savings initiatives were temporarily
delayed. Taken together, these factors had a significant effect on EBITDA in
the quarter. EPS and Operating income were also affected by these factors, and
by expected higher pension and amortization costs.
"We continued to have solid revenue increases in our key growth services
in the quarter. We also made progress on our multi-product household
strategy," said Michael Sabia, President and Chief Executive Officer of BCE.
"However, our financial performance suffered as a result of decisions we took
to invest in service and to clear up the lingering consequences of the
Entourage strike. With significant progress on these issues, we are ramping up
our cost-saving initiatives in the fourth quarter and as we enter 2006."
In terms of its overall cost reduction program (Galileo), on a year-to-
date basis the company has generated $353 million in savings. This includes
$111 million in the third quarter. The latter was affected by the company's
decision to defer some Galileo initiatives.
Going into the fourth quarter, a number of initiatives will come on-line
and others will be accelerated. They include: the continued migration of
customers to Bell Canada's new and simple One Bill; the deployment of a new
bell.ca web site that transforms this online destination into a simple and
cost-effective sales channel; and the convergence of consumer call centres to
provide customers with a single point of contact for their multiple Bell
services.
Bell has also launched a significant procurement review effort that
targets the company's $8.5 billion external operating and capital
expenditures. Its objective is to drive down the cost base through price
improvements, consumption controls, supply-chain re-designs, inventory
controls as well as a review of the overall real estate spend. The full impact
of this and other measures will contribute to the company achieving its target
run rate of savings of $500-$600 million for 2005 and of $1-1.5 billion by the
end of 2006.
Bell recently announced two appointments that further strengthened the
executive leadership of the company to bring an ever-sharper focus to the day-
to-day execution of its business plans. George Cope will join Bell Canada as
President and Chief Operating Officer in January 2006 to lead the company's
various customer-facing groups (Residential, Enterprise, SMB and wholesale),
excluding wireless. He will focus on driving revenue growth, delivering new
products to the marketplace and enhancing our customer service. In addition,
Stephen Wetmore was given expanded responsibilities as Group President -
Corporate Performance and National Markets of Bell Canada. In this new
capacity, Mr. Wetmore has overall responsibility for driving the improvement
of the company's cost structure and thus contributing to profitable growth.
"Strengthening the executive leadership of the company is about a renewed
focus on driving our future growth, re-setting our cost structure and
improving our customer service to meet the competitive realities of the
market," said Mr. Sabia. "It's also about relentless execution of the plan we
have put in place to deliver value to our customers and shareholders."
Key operational achievements
Video
ExpressVu posted its best third quarter since 2001 as net additions
jumped 148% over the same quarter in 2004 to 82,000. So far this year, Bell
has added 174,000 net new video subscribers, bringing the total subscriber
base to 1,677,000, up 14.9% year-over-year. The improvement in net activations
this quarter and year-to-date was driven by the positive impact of our set-top-
box rental program and the addition of 12,500 subscribers from the acquisition
of Cable VDN Inc.
Video revenues increased by 17.8% year-over-year, driven by a higher
customer base, an improvement in Average Revenue Per User (ARPU) of $3 over
the third quarter of last year and a churn rate of 1.0%, down by 0.1 points
year-over-year. The higher ARPU is a result of a pricing increase of $2 and
greater up-selling initiatives that leveraged strong programming and hardware
offerings. Cost containment and the impact of a new rental program drove
improved operating performance, despite a significant increase in new
additions.
Bell continued to lead the Canadian market in the delivery of high-
definition (HD) programming and recently launched its third high-definition
sports channel, 'Raptors NBA TV in High Definition', to bring the total number
of high-definition channels to 28. In addition, with the return of the hockey
season, Bell is the only carrier of NHL Centre Ice in Canada.
On the hardware front, there has been strong demand for the new 9200 HD
PVR (Personal Video Recorder) Plus. The 9200 can be connected to two
televisions for separate program recording and viewing on each, making it
simple for customers to watch and record the largest selection of HD
programming available in Canada.
Wireless
Wireless subscriber momentum continued in the third quarter as Bell
stepped up its efforts to secure new, higher value, long term customers to
drive overall wireless ARPU. Bell attracted 358,000 gross subscribers, a 27%
increase over the third quarter of 2004. Bell's new Push-to-Talk service,
called "10-4", and BlackBerry subscriptions helped deliver 68%, or 243,000
postpaid subscribers of the total gross activations. "10-4" ended the third
quarter with 70,000 consumer and business subscribers.
Net additions were 123,000 in the third quarter, up 12.8% over the same
period last year. At the end of the third quarter, Bell had 5.2 million
wireless subscribers, an increase of 11.1% when compared to September 30,
2004. Contributing to these results was the success of Solo Mobile, launched
on July 25 to specifically target the youth market, the introduction of new
handsets, competitive rate plans and Virgin Mobile service.
Subscriber growth, and a $1 increase in ARPU to $51, contributed to
wireless revenues of $801 million, an improvement of $74 million, or 10.2%,
over the third quarter of 2004. Wireless EBITDA margin was at 44.0% in the
third quarter of 2005, down 1.4% over last year, due principally to the cost
associated with acquiring an increased number of high-value subscribers.
Blended churn of 1.5% was 0.3 points higher than in the third quarter of
2004 but down 0.1 point compared to the second quarter of this year. Prepaid
churn in the quarter improved to 1.6% compared to 2.1% in the second quarter
of 2005. Postpaid churn was up slightly to 1.5% this quarter from 1.4% last
quarter.
In mid-August, Bell introduced MOBI TV, the first Canadian mobile
television application. This new technology will provide customers with a
variety of television programming on their mobile handsets.
On October 31, Bell became the first wireless operator in Canada to
launch Evolution, Data Optimized (EVDO), which provides the company with new
revenue opportunities in both business and consumer markets. EVDO, with a
wireless data speed rate five times faster than what is currently available,
allows Bell to grow next-generation services to drive higher ARPU. EVDO
delivers data-rich content such as e-mail, video messaging, gaming, video
conferencing, telematics and streaming entertainment.
High-speed Internet
Bell's high-speed Internet service added 106,000 subscribers in the third
quarter of 2005, an increase of 26% over the same period in 2004. The total
high-speed subscriber base reached 2,134,000, up 24% over the third quarter of
last year. Focused selling efforts, the continued success of Basic Lite and
subscriptions to the 5 Mbps Ultra service resulted in 58% of gross additions
subscribing to high-speed products. An expanded footprint and attractive back-
to-school offers also contributed to overall growth in the third quarter.
Sympatico.MSN portal revenues increased by 58% in the quarter over the
third quarter of 2004. The portal continues to be the country's most popular
online destination with over 16 million unique visitors to the site monthly.
The company launched kidsmania.ca on October 5, a subscription-based
service offering interactive education and entertainment ("edutainment") in
English and French to children aged 3-12. It is a first in Canada and is
achieving favourable customer adoption in the first few weeks of its
availability.
Bell also introduced Live @ The Orange in partnership with Universal
Music. This Canadian first allows subscribers to purchase exclusive live music
recordings through SympaticoMusicStore, view live studio sessions on ExpressVu
HDTV, and download the music recordings to their Bell mobile phones. It offers
fans unparalleled access to content and leverages Bell's wide distribution
capabilities.
Consumer segment highlights
At the end of the third quarter, 59% of Bell households in Quebec and
Ontario subscribed to at least two Bell services, up from 57% in the second
quarter. Of this total, 1.34 million households subscribed to at least three
services, up 70,000 from the second quarter. This contributed to a steady
increase in average revenue per household in the quarter.
Consumer segment revenues grew by 1.1% over the same quarter of 2004, at
$1.9 billion. This increase was driven by a continued expansion of video,
wireless and high-speed subscriber bases, as well as higher ARPU performance.
This was partly offset by greater wireline erosion, which led to lower long
distance and local access revenues. Year-to-date Consumer revenues were $5.7
billion, up 1.5% from the same period last year.
Operating income was down 15.8% for the quarter, attributable to factors
previously discussed surrounding the Entourage strike, higher pension and
amortization costs and a 3.5% decline in the residential NAS (Network Access
Service) customer base. Costs associated with acquiring higher revenue-
generating customers also contributed to these results.
On September 8, Bell launched Digital Voice, its IP-based voice
communications solution, in the Greater Toronto area and expanded the
availability of its over-the-top service throughout Ontario and Quebec after a
successful trial period in select Quebec communities. On October 25, Bell made
Digital Voice available in Quebec starting with Montreal, providing two of
Canada's major urban centres with a premium IP-telephony service with advanced
capabilities such as voicemail to email, additional numbers, enhanced call
forwarding and online account management. It is recognized as one of the most
innovative and advanced offerings of its kind in North America and is part of
company's effort to maximize retention in a highly competitive market.
Business segment highlights
The Business segment achieved its fifth consecutive quarter of improved
revenue growth, with revenues of $1.5 billion, up 5.3% over the third quarter
of 2004. Year-to-date revenues were approximately $4.5 billion, representing
an increase of 4.1% over 2004. Data and wireless revenues rose in the quarter
for Enterprise and SMB, yet there was a decline in long distance and local
access revenues.
SMB's strong performance was driven by the success of the company's VCIO
(Virtual Chief Information Officer) strategy and by steady growth in both
wireless and data revenues. In Enterprise, demand for Information and
Communication Technologies (ICT) services and IP-based solutions contributed
to the revenue growth.
Small and Medium Business
The SMB group experienced its best quarter since the launch of its VCIO
strategy. Revenues for these services grew significantly over the third
quarter of last year, with 34% organic growth. Bell Business Solutions (BBS),
housing the resources of CSB Systems, Nexxlink Technologies and Charon
Systems, contributed significantly to data products growth in the quarter.
In August, the SMB group launched Business IP Voice. This service
provides small and medium businesses with access to new capabilities, lower
communication costs and improved productivity through applications that have
been available only to large enterprise customers in the past.
The SMB group also recently opened a new innovation centre in Kanata,
Ontario to develop IP-based technologies and applications. The centre will
focus on advanced solutions for small and medium businesses in key sectors
such as health care, retail and transportation. The centre is a collaborative
effort with The Wesley Clover Group, owned by telecommunications entrepreneur
Terry Matthews.
Enterprise
Revenues increased this quarter, due to growth in wireless and data
revenues. The Enterprise group continued to make progress as a leading ICT
services provider to Canadian corporations, governments and public sector
organizations. Sales of ICT services grew by 22% over the third quarter of
2004 and by 40% on a year-to-date basis. Enterprise added 23,000 IP-enabled
voice lines on customer premises equipment during the quarter for a total of
208,000 lines.
Significant customer wins in the third quarter included:
- An important five-year partnership with the Aéroports de Montréal to
provide solutions including Wi-Fi technology, "intelligent" digital
signage, IP telephony, computerized information kiosks and the
installation of business centres in public areas at Montreal - Trudeau
Airport. Bell is serving as the systems integrator for this project
which will allow the Airport to provide one of the most technologically
advanced passenger experiences in Canada.
- A three-year agreement with Megatrade(TM) Communications Services Corp.
for its approximately 120 member organizations in the financial
services industry across Canada. The agreement covers IP-migration and
the provision of IP VPN services.
- A three-year contract with CIBC to provide and manage DSL and IP VPN
services for its 1200 remote automatic banking machines.
In the quarter, Bell took important steps to consolidate its industry
leading wireless data position, including the acquisition of The Createch
Group. Createch's expertise in supply chain optimization, manufacturing and
logistics performance improvement will combine with Bell's existing wireless
data capabilities to expand the Enterprise wireless data portfolio and drive
additional benefits for Bell customers.
Bell Canada was also selected by a group of leading suppliers and
retailers called the Supply Chain Network Project(TM)(SCN) to deploy Canada's
first end-to-end EPC/RFID (Electronic Product Code/Radio Frequency
Identification) pilot. The pilot will involve up to four suppliers, one
warehouse and one STAPLES Business Depot location and will encompass pallet,
case and item level tagging. This project will explore how an EPC/RFID enabled
supply chain can help retailers and suppliers reduce their costs, increase
their productivity and enhance the customer experience.
National Markets
In September, the company announced an agreement with Rogers
Communications to jointly build and manage a nation-wide wireless broadband
network. However, Bell and Rogers will compete in the marketing and delivery
of applications and services over this network, including a host of portable
voice, video streaming and data applications. The network is expected to reach
more than two-thirds of Canadians in less than three years, covering over 40
cities and approximately 50 unserved rural and remote communities.
At the end of Q3 2005, Bell Canada completed construction of the Alberta
SuperNet and is currently awaiting completion of service acceptance by the
Government of Alberta. The SuperNet is now operational in 429 communities
across Alberta, connecting over 4,200 learning and health facilities and
government offices across the province. Bell is now focused on leveraging this
province-wide broadband network to deliver shared application services like
Voice and Video. The network will also connect rural Alberta businesses to the
rest of the country through Bell national network infrastructure.
Telesat Canada
Telesat's third quarter revenues grew by approximately 23% year over year
to $112 million, largely as a result of growth in business network services
revenues from Anik F2 Ka-band, Interactive Distance Learning Services, and The
SpaceConnection Inc. Operating income increased by 10.3% in the third quarter.
Anik F1R was launched successfully in September with transfer into
service in October. Anik F3 is on schedule for launch in Fall 2006.
Bell Globemedia
Bell Globemedia's revenues for the third quarter increased by 10.9% over
the same period last year to reach $335 million. The company's operating
income increased by 26% to $29 million.
Revenue growth was driven by double-digit growth in specialty television
advertising and by an overall improvement in the print advertising market.
CTV's strong programming schedule once again drove top ratings. For the summer
season, CTV held 10 of the top 10 and 15 of the top 20 programs in Canada.
Canadian Idol was once again the top television program during the summer
season in all of its demographics.
Revenue growth at the Globe and Mail was also strong, reflecting
heightened on-line sales activity. According to the most recent NADBank
audience measurement statistics, The Globe and Mail continues to lead its
national competitor in readership by 60% on weekdays and 78% on Saturdays.
BCE Financial Performance
Year-to-date revenues at BCE totalled $14.8 billion, a 4.2% increase over
the same period last year. Operating income year to date was $3.1 billion,
compared to $2.1 billion in the same period in 2004. Year-to-date EBITDA was
$5.8 billion, an increase of 1.8% over the previous year. BCE's EBITDA margin
for the third quarter was 38.4% and for year to date was 39.5%, due to
previously discussed factors.
Net earnings applicable to common shares for Q3 2005 were $441 million
($0.48 per common share), up from net earnings of $82 million ($0.09 per
common share) for the third quarter of 2004. Included in 2004 third quarter
earnings was a charge of $985 million, attributable to restructuring and other
costs.
Cash from operating activities was $1.7 billion in the quarter and
$4.1 billion year to date, compared to $1.8 billion and $4.2 billion for the
comparable periods in 2004. Free cash flow was $344 million in the third
quarter of 2005 and $320 million for the first nine months of 2005.
Bell Canada Statutory Results
Bell Canada "statutory" includes Bell Canada, and Bell Canada's interests
in Aliant, Bell ExpressVu (at 52%), and other Canadian telcos.
In the third quarter of 2005, Bell Canada's reported statutory revenue
was $4.3 billion, up 2.9% compared to the same period last year. Net earnings
applicable to common shares were $488 million in the third quarter of 2005,
compared to a net loss applicable to common shares of $53 million for the same
period last year.
In the first nine months of 2005, Bell Canada's reported statutory
revenue was $12.8 billion, up 2.5% compared to the same period last year. Net
earnings applicable to common shares were $1,596 million in the first nine
months of 2005, compared to net earnings applicable to common shares of
$1,062 million for the same period last year, an increase of 50.3%.
Outlook
BCE Inc. confirmed its annual full year 2005 guidance. Management
believes that it is on track to meet the lower end of guidance on EPS, Free
Cash Flow and Capital Intensity.
<<
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Guidance
2005E
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Revenue Growth (greater or equal) GDP
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Galileo Savings $500-$600M
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EPS(a) Single digit growth
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Free Cash Flow(b) $700 - $900M
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Bell Canada Capital Intensity(c) 18% - 19%
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Cellular and PCS Subscriber Growth 10%-15%
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High Speed Internet Subscriber Growth 15%-20%
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Video Subscriber Growth 10%-15%
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>>
(a) Before net investment gains/losses, or impairment or restructuring
charges (please see note 3 for additional details).
(b) Cash from operating activities less capital expenditures, total
dividends and other investing activities (please see note 4 for
additional details).
(c) Capital expenditures as a percentage of revenues.
About BCE
BCE is Canada's largest communications company. Through its 28 million
customer connections, BCE provides the most comprehensive and innovative suite
of communication services to residential and business customers in Canada.
Under the Bell brand, the company's services include local, long distance and
wireless phone services, high-speed and wireless Internet access, IP-broadband
services, value-added business solutions and direct-to-home satellite and VDSL
television services. Other BCE businesses include Canada's premier media
company, Bell Globemedia, and Telesat Canada, a pioneer and world leader in
satellite operations and systems management. BCE shares are listed in Canada,
the United States and Europe.
Notes
(1) The employee reduction program at Bell in 2004 resulted in a charge
to earnings in the third quarter of 2004 of $985 million, which adversely
affected operating income and EPS.
(2) The term EBITDA (earnings before interest, taxes, depreciation and
amortization) does not have any standardized meaning prescribed by Canadian
generally accepted accounting principles (GAAP). Please refer to the section
of BCE Inc.'s 2005 Third Quarter MD&A, dated November 1, 2005, entitled "Non-
GAAP Financial Measures" included in this news release, for more details on
EBITDA including a reconciliation of EBITDA to operating income.
(3) Net earnings and EPS before restructuring and other items and net
gains on investments do not have any standardized meaning prescribed by GAAP.
Please refer to the section of BCE Inc.'s 2005 Third Quarter MD&A, dated
November 1, 2005, entitled "Non-GAAP Financial Measures" included in this news
release for more details on net earnings and EPS before restructuring and
other items and net gains on investments including a reconciliation to net
earnings applicable to common shares on a total and per share basis.
(4) We define free cash flow as cash from operating activities after
capital expenditures, total dividends and other investing activities. Free
cash flow does not have any standardized meaning prescribed by GAAP. Please
refer to the section of BCE Inc.'s 2005 Third Quarter MD&A, dated November 1,
2005, entitled "Non-GAAP Financial Measures" included in this news release for
more details on free cash flow including a reconciliation of free cash flow to
cash from operating activities. For 2005, we expect to generate approximately
$700 million to $900 million in free cash flow. This amount reflects expected
cash from operating activities of approximately $5.9 billion to $6.1 billion
less capital expenditures, total dividends and other investing activities.
BCE 2005 Third Quarter Financial Information
BCE's 2005 Third Quarter Shareholder Report (which contains BCE's 2005
third quarter MD&A and unaudited consolidated financial statements) and other
relevant financial materials are posted at www.bce.ca/en/investors, under
"Investor Briefcase". BCE's 2005 Third Quarter Shareholder Report is also
available on the Web site maintained by the Canadian securities regulators at
www.sedar.com or it can be ordered from BCE's Investor Relations
Department
(email: investor.relations@bce.ca, tel.: 1 800
339-6353;
fax: (514) 786-3970).
BCE's 2005 Third Quarter Shareholder Report will be sent to BCE's
shareholders who have requested to receive it, on or about November 7, 2005.
Call with Financial Analysts
BCE will hold a teleconference for financial analysts to discuss its
third quarter results on Wednesday, November 2, 2005 at 8:00 a.m. (Eastern).
Media are welcome to participate on a listen only basis. Michael Sabia,
President and CEO, Siim Vanaselja, Chief Financial Officer, and other
executives will participate in the teleconference.
To participate, please dial 416-405-9328 or 1-800-387-6216 shortly before
the start of the call. A replay will be available for one week by dialing
416-695-5800 or 800-408-3053 (passcode 3163915(pound key)). This
teleconference will also be Webcast live and archived for 90 days on BCE's
website at www.bce.ca.
Call with the Media
BCE will hold a teleconference for media to discuss its third quarter
results on Wednesday, November 2, 2005 at 2:30 p.m. (Eastern). Michael Sabia,
President and CEO will participate in the teleconference.
To participate, please dial 416-405-9328 or 800-387-6216 shortly before
the start of the call. A replay will be available for one week by dialing
416-695-5800 or 800-408-3053 (passcode 3166277(pound key)). This
teleconference will also be Webcast live and archived for 90 days on BCE's
website at www.bce.ca.
Caution Concerning Forward-Looking Statements
Certain statements made in this news release, including, but not limited
to, the statements appearing under the "Outlook" section, and other statements
that are not historical facts, are forward-looking and are subject to
important risks, uncertainties and assumptions. The results or events
predicted in these forward-looking statements may differ materially from
actual results or events. These statements do not reflect the potential impact
of any non-recurring or other special items or of any dispositions,
monetizations, mergers, acquisitions, other business combinations or other
transactions that may be announced or that may occur after the date hereof.
For a description of risks that could cause actual results or events to
differ materially from current expectations please refer to the sections
entitled "Risks That Could Affect Our Business" contained in BCE Inc.'s Annual
Information Form for the year ended December 31, 2004, in BCE Inc.'s 2005
First Quarter MD&A dated May 3, 2005, and in BCE Inc.'s 2005 Second Quarter
MD&A dated August 2, 2005 all filed by BCE Inc. with the Canadian securities
commissions (available at www.bce.ca and on SEDAR at www.sedar.com), and with
the U.S. Securities and Exchange Commission under Form 40-F and Form 6-K,
respectively, (available on EDGAR at www.sec.gov), as updated in
BCE Inc.'s
2005 Third Quarter MD&A dated November 1, 2005, included in this news release,
under the section entitled "Risks That Could Affect Our Business".
The forward-looking statements contained in this news release represent
our expectations as of November 2, 2005 and, accordingly, are subject to
change after such date. However, we disclaim any intention or obligation to
update any forward-looking statements, whether as a result of new information
or otherwise.
------------------------
The Quarter at a Glance
This section reviews the key measures we use to assess our performance
and how our results in Q3 2005 compare to our results in Q3 2004.
In the third quarter, we achieved solid revenue performance, driven by
strong video, wireless and high-speed Internet subscriber acquisitions and
improved organic growth in our Business segment, while continuing to make
steady progress on our key strategic priorities. Revenues from our growth
services (comprised mainly of wireless, video and data-related products such
as high-speed Internet) accounted for 44% of total revenues at Bell Canada at
the end of Q3 2005, which keeps us on track to achieve our target of 45% by
the end of 2005. Revenue declines in our legacy voice and data businesses were
brought about by the more competitive telecommunications landscape. Legacy
declines, together with increased investment in customer service and customer
acquisitions, put pressure on operating margins.
Overall revenue growth in Q3 2005 was 3.6% at BCE and 2.9% at Bell
Canada. Despite solid revenue performance and steady progress made on
extracting further cost savings from our business operations through our
Galileo Program (Galileo), operating income before restructuring and other
items(1) declined by 10.7% at BCE and 12.1% at Bell Canada this quarter. The
decreases were due largely to higher operating costs incurred to address
service issues exacerbated by the recent labour dispute at Entourage
Technology Solutions (Entourage) in Ontario, higher expected subscriber
acquisition costs and further wireline customer losses to alternative
telephony providers, in addition to increased net benefit plans cost and
amortization expense.
(1) EBITDA, operating income before restructuring and other items, net
earnings before restructuring and other items and net gains on
investments, and free cash flow do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
(GAAP) and are therefore unlikely to be comparable to similar
measures presented by other companies. For more details on these
measures, including a reconciliation to the most comparable GAAP
measure, please refer to the section entitled Non-GAAP Financial
Measures contained in BCE Inc.'s 2005 Third Quarter MD&A dated
November 1, 2005.
In our Consumer segment, we continued to execute on our strategy of
securing multi-product households to drive greater customer loyalty and
generate higher revenue per household, which we believe will help to counter
the competitive threat posed by cable telephony. Overall, revenue grew as a
result of an across-the-board improvement in all our growth services, dampened
somewhat by a decline in legacy revenues.
Our Business segment enjoyed a fifth consecutive quarter of improved
revenue growth, despite increased competitive pressures and lower demand for
legacy wireline business services, as we continued to increase sales of our
Internet Protocol (IP) based connectivity and Information and Communications
Technology (ICT or value-added services (VAS)) solutions to small and
medium-sized business (SMB) and Enterprise customers.
In the Aliant segment, strong growth in wireless and Internet service
revenues, as well as a recovery from the 2004 labour disruption, offset
declines in its wireline business resulting from the impacts of competition,
technology substitution and regulatory restrictions.
Within the Other Bell Canada segment, while the market remains
challenging for our wholesale business, revenue grew as a result of the
acquisition of the wholesale operations of 360networks Corporation
(360networks), which was acquired in November 2004, and the sale of access
capacity.
Within the Other BCE segment, Bell Globemedia Inc. (Bell Globemedia)
continued to perform well, driven by robust growth in advertising revenue,
reflecting strong television ratings and strengthening subscription revenues.
Telesat Canada (Telesat) also had a strong quarter, reflecting growth in
Ka-band revenues on its Anik F2 satellite, revenue gains from its network for
Interactive Distance Learning services and the positive impact from an
acquisition at the beginning of the year.
<<
Customer Connections
Q3 2005 30-SEPT-05
CONNECTIONS NET CONNEC-
(IN THOUSANDS) ACTIVATIONS TIONS
-------------------------------------------------------------------------
Wireless 123 5,231
High-Speed Internet 106 2,134
Video 82 1,677
NAS (60) 12,640
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>>
To view BCE chart Growth in EOP Connections please click here.
http://files.newswire.ca/175/Q3_05_E01.jpg
- Wireless - Subscriber momentum continued this quarter with 123,000 net
activations, an increase of 12.8% compared with net activations of
109,000 in Q3 2004, resulting in an 11.1% expansion of our customer
base year-over-year. Churn improved to 1.5% compared with 1.6% in Q2
2005 due to lower prepaid churn, but increased from 1.2% in Q3 2004.
Although postpaid rate plans accounted for 68% of gross activations,
they represented 41% of our total net activations this quarter, down
from 87% last year, as a result of substantially higher postpaid churn.
- High-Speed Internet - Our high-speed Internet business added 106,000
new net customers this quarter, growing our subscriber base by 24% over
Q3 2004 to 2,134,000. Subscriber growth during the quarter was fuelled
by the growth of our Basic Lite products in Ontario and Québec and
higher net additions at Aliant.
- Video - Our video business had its best Q3 since 2001 activating 82,000
new net customers, an increase of 148% compared with Q3 2004. Our video
subscriber base has grown by 14.9% over the last twelve months to reach
1,677,000. Churn improved by 0.1 percentage points, year-over-year, to
1.0%.
- Network Access Services (NAS) - NAS in service declined by 60,000 or
0.5% during the quarter, reflecting competitive losses and lower demand
for second lines, offset partly by the seasonal impact of reconnection
orders associated with residential moves in Ontario and Québec and
students returning to school. End-of-period NAS in service declined by
2.5% since the end of Q3 2004, representing a higher rate of
year-over-year decline compared with previous quarters. The increase in
the year-over-year NAS rate of decline can be attributed mainly to the
ramp up in competition from the major cable operators in Ontario and
Québec.
Operating Revenues
To view BCE chart Revenues please click here.
http://files.newswire.ca/175/Q3_05_E02.jpg
Our revenues increased by 3.6% year-over-year to reach $4,951 million in
the quarter. The growth reflected improved revenue performance across all of
our segments. At Bell Canada, revenues grew by 2.9%, driven primarily by the
Business segment where continued wireless strength, organic growth of ICT (or
VAS) solutions sales and the contribution from recent acquisitions in driving
our Virtual Chief Information Officer (VCIO) strategy in SMB led to improved
top-line results. Furthermore, our Consumer segment delivered a solid quarter
of revenue growth as a result of the performance of its video, Internet and
wireless services, despite continued decreases in legacy wireline services,
while Aliant revenues also increased notably due in part to its recovery from
a labour disruption in 2004. Overall revenue growth was further enhanced by
the performance in the Other BCE segment, where strong double-digit growth of
10.9% at Bell Globemedia and 23% at Telesat more than offset a decline of 1.5%
at CGI Group Inc.
Operating Income and EBITDA(1)
(1) EBITDA, operating income before restructuring and other items, net
earnings before restructuring and other items and net gains on
investments, and free cash flow do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
(GAAP) and are therefore unlikely to be comparable to similar
measures presented by other companies. For more details on these
measures, including a reconciliation to the most comparable GAAP
measure, please refer to the section entitled Non-GAAP Financial
Measures contained in BCE Inc.'s 2005 Third Quarter MD&A dated
November 1, 2005.
To view BCE chart Operating Income and EBITDA please click here.
http://files.newswire.ca/175/Q3_05_E03.jpg
Operating income at BCE for the quarter was $957 million, compared with
$25 million for Q3 2004, which included there cognition of $985 million of
restructuring charges related to last year's employee departure program.
Operating income before restructuring and other items(1) for Q3 2005 decreased
by 10.7% or $118 million, compared with the previous year. Despite higher
revenues, cost savings from Galileo and recovery from the 2004 labour
disruption at Aliant, we experienced higher operating expenses resulting from
service recovery efforts following settlement of the Entourage labour dispute
in July, the expected increase in the cost of acquiring a substantially higher
number of wireless subscribers, the Canadian Radio-television and
Telecommunications Commission's (CRTC) decision with respect to Competitor
Digital Network Services (CDN), and continued margin pressure from the ongoing
transformation of our product mix towards growth services. Higher net benefit
plans cost and amortization expense also contributed to the decline. Similarly
at Bell Canada, operating income for Q3 2005 showed a marked improvement
year-over-year, increasing to $908 million from a loss of $13 million as a
result of the charges recognized in 2004 in consideration of the employee
departure program. Operating income before restructuring and other items(1)
declined by $129 million in the quarter, or 12.1%, to $938 million from
$1,067 million in Q3 2004 for the reasons referred to previously.
(1) EBITDA, operating income before restructuring and other items, net
earnings before restructuring and other items and net gains on
investments, and free cash flow do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
(GAAP) and are therefore unlikely to be comparable to similar
measures presented by other companies. For more details on these
measures, including a reconciliation to the most comparable GAAP
measure, please refer to the section entitled Non-GAAP Financial
Measures contained in BCE Inc.'s 2005 Third Quarter MD&A dated
November 1, 2005.
Our EBITDA for the quarter declined $37 million, or 1.9%, to
$1,899 million compared with last year, reflecting a decrease at Bell Canada
offset partly by an increase in our Other BCE segment. At Bell Canada, EBITDA
was $1,804 million this quarter, representing a 2.8% decline over last year,
due primarily to decreases at our Consumer and Other Bell Canada segments,
which were partially offset by slightly improved performance at our Business
segment and significantly stronger operating results at Aliant.
EBITDA margin in the third quarter was 38.4% at BCE and 41.7% at Bell
Canada, down 2.1 and 2.4 percentage points, respectively, compared with Q3
2004. The year-over-year declines reflected operating cost pressures from
ongoing service issues related to the residual impacts of the Entourage labour
dispute, as well as a number of expected impacts, including higher wireless
acquisition costs, continued erosion of high-margin legacy voice and data
services in all our segments, and the CRTC's decision with respect to CDN.
Weaker EBITDA performance was partly offset by margin improvement at Aliant.
Net Earnings / Earnings per Share
To view BCE chart EPS please click here.
http://files.newswire.ca/175/Q3_05_E04.jpg
Net earnings applicable to common shares for Q3 2005 were $441 million,
or $0.48 per common share, compared with net earnings of $82 million, or
$0.09 per common share, for the same period last year. Included in Q3 earnings
this year was a net charge of $21 million for restructuring and other items,
compared with a net charge of $402 million for restructuring and other items
and net gains on investments in Q3 2004. Net earnings before restructuring and
other items and net gains on investments(1) for Q3 2005 were $462 million, or
$0.50 per common share, down $22 million, or $0.02 per share, representing a
decrease of 3.8% per share over last year. This decline can be attributed to
lower operating income, offset partly by net income tax savings, which
included the impact from a loss monetization program based on an agreement
entered into between Bell Canada and Bell Canada International Inc. (BCI) in
August 2004.
Capital Expenditures
To view BCE chart Capital Expenditures please click here.
http://files.newswire.ca/175/Q3_05_E05.jpg
(1) EBITDA, operating income before restructuring and other items, net
earnings before restructuring and other items and net gains on
investments, and free cash flow do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
(GAAP) and are therefore unlikely to be comparable to similar
measures presented by other companies. For more details on these
measures, including a reconciliation to the most comparable GAAP
measure, please refer to the section entitled Non-GAAP Financial
Measures contained in BCE Inc.'s 2005 Third Quarter MD&A dated
November 1, 2005.
Capital expenditures were $968 million this quarter, or 19.4% higher than
the same period last year. As a percentage of revenues, capital expenditures
increased this quarter to 19.6% from 17.0% last year, reflecting acceleration
in our spending program. This year-over-year increase related to an expansion
of our fibre-to-the-node (FTTN) footprint to deliver higher-speed broadband
access, the initial deployment of an Evolution, Data Optimized (EVDO) wireless
data network in certain of our markets, information technology (IT) efficiency
projects to deliver cost savings, investment in our IP television (IPTV)
platform, Digital Subscriber Line (DSL) footprint expansion, as well as a
return to more normal spending levels at Aliant after its labour disruption in
2004.
Cash from operating activities and free cash flow(1)
(1) EBITDA, operating income before restructuring and other items, net
earnings before restructuring and other items and net gains on
investments, and free cash flow do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
(GAAP) and are therefore unlikely to be comparable to similar
measures presented by other companies. For more details on these
measures, including a reconciliation to the most comparable GAAP
measure, please refer to the section entitled Non-GAAP Financial
Measures contained in BCE Inc.'s 2005 Third Quarter MD&A dated
November 1, 2005.
To view BCE chart Cash From Operating Activities please click here.
http://files.newswire.ca/175/Q3_05_E06.jpg
To view BCE chart Free Cash Flow please click here.
http://files.newswire.ca/175/Q3_05_E07.jpg
Cash from operating activities in Q3 2005 increased for a second
consecutive quarter to $1,686 million, reflecting the continued positive
contribution from operations and the negative impact from certain items
earlier this year. Cash from operating activities in Q3 2005 was 7.8% or
$142 million lower than last year. The result for Q3 2004 was impacted
favourably by a payment received from the settlement of lawsuits against
Manitoba Telecom Services Inc. (MTS) and Allstream Inc. and cash received from
a higher accounts receivable securitization level, which was partially offset
by a decrease in taxes paid resulting from a refund (net of instalments) in Q3
2005.
On a year-to-date basis, cash from operating activities was
$4,075 million, compared with $4,212 million for the first nine months of
2004. Despite an improvement in cash earnings resulting from higher EBITDA and
an improvement in accounts receivable collections due to the resolution of
issues associated with the implementation of our new wireless billing platform
in 2004, cash from operating activities was negatively impacted by:
- payments related to employee departure programs at Bell Canada and
Aliant in Q1 2005
- higher pension and other benefit plan payments, stemming primarily from
a voluntary contribution by Aliant in Q1 2005
- an increase in income taxes paid, primarily related to the final
instalment for 2004 made in Q1 2005.
Our free cash flow in Q3 2005 improved for the second consecutive quarter
to $344 million, reflecting increased cash flow from operations and the timing
of certain items, including income tax instalment payments, voluntary pension
plan contributions and employee severance, which unfavourably affected free
cash flow in the first two quarters of 2005. On a year-over-year basis, free
cash flow decreased from $673 million generated in the third quarter of 2004,
attributable mainly to lower cash from operating activities, an increase in
capital expenditures related to our investment in next-generation service
platforms and higher dividends paid as a result of a $0.03 quarterly increase
in the dividend per common share. Similarly, for the first nine months of
2005, free cash flow was $320 million compared with $993 million for the same
period last year, due to a decrease in cash from operating activities in
addition to Telesat insurance proceeds that were received in the first half of
2004.
------------------------
Management's Discussion and Analysis
In this MD&A, we, us, our and BCE mean BCE Inc., its subsidiaries and
joint ventures.
All amounts in this MD&A are in millions of Canadian dollars, except
where otherwise noted.
Please refer to the unaudited consolidated financial statements for the
third quarter of 2005 when reading this MD&A. We also encourage you to
read BCE Inc.'s MD&A for the year ended December 31, 2004 dated March 2,
2005 (BCE 2004 MD&A).
You will find more information about BCE, including BCE Inc.'s annual
information form for the year ended December 31, 2004 (BCE 2004 AIF), the
BCE 2004 MD&A and recent financial reports, on BCE Inc.'s website at
www.bce.ca , on SEDAR at www.sedar.com and on EDGAR at www.sec.gov .
This management's discussion and analysis of financial condition and
results of operations (MD&A) comments on BCE's operations, performance and
financial condition for the three months (Q3) and nine months (YTD) ended
September 30, 2005 and 2004.
------------------------
About Forward-Looking Statements
A statement we make is forward-looking when it uses what we know and
expect today to make a statement about the future.
Forward-looking statements may include words such as anticipate, believe,
could, expect, goal, guidance, intend, may, objective, outlook, plan,
seek, should, strive, target and will.
Securities laws encourage companies to disclose forward-looking
information so that investors can get a better understanding of the company's
future prospects and make informed investment decisions.
Unless otherwise mentioned in this MD&A, the outlooks provided in the BCE
2004 MD&A dated March 2, 2005 remain unchanged.
This MD&A contains forward-looking statements about BCE's objectives,
strategies, financial condition, results of operations, cash flows and
businesses. These statements are "forward-looking" because they are based on
our current expectations, estimates and assumptions about the markets we
operate in, the Canadian economic environment and our ability to attract and
retain customers and to manage network assets and operating costs. It is
important to know that:
- forward-looking statements in this MD&A describe our expectations at
November 1, 2005
- our actual results could be materially different from what we expect if
known or unknown risks affect our business, or if our estimates or
assumptions turn out to be inaccurate. As a result, we cannot guarantee
that any forward-looking statement will materialize and, accordingly,
you are cautioned not to place undue reliance on these forward-looking
statements
- forward-looking statements do not take into account the effect that
transactions or non-recurring or other special items announced or
occurring after the statements are made may have on our business. For
example, they do not include the effect of dispositions, sales of
assets, monetizations, mergers, acquisitions, other business
combinations or transactions, asset write-downs or other charges
announced or occurring after forward-looking statements are made. The
financial impact of such transactions and non-recurring and other
special items can be complex and necessarily depends on the facts
particular to each of them. Accordingly, the expected impact cannot be
meaningfully described in the abstract or presented in the same manner
as known risks affecting our business
- we disclaim any intention and assume no obligation to update any
forward-looking statement even if new information becomes available, as
a result of future events or for any other reason.
Risks that could cause our actual results to materially differ from our
current expectations are discussed throughout this MD&A and, in particular, in
Risks That Could Affect Our Business.
Non-GAAP Financial Measures
------------------------
This section describes the non-GAAP financial measures we used in the
MD&A to explain our financial results. It also provides reconciliations
of the non-GAAP financial measures to the most comparable Canadian GAAP
financial measures.
EBITDA
------------------------
EBITDA
We define EBITDA (earnings before interest, taxes, depreciation and
amortization) as operating revenues less operating expenses, which means
it represents operating income before amortization expense, net benefit
plans cost, and restructuring and other items.
The term EBITDA does not have any standardized meaning prescribed by
Canadian generally accepted accounting principles (GAAP). It is therefore
unlikely to be comparable to similar measures presented by other companies.
EBITDA is presented on a consistent basis from period to period.
We use EBITDA, among other measures, to assess the operating performance
of our ongoing businesses without the effects of amortization expense, net
benefit plans cost, and restructuring and other items. We exclude amortization
expense and net benefit plans cost because they largely depend on the
accounting methods and assumptions a company uses, as well as non-operating
factors, such as the historical cost of capital assets and the fund
performance of a company's pension plans. We exclude restructuring and other
items because they are transitional in nature.
EBITDA allows us to compare our operating performance on a consistent
basis. We believe that certain investors and analysts use EBITDA to measure a
company's ability to service debt and to meet other payment obligations, or as
a common valuation measurement in the telecommunications industry.
The most comparable Canadian GAAP financial measure is operating income.
The tables below are reconciliations of EBITDA to operating income on a
consolidated basis for BCE and Bell Canada.
<<
YTD YTD
BCE Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
EBITDA 1,899 1,936 5,838 5,733
Amortization expense (803) (769) (2,368) (2,305)
Net benefit plans cost (108) (61) (315) (189)
Restructuring and other items (31) (1,081) (32) (1,098)
-------------------------------------------------------------------------
Operating income 957 25 3,123 2,141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
YTD YTD
BELL CANADA Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
EBITDA 1,804 1,856 5,458 5,432
Amortization expense (756) (734) (2,234) (2,199)
Net benefit plans cost (110) (55) (323) (173)
Restructuring and other items (30) (1,080) (30) (1,096)
-------------------------------------------------------------------------
Operating income 908 (13) 2,871 1,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Income Before Restructuring and Other Items
The term operating income before restructuring and other items does not
have any standardized meaning prescribed by Canadian GAAP. It is therefore
unlikely to be comparable to similar measures presented by other companies.
We use operating income before restructuring and other items, among other
measures, to assess the operating performance of our ongoing businesses
without the effects of restructuring and other items. We exclude these items
because they affect the comparability of our financial results and could
potentially distort the analysis of trends in business performance. The
exclusion of these items does not imply they are non-recurring.
The most comparable Canadian GAAP financial measure is operating income.
The tables below are reconciliations of operating income to operating income
before restructuring and other items on a consolidated basis for BCE and Bell
Canada.
YTD YTD
BCE Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
Operating income 957 25 3,123 2,141
Restructuring and other items 31 1,081 32 1,098
-------------------------------------------------------------------------
Operating income before
restructuring and other items 988 1,106 3,155 3,239
-------------------------------------------------------------------------
-------------------------------------------------------------------------
YTD YTD
BELL CANADA Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
Operating income 908 (13) 2,871 1,964
Restructuring and other items 30 1,080 30 1,096
-------------------------------------------------------------------------
Operating income before
restructuring and other items 938 1,067 2,901 3,060
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Before Restructuring and Other Items and Net Gains on
Investments
The term net earnings before restructuring and other items and net gains
on investments does not have any standardized meaning prescribed by Canadian
GAAP. It is therefore unlikely to be comparable to similar measures presented
by other companies.
We use net earnings before restructuring and other items and net gains on
investments, among other measures, to assess the operating performance of our
ongoing business without the effects of after-tax restructuring and other
items and net gains on investments.
We exclude these items because they affect the comparability of our
financial results and could potentially distort the analysis of trends in
business performance. The exclusion of these items does not imply they are
non-recurring.
The most comparable Canadian GAAP financial measure is net earnings
applicable to common shares. The table on the next page is a reconciliation of
net earnings applicable to common shares to net earnings before restructuring
and other items and net gains on investments on a consolidated basis and per
common share.
Q3 2005 Q3 2004 YTD 2005 YTD 2004
PER PER PER PER
TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
-------------------------------------------------------------------------
Net earnings
applicable to
common shares 441 0.48 82 0.09 1,478 1.60 1,106 1.20
Restructuring
and other items 21 0.02 725 0.78 22 0.02 710 0.76
Net gains on
investments - - (323) (0.35) (28) (0.03) (361) (0.39)
-------------------------------------------------------------------------
Net earnings
before
restructuring
and other items
and net gains
on investments 462 0.50 484 0.52 1,472 1.59 1,455 1.57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------------------
Free Cash Flow
We define free cash flow as cash from operating activities after capital
expenditures, total dividends and other investing activities.
The term free cash flow does not have any standardized meaning prescribed
by Canadian GAAP. It is therefore unlikely to be comparable to similar
measures presented by other companies. Free cash flow is presented on a
consistent basis from period to period.
We consider free cash flow to be an important indicator of the financial
strength and performance of our business because it shows how much cash is
available to repay debt and to reinvest in our company. We believe that
certain investors and analysts use free cash flow when valuing a business and
its underlying assets.
The most comparable Canadian GAAP financial measure is cash from
operating activities. The table below is a reconciliation of free cash flow to
cash from operating activities on a consolidated basis.
YTD YTD
Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
Cash from operating activities 1,686 1,828 4,075 4,212
Capital expenditures (968) (811) (2,619) (2,318)
Total dividends paid (374) (342) (1,110) (1,034)
Other investing activities - (2) (26) 133
-------------------------------------------------------------------------
Free cash flow 344 673 320 993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
About Our Business
A detailed description of our products and services and our objectives
and strategy is provided in the BCE 2004 MD&A.
Strategic Priorities
Our strategy is to deliver unrivalled integrated communication services
to customers and to take a leadership position in setting the standard in
Internet Protocol (IP). During the quarter, we made significant progress on
each of our three key strategic priorities.
1) Enhancing customer experience while targeting lower costs (our Galileo
program)
In our Consumer segment:
- At the end of Q3 2005, 58.8% of the total households in our Ontario and
Québec footprint subscribed to two or more products (a combination of
local wireline, Internet, video, and long distance services) and 21.1%
of total households subscribed to three or more products.
- To date, nearly 1.4 million customers in Ontario and Québec are
enjoying the benefits of a single bill for their wireline, Internet,
and video services, representing a 45% increase since Q2 2005.
- In early August, we began migrating existing One Bill customers to a
new two-page format with electronic bill (eBill) capability and in
mid-October we began the second phase of this process by adding new
customers to the single bill platform. Simplification of the billing
process not only improves the customer experience, but also lowers
costs due to the issuance of fewer invoices.
- We finalized development of our new Bell.ca website and initiated
testing in anticipation of a full-scale launch in Q4 2005. The new
website enhances the customer experience through an improved search
engine, self-serve options and shopping simplification.
In our Business segment:
- We continued making progress on moving our core traffic to a pervasive
national IP multi-protocol label-switching (IP-MPLS) network. At the
end of Q3 2005, we achieved our year-end objective to have 75% of the
migratable traffic on our core network IP-based.
- As part of our shift to IP, we continued the process of rationalizing
legacy data services. At the end of Q3 2005, we had discontinued 23
legacy data services. Since we began this initiative in 2004, we have
stopped selling 42 legacy data services.
- The trend towards IP continued with 20 new large enterprise customers
implementing IP Virtual Private Networks (IPVPN) this quarter,
including the Canadian Imperial Bank of Commerce (CIBC) and Megatrade
Communications Services Corp. (Megatrade). This brought the total
number of Enterprise customers implementing IPVPN networks as of the
end of Q3 2005 to 131.
- At the end of Q3 2005, we had enrolled 433 enterprise customers on
'Service Promise', which is our commitment to provide customers with a
clearly defined and consistent level of service in the delivery of
connectivity services.
Overall, our various Galileo initiatives led to cost reductions this
quarter of $111 million, bringing total savings for the first nine months of
2005 to $353 million. This keeps us on track to achieve our target run-rate
savings of $500-$600 million for 2005 as certain initiatives such as our new
One Bill and Bell.ca website roll-outs gain further traction during Q4.
We also launched a significant procurement review effort that targets the
company's approximate $8.5 billion external operating and capital
expenditures. Its objective is to drive down the cost base through price
improvements, consumption controls, supply-chain re-designs, and inventory
controls as well as a review of the overall real estate spend.
From March to July 2005, we engaged the services of the equivalent of
over 1,000 additional field force technicians, including contractors,
temporary workers, Bell technicians and a substantial amount of overtime help
in order to maintain customer service during the Entourage Technology
Solutions (Entourage) labour disruption. During August and September of 2005
we maintained our investment in additional workers to recover from the strike,
which comprised the returning Entourage workforce, Bell Canada technicians on
overtime and supplementary contractors. Our investment in service recovery
allowed us to substantially clear the backlog of orders from the four-month
strike in six weeks, while simultaneously coping with our large seasonal
demand. We have also taken several actions to address any damage to our
relationship with our customers during this time including building a faster
escalation process to ensure that customers' issues are dealt with more
promptly.
2) Deliver abundant bandwidth to enable next-generation services
We continued our fibre-to-the-node (FTTN) rollout by deploying another
499 neighbourhood nodes, raising the total number of nodes served to 1,854.
Our objective is to deploy 2,000 nodes by the end of 2005.
On August 2, 2005, we announced the purchase of the residential assets of
Cable VDN Inc. (Cable VDN), a Montréal-based cable company selling residential
analog and digital TV and high-speed Internet services. This acquisition
enhances our capability to deliver a package of services, including video,
Internet, wireless and voice telephony, more quickly and cost effectively to
multiple-dwelling units (MDUs).
In Q3 2005, we implemented an increase in broadband access speed for both
our Ultra high-speed users to 5 megabits per second (Mbps) from 4 Mbps for
Sympatico customers and to 6 Mbps from 4 Mbps for small and medium-sized
businesses (SMB) customers.
We recently launched Canada's first Evolution, Data Optimized (EVDO)
wireless data network in Toronto and Montréal. This provides us with new
opportunities in both business and consumer markets to grow next-generation
services, encompassing data-rich content such as e-mail, video messaging,
gaming, video conferencing, telematics and streaming entertainment. EVDO will
enable average wireless data speeds of 400-500 kilobits per second (Kbps) with
peaks of 2.4 Mbps compared with throughput speeds of up to 144 Kbps delivered
over our existing single carrier radio transmission technology (1xRTT)
network.
3) Create next-generation services to drive future growth
Our Consumer segment:
- Introduced an enhanced Voice over Internet Protocol (VoIP) product, the
new Bell Digital Voice, in the Greater Toronto Area on September 8,
2005 and in Montréal on October 25, 2005. The new service, which is the
first of its kind in Canada, uses existing phone lines to provide
customers with advanced Internet-based calling features and the
reliability of Bell Canada's phone network.
- Ended Q3 2005 with approximately 70,000 subscribers on its '10-4'
push-to-talk service, which included a significant number of
non-business consumers.
- Began an exclusive partnership with Loblaw Cos. Ltd. to distribute Bell
Mobility and Solo Mobile products through its retail outlets. As part
of the agreement, Loblaws will distribute Bell Mobility's prepaid
wireless service under the President's Choice(TM) private label brand.
- Introduced a mobile television application called MOBI TV in
mid-August. The service allows customers with provisioned handsets to
access a variety of video channels on a mobile basis.
- Introduced MSN's instant messaging service (MSN Messenger) as an
available feature for our wireless customers. The new service enables
Bell Mobility customers to use MSN Messenger to transmit text messages
to other mobile phones or PCs on their contact list in real-time over
the Internet.
- Launched 'kidsmania', a new educational online service from Sympatico
for children aged 3 to 12. A first of its kind in Canada, kidsmania
offers more than 50 interactive games and activities that feature many
of today's most popular children's characters.
- Made two of the most technologically advanced set-top box (STB) models
on the market today commercially available to Bell ExpressVu customers.
The 9200 model has the largest hard drive of any STB on the market
today, allowing users to watch and record programming on two different
television sets and to receive off-air high-definition (HD) channels.
The 4100 model is one of the most compact receivers in its category and
offers customers access to Dolby Digital audio, advanced iTV services
and on-screen caller ID.
Our SMB unit:
- Announced the launch of Business IP Voice, a new service designed to
provide innovative Internet-based technology solutions that deliver
business advantages often only available to large corporations such as
providing a dedicated, reservation-free conferencing tool and
forwarding a voice mail message as an attachment to an e-mail account.
- Opened a new innovation centre to develop IP-based technology and
applications for SMB customers and governmental bodies.
Our Enterprise unit:
- Has sold 208,000 IP-enabled lines on customer premises equipment (CPE)
to date, representing a 96% increase over the past twelve months.
- Announced the acquisition of The Createch Group, a Québec-based
professional services firm specializing in business process
optimization and information technology (IT) integration, to enable us
to consolidate our existing suite of wireless data solutions and to
expand our Enterprise wireless data portfolio.
- Purchased a majority shareholder position in end2end Software Corp., a
developer of work flow solutions for the capital markets sector with a
particular focus on applications that automate certain aspects of the
equity trading process such as electronic trade routing for
institutional investors, thereby enhancing our Institutional Trade
Management Solution (ITMS).
Other Corporate Developments
George Cope, formerly President and Chief Executive Officer of TELUS
Mobility, was appointed as President and Chief Operating Officer of Bell
Canada. He will be responsible for Bell Canada's Residential Services unit,
which includes the wireline, Internet and video businesses, but not the
wireless business, as well as for Bell Canada's Enterprise, SMB and wholesale
units. Mr. Cope will begin working for Bell Canada in January 2006. In
addition, we announced the appointment of Stephen Wetmore as Group President,
Corporate Performance and National Markets for Bell Canada. In this new
broader capacity, Mr. Wetmore will have overall responsibility for improving
Bell Canada's cost structure.
On September 16, 2005, we announced an alliance with Rogers
Communications Inc. (Rogers) to jointly build and manage a nationwide wireless
broadband network through a joint venture, which holds approximately 98 MHz of
wireless broadband spectrum in the 2.5 GHz frequency range across much of
Canada. The development and commercialization of services, as well as sales,
marketing and end-user customer care and billing functions will be provided
directly by Bell Canada and Rogers to their respective customers. The services
will allow subscribers to have wireless access to the Internet and use a host
of voice, video streaming and data applications from wherever the service is
available. The network footprint is expected to reach more than two-thirds of
Canadians in less than three years, covering over 40 cities and approximately
50 unserved rural and remote communities. Separately, in conjunction with this
transaction, we reached an agreement to acquire the remaining 50 per cent of
NR Communications not already owned by Bell Canada.
Quarterly Financial Information
The table below shows selected consolidated financial data for the eight
most recently completed quarters. This information has been prepared on the
same basis as the annual consolidated financial statements, but is unaudited.
<<
2005 2004 2003
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
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Operating
revenues 4,951 4,980 4,859 4,986 4,778 4,779 4,638 4,815
EBITDA 1,899 2,001 1,938 1,831 1,936 1,953 1,844 1,847
Amortization
expense (803) (792) (773) (803) (769) (769) (767) (775)
Net benefit
plans cost (108) (104) (103) (67) (61) (65) (63) (46)
Restructuring
and other items (31) (5) 4 (126)(1,081) (14) (3) (13)
-------------------------------------------------------------------------
Operating income 957 1,100 1,066 835 25 1,105 1,011 1,013
Earnings from
continuing
operations 459 581 492 367 102 544 485 486
Discontinued
operations - - (1) (2) (2) 27 3 (86)
Extraordinary
gain - - - 69 - - - -
Net earnings 459 581 491 434 100 571 488 400
Net earnings
applicable to
common shares 441 563 474 417 82 554 470 386
Included in net
earnings:
Net gains on
investments
Continuing
operations - 28 1 64 325 - - 84
Discontinued
operations - - (1) (2) (2) 31 7 (94)
Restructuring
and other items (21) (3) 2 (62) (725) 16 (1) (9)
Net earnings per
common share
Continuing
operations
- basic 0.48 0.61 0.51 0.38 0.09 0.57 0.51 0.50
Continuing
operations
- diluted 0.48 0.61 0.51 0.38 0.09 0.57 0.51 0.50
Net earnings
- basic 0.48 0.61 0.51 0.45 0.09 0.60 0.51 0.41
Net earnings
- diluted 0.48 0.61 0.51 0.45 0.09 0.60 0.51 0.41
Average number
of common
shares
outstanding
(millions) 927.0 926.6 926.2 925.3 924.6 924.3 924.1 923.4
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------------------------
Financial Results Analysis
This section provides detailed information and analysis about our
performance in Q3 2005 and YTD 2005 compared with Q3 2004 and YTD 2004.
It focuses on our consolidated operating results and provides financial
information for each of our operating segments.
Consolidated Analysis
Q3 Q3 % YTD YTD %
2005 2004 CHANGE 2005 2004 CHANGE
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Operating revenues 4,951 4,778 3.6% 14,790 14,195 4.2%
Operating expenses (3,052) (2,842) (7.4%) (8,952) (8,462) (5.8%)
-------------------------------------------------------------------------
EBITDA 1,899 1,936 (1.9%) 5,838 5,733 1.8%
Amortization expense (803) (769) (4.4%) (2,368) (2,305) (2.7%)
Net benefit plans
cost (108) (61) (77.0%) (315) (189) (66.7%)
Restructuring and
other items (31) (1,081) n.m. (32) (1,098) n.m.
-------------------------------------------------------------------------
Operating income 957 25 n.m. 3,123 2,141 45.9%
Other income
(expense) (1) 333 n.m. 30 393 n.m.
Interest expense (247) (253) 2.4% (741) (758) 2.2%
-------------------------------------------------------------------------
Pre-tax earnings
from continuing
operations 709 105 n.m. 2,412 1,776 35.8%
Income taxes (193) 44 n.m. (687) (511) (34.4%)
Non-controlling
interest (57) (47) (21.3%) (193) (134) (44.0%)
-------------------------------------------------------------------------
Earnings from
continuing
operations 459 102 n.m. 1,532 1,131 35.5%
Discontinued
operations 0 (2) 100.0% (1) 28 n.m.
-------------------------------------------------------------------------
Net earnings 459 100 n.m. 1,531 1,159 32.1%
Dividends on
preferred shares (18) (18) 0.0% (53) (53) 0.0%
-------------------------------------------------------------------------
Net earnings
applicable to
common shares 441 82 n.m. 1,478 1,106 33.6%
-------------------------------------------------------------------------
EPS 0.48 0.09 n.m. 1.60 1.20 33.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m.: not meaningful
>>
Operating revenues
To view BCE chart Operating Revenues please click here.
http://files.newswire.ca/175/Q3_05_E08.jpg
Our revenues increased by 3.6% in the third quarter to $4,951 million and
by 4.2% to $14,790 million year-to-date, reflecting improved revenue
performance across all of our segments. At Bell Canada, growth was fuelled
primarily by the Business segment where continued strength in wireless, driven
by competitively attractive devices and price plans, organic growth of
Information and Communications Technology (ICT or value-added services (VAS))
solutions and the contribution from recent acquisitions in further developing
our Virtual Chief Information Officer (VCIO) strategy, delivered improved top-
line results. Our Consumer segment also contributed to the year-over-year
improvements with strong wireless, video and high-speed Internet subscriber
growth driving revenue growth, while Aliant segment revenues were supported by
the continued solid performance of its wireless and Internet businesses and
recovery from its 2004 labour disruption that negatively affected results in
Q2 and Q3 of last year. Revenue growth at Bell Canada was moderated by the
continued decline in our legacy voice and data business, as competitive
pressures and the ongoing transformation of our business towards growth
services (comprised mainly of wireless, video and data-related products such
as high-speed Internet) further eroded local and access services and long
distance revenues this year. The Other BCE segment contributed significantly
to higher revenues in the quarter and year-to-date, with strong growth
delivered by Telesat Canada (Telesat) and Bell Globemedia Inc. (Bell
Globemedia). However, while CGI Group Inc. (CGI) posted double-digit growth on
a year-to-date basis, it reported a decrease in Q3 2005 as it was no longer
benefiting from a year-over-year increase in revenues from its purchase of
American Management Systems Inc. (AMS) in Q2 2004 and as the appreciation of
the Canadian dollar negatively impacted its U.S. dollar revenues.
Operating income
To view BCE chart Consolidated Operating Income please click here.
http://files.newswire.ca/175/Q3_05_E09.jpg
Operating income was $957 million and $3,123 million for the third
quarter and first nine months of 2005, respectively, compared with $25 million
and $2,141 million for the same periods in 2004, which included the
recognition of restructuring charges in the amount of $985 million related to
last year's employee departure program. Operating income before restructuring
and other items decreased by 10.7%, or $118 million, to $988 million this
quarter and by 2.6%, or $84 million, to $3,155 million year-to-date. Despite
higher revenues, cost savings from Galileo and recovery from Aliant's 2004
labour disruption, this decline was due mainly to higher operating expenses
resulting from service recovery efforts following settlement of the Entourage
labour dispute in July, an expected increase in the cost of acquiring a
substantially higher number of wireless subscribers, and continued margin
pressure from the ongoing transformation of our product mix towards growth
services. Higher net benefit plans cost and amortization expense also
contributed to the decrease.
Similarly, at Bell Canada, operating income increased to $908 million in
the third quarter and $2,871 million year-to-date, compared to a loss of
$13 million and income of $1,964 million in the same respective periods last
year. The year-over-year improvements in operating income were due mainly to a
$985 million charge recorded in Q3 2004 in consideration of the employee
departure program. Bell Canada posted solid year-over-year revenue growth for
both the third quarter and first nine months of 2005 and generated further
Galileo-related cost savings, while facing certain cost pressures brought
about by ongoing service issues, stronger wireless subscriber acquisition,
accelerated network access services (NAS) and long distance erosion, the
impact from the Canadian Radio-television and Telecommunications Commission's
(CRTC) decision with respect to Competitor Digital Network Services (CDN), and
higher net benefits plans cost and amortization expense.
Our various cost-reduction and process improvement initiatives generated
$111 million in savings this quarter, bringing total Galileo-related cost
savings for the first nine months of 2005 to $353 million. These savings
resulted mainly from:
- the employee departures that took place in Q4 2004
- reduced procurement costs resulting in cost of acquisition (COA)
savings
- the elimination of network elements and standardization of core
operating processes.
EBITDA
Our EBITDA for the quarter was down $37 million, or 1.9%, to
$1,899 million, compared with last year, reflecting a decrease at Bell Canada,
offset partly by an increase in our Other BCE segment.
Bell Canada's EBITDA this quarter was $1,804 million, representing a 2.8%
decline over last year, due primarily to operating expense pressures from
residual service issues following resolution of the Entourage labour dispute,
higher expected wireless acquisition costs and continued erosion of high-
margin legacy voice and data services, as well as to the impact from the
CRTC's decision with respect to CDN. This was offset partly by higher video,
wireless and data revenues across all segments. Year-to-date, our EBITDA was
$5,838 million or 1.8% higher than the previous year, reflecting increases in
all segments, while Bell Canada EBITDA of $5,458 million corresponded to an
increase of 0.5%, resulting mainly from EBITDA improvement in our Business and
Aliant segments offset by the weaker EBITDA performance of our Consumer and
Other Bell Canada segments.
EBITDA margin for BCE was 38.4% in the third quarter and 39.5% year-to-
date, down 2.1 and 0.9 percentage points, respectively, compared with the same
periods in 2004. Bell Canada's EBITDA margin was 41.7% and 42.7% for the same
periods, reflecting declines of 2.4 and 0.8 percentage points compared with
last year. Although we are targeting a stable EBITDA margin for Bell Canada in
2005, we may not achieve this objective due primarily to the accelerated
erosion of our legacy voice and data businesses and the timing of Galileo cost
savings that will ramp up further in 2006.
Wireless EBITDA this quarter increased by 8.7% on wireless revenue growth
of 10.2%, despite the higher cost of acquiring 27% more gross subscribers
compared with the third quarter of 2004. Primarily as a result of the
incremental cost of subscriber acquisition, wireless EBITDA margin for Q3 2005
was 44.0% or 1.4 percentage points lower than the same period last year. On a
year-to-date basis, wireless EBITDA improved 9.1%, which reflected wireless
revenue growth of 10.1%. This increase was offset partly by the costs of
acquiring 25% more customers this year, as well as by higher bad debt expense
and customer service-related costs during the first half of the year, which
resulted in a 0.6 percentage-point decline in EBITDA margin to 42.7%.
Wireless COA increased 13.4% to $432 per gross activation in the third
quarter of 2005 from $381 per gross activation for the same three-month period
in 2004. Higher COA was driven by an increase in hardware subsidies incurred
to acquire higher average revenue per user (ARPU) and long-term contract
customers, as well as by an increase in promotions and advertising costs due
to the competitive environment. Conversely, on a year-to-date basis, COA
decreased 2.4% to $405 per gross activation in 2005 from $415 per gross
activation for the comparable period last year. In this case, the improvement
was attributable mainly to higher gross activations, offset partly by greater
hardware subsidization and marketing spend.
Video EBITDA increased both on a quarterly and year-to-date basis to
$12 million and $22 million, respectively, compared with negative $16 million
and negative $15 million for the same periods in 2004, despite higher costs
incurred to acquire 61% and 49% more gross activations and to handle increased
call volumes at our contact centres. The year-over-year improvements reflected
an increased number of net activations on our new rental program, double-digit
revenue growth driven by a higher average number of subscribers in combination
with higher ARPU, and continued focus on cost containment.
The COA for video services in both the third quarter and first nine
months of 2005 decreased by 34% to $360 and $388 per gross activation,
respectively, from $548 and $586 per gross activation in the same periods last
year. The significant improvements can be attributed primarily to the
capitalization of STB and installation costs associated with our new rental
program, more favourable STB pricing due to the negotiation of a new supply
contract and the increased purchasing power of a stronger Canadian dollar,
offset partially by a higher number of customers taking additional STBs and
promotional offers.
Amortization expense
Amortization expense of $803 million in Q3 2005 and $2,368 million on a
year-to-date basis in 2005 represent increases of 4.4% and 2.7%, respectively,
compared to the same periods last year. This was a result of an increase in
our capital asset base from capital spending that continues to be higher than
asset retirements.
Net benefit plans cost
The net benefit plans cost of $108 million in Q3 2005 and $315 million on
a year-to-date basis in 2005 represents increases of 77% and 67%,
respectively, compared to the same periods last year. The increases resulted
mainly from:
- a reduction in the discount rate from 6.5% to 6.2%, which resulted in
an increase in the accrued benefit obligation of our pension plans
- a reduction in plan asset base due to the amortization of investment
losses experienced in 2001 and 2002
- fully amortizing in 2004 the savings relating to the transitional asset
that arose upon the adoption of new accounting rules in 1987
- an increase in the pension obligations from the early retirement
program implemented in 2004.
Restructuring and other items
We recorded restructuring and other items of $31 million in Q3 2005 and
$32 million on a year-to-date basis in 2005, which consisted mainly of:
- charges of $22 million in Q3 2005 and $24 million on a year-to-date
basis in 2005 related to new restructuring initiatives for the
involuntary departure of approximately 300 employees
- charges of $9 million in Q3 2005 and $31 million on a year-to-date
basis in 2005 related to relocating employees and closing real estate
facilities that are no longer needed because of the reduction in the
workforce from the 2004 employee departure program.
The year-to-date charges were partly offset by a $25 million credit in Q1
2005 for the reversal of restructuring provisions that were no longer
necessary, since the actual payments made to employees were lower than
estimated.
We recorded restructuring and other items of $1,081 million in Q3 2004
and $1,098 million on a year-to-date basis in 2004, which consisted of:
- a restructuring charge of approximately $985 million in Q3 2004
relating to the employee departure program at Bell Canada
- other costs of $96 million in Q3 2004 mostly for future lease costs for
facilities that were no longer needed, asset write-downs and other
provisions
- a $110 million provision recorded in Q2 2004 for cost overruns on a
contract with the Government of Alberta
partly offset by:
- $75 million recorded in Q2 2004 relating to an agreement reached
between BCE Inc. and MTS to settle lawsuits
- $23 million recognized in Q2 2004 for the reversal of restructuring
provisions that were no longer necessary, since the actual payments
made to employees were lower than estimated.
Net earnings / Earnings per Share (EPS)
Net earnings applicable to common shares for Q3 2005 were $441 million,
or $0.48 per common share, significantly higher than net earnings of
$82 million, or $0.09 per common share, for the same period last year.
Included in the third quarter earnings this year was a net charge of
$21 million for restructuring and other items, compared to a net charge of
$402 million from restructuring and other items and net gains on investments
in Q3 2004. Net earnings before restructuring and other items and net gains on
investments of $462 million, or $0.50 per common share, were down $22 million,
or $0.02 per share, representing a decrease of 3.8% over last year.
The decline in Q3 2005 can be attributed to lower EBITDA and higher
pension and amortization expense, partly offset by net income tax savings,
including the impact from the loss monetization program between Bell Canada
and Bell Canada International Inc. (BCI) (see Related Party Transactions).
On a year-to-date basis, net earnings applicable to common shares were
$1,478 million, or $1.60 per common share, 34% higher than net earnings of
$1,106 million, or $1.20 per common share, for the same period last year.
Included in year-to-date earnings this year was a net gain of $6 million from
net gains on investments and restructuring and other items, compared with a
net charge of $349 million for the same period last year. Net earnings before
restructuring and other items and net gains on investments of $1,472 million,
or $1.59 per common share, were up $17 million, or $0.02 per share,
representing an increase of 1.2% over last year.
On a year-to-date basis, the improvement in EPS before restructuring and
other items and net gains on investments is attributed to a higher EBITDA,
which, combined with the impact from the loss monetization program between
Bell Canada and BCI, more than offset the increase in pension and amortization
expense.
<<
Segmented Analysis
Q3 Q3 % YTD YTD %
2005 2004 CHANGE 2005 2004 CHANGE
-------------------------------------------------------------------------
Operating revenues
Consumer 1,929 1,908 1.1% 5,675 5,591 1.5%
Business 1,516 1,440 5.3% 4,493 4,316 4.1%
Aliant 520 497 4.6% 1,562 1,527 2.3%
Other Bell Canada 500 486 2.9% 1,464 1,428 2.5%
Inter-segment
eliminations (139) (125) (11.2%) (401) (378) (6.1%)
-------------------------------------------------------------------------
Total Bell Canada 4,326 4,206 2.9% 12,793 12,484 2.5%
Other BCE 732 679 7.8% 2,315 2,052 12.8%
Inter-segment
eliminations (107) (107) 0.0% (318) (341) 6.7%
-------------------------------------------------------------------------
Total operating
revenues 4,951 4,778 3.6% 14,790 14,195 4.2%
-------------------------------------------------------------------------
Operating income
Consumer 479 569 (15.8%) 1,557 1,655 (5.9%)
Business 213 245 (13.1%) 674 713 (5.5%)
Aliant 105 71 47.9% 291 245 18.8%
Other Bell Canada 111 (898) n.m. 349 (649) n.m.
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Total Bell Canada 908 (13) n.m. 2,871 1,964 46.2%
Other BCE 49 38 28.9% 252 177 42.4%
-------------------------------------------------------------------------
Total operating
income 957 25 n.m. 3,123 2,141 45.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m.: not meaningful
>>
Consumer revenues
To view BCE chart Consumer Revenues please click here.
http://files.newswire.ca/175/Q3_05_E10.jpg
Consumer revenues increased by 1.1% in the third quarter of 2005 and by
1.5% for the first nine months of 2005 to $1,929 million and $5,675 million,
respectively. Video, data, wireless, and terminal sales and other revenues
contributed 2.0%, 1.1%, 1.0%, and 0.6%, respectively, to overall consumer
revenue growth in Q3 2005, offset partly by a negative contribution of 2.4%
from long distance and 1.2% from local and access services. In the first nine
months of the year, wireless, video, data and terminal sales and other
revenues contributed 1.5%, 1.4%, 1.2%, and 0.3% to the overall growth, offset
partly by a negative contribution from long distance and local and access
services of 1.0% and 1.9%, respectively. Both the quarterly and year-to-date
results for 2005 were driven by the continued expansion of our wireless, video
and high-speed Internet subscriber bases and an increase in video ARPU, offset
partly by lower long distance revenues due to ongoing price competition, as
well as a decline in local and access revenues brought about by an
acceleration in NAS losses and continued wireless long distance prepaid and
VoIP substitution. Although overall consumer revenue growth slowed somewhat
compared with previous quarters, this result was anticipated given increased
competition from cable telephony offerings and other alternative VoIP
providers, which adversely affected long distance and local and access service
revenues.
Wireless
Consumer wireless revenues increased year-over-year both this quarter and
year-to-date, mainly as a result of a higher average number of customers
compared with last year and price increases for certain services and features.
Although subscriber momentum continued during the third quarter of 2005,
fuelled by attractive new handsets, applications such as our '10-4' service
and seasonal "back-to-school" promotions, overall revenue growth was dampened
by a higher proportion of customers choosing prepaid service or postpaid
monthly rate plans that included up to six months of free unlimited local
airtime. In addition, on a year-to-date basis, revenue growth was impacted
negatively by the billing and retention credits issued in Q1 2005 to
compensate customers for billing errors and delays that occurred following
implementation of our new billing platform last year. The issuance of customer
credits returned to normal levels in Q2 2005.
(For further information about our wireless business, please see Wireless
within our Product Line Analysis.)
Video
To view BCE chart Video Revenues please click here.
http://files.newswire.ca/175/Q3_05_E11.jpg
To view BCE chart Video Subscribers please click here.
http://files.newswire.ca/175/Q3_05_E12.jpg
Our video revenues grew by 17.8% this quarter to $251 million from
$213 million last year, as a result of a higher average number of subscribers
and higher ARPU. Similarly, on a year-to-date basis, our video revenues grew
by 12.2% to $708 million.
We had a strong Q3 with the addition of 82,000 new net video customers, a
148% increase compared with the 33,000 net activations achieved in the third
quarter of 2004. These additions contributed to a 14.9% year-over-year
increase in our video customer base to 1,677,000. The strong improvement in
net activations this quarter and year-to-date was driven by the positive
impact of our STB rental program and included the addition of 12,500
subscribers from the acquisition of Cable VDN.
Our ARPU this quarter increased to $51 per month from $48 per month in Q3
2004 as a result of a price increase implemented in March 2005 and up-selling
initiatives, offset partially by bundle and retention discounts. On a year-to-
date basis, ARPU increased by $1 to $49 per month as the March price increase
and a shift in the product mix towards higher priced programming packages were
partially offset by lower pay-per-view revenues and bundle discounts. On
October 1, 2005, we implemented a $2 increase on our basic packages for all
new customers.
Our video churn rate improved by 0.1 percentage points, year-over-year,
to 1.0% this quarter and 0.9% year-to-date, compared with 2004, reflecting the
continued success of our multi-product household strategy and the requirement
that, as of August 1, 2004, all new video customers have contracts.
Signal piracy continues to be a major issue facing all segments of the
Canadian broadcasting industry. During this quarter, we completed the
deployment of a new conditional access system commenced in 2004 (our card swap
program). All new customers since August 2004 have been supplied with the new
system and, over the past year, we have been replacing old smart cards for all
remaining customers. As of July, 2005, customers can only receive direct-to-
home (DTH) video and audio services over the new conditional access system. In
addition to the card swap, we continued our ongoing efforts against television
signal theft, including sophisticated set-top-box tracking systems and
specific point-of-sale practices such as obtaining customer photo
identification and credit card information, aggressive measures to investigate
and initiate legal action against persons engaged in the manufacture, sale and
distribution of signal theft technology, and enforcement of policies with
authorized retailers to combat piracy including a zero tolerance policy for
activities related to signal theft.
Data
Consumer data revenues grew this quarter and year-to-date, fuelled by
growth of 24% in our high-speed Internet subscriber base and an increase in
revenues from our Sympatico.MSN.ca web portal and Bell Sympatico value-added
services. Our Sympatico.MSN.ca portal revenues increased by 58% over the third
quarter of 2004. The portal currently averages 16.3 million unique visitors
per month, or 85% of online Canadians.
Consumer high-speed Internet net additions were stronger this quarter and
year-to-date compared with last year. This was driven by the introduction of
our Basic Lite service in the Ontario market, as well as by footprint
expansion, focused selling efforts and improved retention strategies. The
introduction of lower priced high-speed services, such as Basic Lite, that are
geared towards the very price sensitive segments of the market has expanded
the overall high-speed market, stimulating high-speed service growth and
accelerating the rate of erosion of dial-up Internet service. In Q3 2005, 58%
of Internet gross activations subscribed to high-speed products.
At the beginning of Q4 2005, we launched kidsmania, a subscription-based
service that offers more than 50 interactive and educational games and
activities for children.
(For further information about our data business, please see Data within
our Product Line Analysis.)
Wireline
Local and access revenues, which represents the largest proportion of our
Consumer segment revenues, declined this quarter and year-to-date compared
with the same periods last year, due mainly to NAS declines which resulted in
lower NAS and related SmartTouch feature revenues, offset partly by an
increase in wireline maintenance plans. NAS decreased both this quarter and
year-to-date as a result of losses to competitive local exchange carriers
(CLECs), cable telephony offerings, VoIP providers, continued pressure from
growth in high-speed Internet access which reduces the need for second
telephone lines, and customers substituting wireline with wireless telephone
service. The rate of year-over-year NAS losses increased this quarter as a
competitor expanded the footprint of its low-priced cable telephony offering
in Québec, while several other cable operators launched new telephony
offerings in certain Ontario and Québec markets.
Long distance revenues were lower both this quarter and year-to-date
compared with the same periods last year, mainly reflecting lower average
revenue per minute (ARPM). Lower ARPM reflected competition from non-
traditional long distance providers, the impact of our $5 Long Distance Bundle
and a lower volume of higher priced overseas minutes. Overall minute volumes
in 2005 were slightly lower than last year as usage gains stemming from our
bundle product were more than offset by losses to non-traditional long
distance providers.
(For further information about our wireline business, please see Local
and access and Long distance within our Product Line Analysis.)
Consumer operating income
To view BCE chart Consumer Operating Income please click here.
http://files.newswire.ca/175/Q3_05_E13.jpg
Our Consumer segment reported operating income of $479 million this
quarter, down 15.8% compared with the third quarter of 2004. This decrease was
due primarily to a higher rate of decline in our high-margin residential NAS
wireline customer base, higher expected acquisition costs from stronger
wireless subscriber growth, higher marketing costs related to an increased
level of advertising, higher contact centre costs driven by increased customer
call volume and handle time, as well as to higher amortization expense and
increased net benefit plans cost. This was partially offset by higher revenues
and savings associated with our Galileo cost-reduction initiatives. For the
first nine months of the year, despite revenue growth of 1.5%, operating
income decreased by 5.9%, year-over-year, to $1,557 million as a result of
higher wireless bad debt expense in Q1 2005 and the expense pressures
discussed previously.
Business revenues
To view BCE chart Business Revenues please click here.
http://files.newswire.ca/175/Q3_05_E14.jpg
Business segment revenues for the three and nine months ended September
30, 2005 were $1,516 million and $4,493 million, respectively, representing
increases of 5.3% and 4.1% compared with the same periods one year earlier.
Our SMB and Enterprise units contributed 2.8% and 1.7%, respectively, of the
total growth in business revenues for Q3 2005, while our other business units
(comprised of Bell West and Group Telecom) contributed 0.8%. On a year-to-date
basis, our SMB and Enterprise units accounted for the entire improvement,
contributing 2.7% and 1.4%, respectively. For both the quarter and year-to-
date, the increases in data and wireless revenues from our Enterprise and SMB
units were partially offset by declines in long distance and local and access
revenues, due to further erosion of our legacy wireline business as
competitive pressures intensified and as our customers continued migrating
their voice and data traffic to IP-based systems. The results for 2005 include
the positive contribution to revenues from the acquisition of Group Telecom in
November 2004.
Enterprise
Revenues for our Enterprise unit were positively impacted this quarter by
strong wireless growth, which was fuelled by customers subscribing to higher-
priced plans and greater long distance and roaming usage, and by higher data
revenues, which included proceeds from the sale of customer contracts related
to legacy point-of-sales systems. Data revenue growth was more organic in Q3
2005 as we have now realized the full benefit of the Infostream Technologies
Inc. and Elix Inc. acquisitions made in Q2 2004. In addition, lower long
distance and local and access revenues, stemming from the ongoing erosion of
legacy voice and data services and the re-price of some existing wireline
business in response to competition within the large enterprise market
segment, negatively impacted revenue growth this year.
On a year-to-date basis in 2005, data delivered strong year-over-year
improvement, even when excluding the impact of acquisitions, due to solid
growth of our IP-based connectivity and ICT (or VAS) revenues. ICT revenues
have grown by 40% this year, compared with the first nine months of last year,
mostly as a result of acquisitions, organic growth, and customer outsourcing.
During the quarter, we continued to broaden our ICT solutions portfolio
through acquisitions of The Createch Group, a Québec-based professional
services firm specializing in business process optimization and IT
integration, and a majority interest in end2end Software Corp., a developer of
work flow solutions for the capital markets sector.
We signed a number of new contracts during the quarter that span over a
two to five-year period, including deals with:
- Aéroports de Montréal to provide a fully integrated end-to-end
communications services solution consisting of standard telecom
services, IP telephony, WiFi coverage and digital signage
- Megatrade for standard telecom applications, hosting services and
implementation of an IP-VPN network
- CIBC to provide and manage DSL and IP-VPN services for its remote
automated bank machine (ABM) network.
SMB
The SMB unit delivered its best quarter since the launch of its VCIO
strategy in 2003, contributing significantly to the solid financial
performance of our Business segment. Revenues generated from SMB customers
increased this quarter and on a year-to-date basis as increases in data,
wireless and terminal sales and other revenues more than compensated for the
decreases in long distance and local and access revenues. Despite a highly
competitive market environment, data revenue growth was driven by the
continued strong traction of our VCIO strategy and cross-selling opportunities
with companies acquired in the last year (including Nexxlink Technologies
Inc., and CSB Systems, which are a part of Bell Business Solutions Inc.),
which resulted in higher terminal equipment and VAS sales. The growth in data
revenues in Q3 2005 was tempered somewhat by a reduction in the number of new
DSL high-speed Internet access service connections, due mainly to service
issues associated with the Entourage labour dispute. Long distance revenues
decreased, due mainly to the combined impact of lower volumes and competitive
pricing pressures, and a weakening pay-phone business that is directly
attributable to wireless and Internet substitution. Similarly, local and
access revenues were also lower due to pressure from our declining pay-phone
business, NAS losses to alternative telephony providers, and lower wireline
access installation fees resulting from reduced order activity.
Bell West
Bell West continued to grow its Enterprise and SMB customer bases leading
to increases in local and access and long distance revenues both this quarter
and on a year-to-date basis. However, data revenues decreased, reflecting
lower construction revenue in 2005 compared with last year from a contract to
build a next-generation network for the Government of Alberta (GOA) (Alberta
SuperNet). At the end of Q3 2005, we completed construction of the Alberta
SuperNet and currently are awaiting completion of service acceptance by the
GOA. Continued strong fibre and customer premise equipment (CPE) sales,
particularly from wholesale customers, contributed to higher terminal sales
and other revenue for both the third quarter and first nine months of 2005.
Group Telecom
In November 2004, we acquired the Canadian operations of 360networks
Corporation, including GT Group Telecom Inc., (collectively 360networks) as
well as certain U.S. network assets. This acquisition increased our customer
base and gave us an extensive fibre network across major cities in Western
Canada. The Business segment now reflects the retail portion of this
acquisition, operating in Western Canada as the Group Telecom unit within Bell
Canada.
Business operating income
To view BCE chart Business Operating Income please click here.
http://files.newswire.ca/175/Q3_05_E15.jpg
Business segment operating income for the third quarter and first nine
months of 2005 decreased by 13.1% and 5.5%, respectively, to $213 million and
$674 million, due mainly to higher net benefits plans cost and amortization
expense, as well as to margin pressure from the loss of higher-margin legacy
voice and data business brought to the competition and the continuing shift of
voice and data traffic to lower-margin IP-based growth services. These
negative impacts were partially offset by a year-over-year increase in
revenues.
In the Enterprise unit, operating income decreased for the quarter and
year-to-date, reflecting margin pressure from the shift in product mix towards
IP services, higher operating expenses related to sales activity that should
lead to further migration of customer connections to IP in future quarters, as
well as by higher amortization expense and net benefit plans cost. These
declines were somewhat offset by solid revenue gains and steady progress on
various Galileo-related cost reduction initiatives.
Our SMB unit had lower operating income year-to-date, compared with the
same period in 2004, due to higher amortization expense, higher net benefit
plans cost and higher operating expenses stemming from the recent business
acquisitions of Nexxlink and CSB, offset partially by strong revenue
performance. However, for the quarter, due to more focused cost management,
particularly with respect to non-cost of goods sold related expenses,
operating income improved year-over-year.
Bell West recorded lower operating income in the third quarter and first
nine months of 2005, due primarily to lower data revenues from construction
revenues for the Alberta SuperNet and higher amortization expense. We also
recorded a $110 million provision in the second quarter of 2004 for cost
overruns on the GOA contract, which was recorded under the caption
Restructuring and other items in the Other Bell Canada segment.
Aliant revenues
To view BCE chart Aliant Revenues please click here.
http://files.newswire.ca/175/Q3_05_E16.jpg
Aliant segment revenues were $520 million in the third quarter and
$1,562 million year-to-date, reflecting increases of $23 million, or 4.6%, and
$35 million, or 2.3%, respectively, compared with the same periods last year.
Continued strong growth in wireless and Internet services, as well as a
recovery from the 2004 labour disruption offset declines in other areas due to
impacts of competition, wireless and Internet substitution, and regulatory
restrictions.
Aliant's wireless revenue increased in the third quarter and year-to-
date, compared with the same periods last year, driven by a 10.9% year-over-
year increase in Aliant's wireless customer base and higher ARPU. Subscriber
results included a 25% increase in digital customers, reflecting Aliant's
strong market position that is supported by a comprehensive dealer network,
broad product selection, attractive pricing offers and extensive service area
coverage. In addition, ARPU increased in the quarter, reflecting the impacts
of a higher percentage of customers subscribing to digital service and an
increase in average minutes of use.
Data revenues increased in the third quarter, but declined on a year-to-
date basis, as higher Internet revenues were more than offset by other data
revenue declines from the continued rationalization of circuit networks by
customers and competitive pricing pressures. The CRTC's CDN decision also had
a negative impact on data revenues. The negative impact from the CDN decision
amounted to $1 million in the quarter and $6 million year-to-date. The growth
in Internet revenues was attributable to year-over-year subscriber growth of
6.9%, reflecting a 40% growth in Aliant's high-speed Internet customer base.
The expansion of the subscriber base reflected expansion of high-speed
Internet service into new areas, the migration of dial-up customers to higher-
speed products, successful marketing programs and an emphasis on bundling
Internet service with other products. The impact of Aliant's aggressive
introductory offers that began late last year and ended in the first quarter
of 2005, combined with a larger number of customers benefiting from discounts
received with value packages, resulted in lower ARPU.
Intense competition in the long distance market, substitution of long
distance calling with Internet and wireless options by customers, and the use
of contact centre management tools (such as integrated voice response systems)
that reduce the duration of calls resulted in lower long distance revenues in
the third quarter and first nine months of 2005, compared with the same
periods last year.
Local and access revenues in the third quarter and year-to-date decreased
over the same periods in 2004. This reflected a 1.6% decline in the NAS
customer base since Q3 2004, which occurred due to losses to the competition
and technology substitution. In addition, the CRTC's regulatory restrictions
continue to place pressure on Aliant's local and access revenue with respect
to bundling and packaging of local services with other non-regulated services,
and limitations imposed with respect to customer win-back promotions.
Moreover, enhanced service features revenue also declined as a higher number
of customers received bundling discounts.
Terminal sales and other revenues increased for the third quarter and
year-to-date, due mainly to higher product sales reflecting Aliant's recovery
from its 2004 labour disruption.
Aliant operating income
Aliant's operating income was $105 million in the third quarter and
$291 million year-to-date, reflecting an increase of $34 million, or 47.9%,
and $46 million, or 18.8%, respectively, compared with the same periods last
year. The full impact of growth and recovery from the 2004 labour disruption
was partially offset by the impact of the CDN decision and an increase in
pension and other post-employment benefits costs. Operating expense increases
required to drive revenue growth were contained by sound expense management
and reflected the cost savings from Aliant's 2004 voluntary early retirement
program.
Other Bell Canada revenues
Other Bell Canada segment revenues of $500 million for the quarter and
$1,464 million for the first nine months of 2005, reflected increases of
$14 million, or 2.9%, and $36 million, or 2.5%, respectively, compared with
the same periods last year. These improvements were due mainly to higher
revenues at our wholesale unit, resulting from the acquisition of the
wholesale portion of 360networks in the fourth quarter of last year, fibre and
access capacity sales in Q3 2005, the early termination of a cross-border
facilities contract in Q2 2005 and a favourable ruling by the CRTC with
respect to subsidies for serving high cost areas at Télébec Limited
Partnership (Télébec) in Q1 2005. This was partly offset by the impact of the
CDN decision, which reduced revenues by $15 million in Q3 2005 and $41 million
year-to-date, and by continued pressure on long distance and data revenues due
to competitive pricing and customers migrating services onto their own network
facilities.
Other Bell Canada operating income
Operating income for the Other Bell Canada segment was $111 million this
quarter, up from a loss of $898 million in Q3 2004, while on a year-to-date
basis operating income was $349 million compared with a loss of $649 million
in the same period last year. The year-over-year increases resulted mainly
from restructuring and other items recorded in Q3 2004 related mostly to the
employee departure program, various Galileo-related cost saving initiatives
and an improvement in year-to-date bad debt expense. These impacts were
partially offset by incremental salaries and higher cost of goods sold
associated with the wholesale operations of 360networks acquired in Q4 2004,
the impact of the CDN decision and higher costs associated with a larger
volume of termination minutes stemming from a greater southbound U.S. traffic.
Other BCE Revenues
Bell Globemedia's revenues for the quarter were $335 million, up 10.9%
from Q3 of last year. On a year-to-date basis, Bell Globemedia's revenues grew
7.4% to $1,090 million. Total advertising revenues grew by 11.5% this quarter
and by 8.0% year-to-date, reflecting strong television ratings as CTV
Television held 10 of the top 10 and 15 of the top 20 regularly scheduled
programs during the summer season among all viewers and increased classified
and national advertising sales at The Globe and Mail. On a year-to-date basis
strong growth in advertising revenues in conventional and specialty television
helped to offset the loss of advertising from hockey broadcasts on our sports
specialty channels TSN and RDS. Bell Globemedia's subscriber revenues grew by
8.2% this quarter and by 5.9% year-to-date, reflecting strong specialty
channel growth and increased online subscription at The Globe and Mail, as
well as an increase in the home delivery rate for The Globe and Mail
implemented at the beginning of 2005.
Telesat's revenues increased by 23% to $112 million this quarter and by
37% to $357 million on a year-to-date basis, primarily as a result of higher
revenues from its network for Interactive Distance Learning services, its
acquisition of The SpaceConnection, Inc. (SpaceConnection), and Ka-band
revenues from Anik F2. SpaceConnection was acquired in January 2005 and is a
provider of programming-related satellite transmission services to major U.S.
television networks and cable programmers.
Anik F2 began commercial service in October 2004 and was the world's
first satellite to commercialize the Ka frequency band, enabling two-way high-
speed Internet access services to consumers and businesses in Canada and the
U.S. In May 2005, Telesat launched its new two-way high-speed Internet access
service using the Ka band of Anik F2. This service is available to consumers
through multiple distributors across Canada, including Barrett Xplore Inc., a
wireless broadband service provider, Télébec, NorthernTel Limited Partnership,
a subsidiary of Northwestel Inc. and Infosat Communications Inc.
On September 8, 2005, Telesat announced the launch of its new satellite,
Anik F1R. On October 1, 2005, this satellite was transferred into service and
is now providing capacity for broadcasters, home satellite television services
and telecommunications.
<<
Q3 Q3 % YTD YTD %
2005 2004 CHANGE 2005 2004 CHANGE
-------------------------------------------------------------------------
Bell Globemedia 335 302 10.9% 1,090 1,015 7.4%
Telesat 112 91 23.1% 357 260 37.3%
CGI 270 274 (1.5%) 818 736 11.1%
Other 15 12 25.0% 50 41 22.0%
-------------------------------------------------------------------------
Other BCE revenues 732 679 7.8% 2,315 2,052 12.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Our share of CGI revenues decreased this quarter by 1.5% to $270 million
as it was no longer benefiting from a year-over-year uplift in revenues from
its purchase of AMS last year. However, on a year-to-date basis revenues
increased by 11.1% to $818 million, reflecting the contribution from the AMS
acquisition.
Other BCE operating income
Operating income for the Other BCE segment grew by 29% this quarter to
$49 million and by 42% to $252 million on a year-to-date basis, reflecting
growth in operating income at Bell Globemedia, Telesat and CGI.
Bell Globemedia's operating income grew by 26% this quarter and by 37% on
a year-to-date basis, reflecting revenue gains and lower sports specialty
programming costs due to the NHL lockout. Telesat's operating income grew by
10.3% this quarter and by 18.3% on a year-to-date basis, reflecting higher
revenues, offset partly by Space-Connection's operating expenses, network
equipment costs for Interactive Distance Learning services and higher
amortization expense related to Anik F2 and Space-Connection. Our share of
CGI's operating income increased by 16.7% this quarter and by 4.3% year-to-
date, reflecting synergies achieved from the AMS acquisition in 2004 and the
termination of a number of unprofitable contracts.
Product Line Analysis
<<
REVENUES Q3 Q3 % YTD YTD %
2005 2004 CHANGE 2005 2004 CHANGE
-------------------------------------------------------------------------
Local and access 1,367 1,395 (2.0%) 4,103 4,175 (1.7%)
Long distance 510 589 (13.4%) 1,566 1,767 (11.4%)
Wireless 801 727 10.2% 2,285 2,076 10.1%
Data 1,001 915 9.4% 2,918 2,677 9.0%
Video 251 213 17.8% 708 631 12.2%
Terminal sales and
other 396 367 7.9% 1,213 1,158 4.7%
-------------------------------------------------------------------------
Total Bell Canada 4,326 4,206 2.9% 12,793 12,484 2.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Local and access
To view BCE chart Local and access Revenues please click here.
http://files.newswire.ca/175/Q3_05_E17.jpg
Local and access revenues of $1,367 million for the quarter and
$4,103 million year-to-date decreased by 2.0% and 1.7%, respectively, compared
with the same periods in 2004, mainly as a result of lower NAS and lower Smart-
Touch feature revenues, partly offset by gains from wireline insurance and
maintenance plans.
NAS in service declined by 322,000 or 2.5% since the third quarter of
2004, as a result of losses to CLECs, cable operators offering local telephone
service, and VoIP providers, as well as continued pressure from growth in high-
speed Internet access that reduces the need for second telephone lines and
wireline to wireless substitution. This year-over-year decrease reflected a
higher level of NAS losses than previous quarters, as a major cable operator
expanded the footprint of its low-priced cable telephony offering in certain
of our Québec markets and other competitors launched new cable telephony
offerings in certain Ontario and Québec markets.
Long distance
To view BCE chart Long Distance Revenues please click here.
http://files.newswire.ca/175/Q3_05_E18.jpg
Long distance revenues were $510 million for the quarter and
$1,566 million for the first nine months of 2005, reflecting year-over-year
decreases of 13.4% and 11.4%, respectively, compared with the same periods in
2004. Lower long distance revenues affected all Bell Canada segments,
particularly our Consumer and Business segments. Overall minute volumes
increased slightly both this quarter and year-to-date by 1.1% and 1.7%,
respectively, to 4,484 million and 13,739 million conversation minutes,
compared with the same periods in 2004. However, ARPM decreased by $0.015 in
both the third quarter and first nine months in 2005 to reach $0.105 and
$0.104, respectively, reflecting competitive pricing pressures in our
consumer, business and wholesale markets, the impact of our $5 Long Distance
Bundle (which we stopped offering at the beginning of Q3 2005), and a higher
volume of minutes from international prepaid calling cards.
Wireless
To view BCE chart Wireless Revenues please click here.
http://files.newswire.ca/175/Q3_05_E19b.jpg
To view BCE chart Wireless Subscribers please click here.
http://files.newswire.ca/175/Q3_05_E20.jpg
Gross wireless activations increased by 27% this quarter to 358,000, up
from 281,000 for the same period last year. Postpaid gross activations
accounted for 68%, or 243,000, of the total number of gross activations this
quarter, representing a 14.1% increase compared with Q3 2004, while prepaid
gross activations improved by 69% to make up the other 115,000 gross
activations. Postpaid growth was fuelled by the launch of several new
handsets, innovative applications such as our '10-4' service, competitive rate-
plan promotions, as well as our increased presence in western Canada. The
significantly higher number of prepaid gross activations was driven mainly by
the successful launch of Solo Mobile and the contribution of subscribers from
Virgin Mobile. These results were achieved despite aggressive wireless offers
in the market from our competitors that featured zero-dollar handsets and the
longer-than-expected extension of certain seasonal promotions. Similarly, on a
year-to-date basis, we had 1,016,000 gross activations, representing a 25.3%
increase over the same period last year, comprising 717,000 postpaid gross
activations and 299,000 prepaid gross activations.
Our postpaid churn rate increased to 1.5% both this quarter and year-to-
date from 1.0% and 1.1% in the same respective periods in 2004. The year-over-
year increases reflected a stricter policy with respect to the application of
customer credits and discounts and to the granting of hardware upgrades, as
well as some residual impacts from our billing system migration that caused
dissatisfaction among certain of our customers who deferred service
deactivation until expiry of their contracts. Prepaid churn decreased to 1.6%
and 1.8% for the third quarter and first nine months of 2005, respectively,
from 1.9% for the same periods last year, due primarily to the success of our
retention initiatives with respect to inactive customers, which included a new
tiered prepaid pricing structure introduced last February designed to
stimulate usage by charging customers $0.30 per minute for the first two
minutes with the remainder of the call at $0.05 per minute. Overall, our
blended churn rate increased to 1.5% this year quarter and 1.6% year-to-date,
compared with 1.2% and 1.3%, respectively, for same periods in 2004.
As a result of strong year-over-year growth in gross activations, the
number of net additions also increased despite higher overall customer churn.
Net additions of 123,000 in Q3 2005 represented a 12.8% increase over the same
quarter last year. This improvement was driven by a more than four-fold
increase in prepaid net additions to 73,000, offset partly by lower postpaid
net additions, which decreased by 47% to 50,000 due to higher churn. On a year-
to-date basis, our 306,000 net additions were 3.4% higher than the same period
last year, despite higher deactivations and the cancellation of 45,000 non-
paying customer accounts in Q1 2005 related to our billing system migration.
On a year-to-date basis, 53% of net additions were on postpaid rate plans.
Accordingly, our total cellular and PCS subscriber base expanded by 11.1% to
reach 5,231,000 as at September 30, 2005 of which 74% were on postpaid rate
plans.
Wireless service revenues grew 10.2% this quarter and 10.1% year-to-date
to $801 million and $2,285 million, respectively, compared with the same
periods last year. In each case, the year-over-year improvement was driven by
subscriber growth of 11.1% and solid ARPU results.
<<
Q3 Q3 % YTD YTD %
2005 2004 CHANGE 2005 2004 CHANGE
-------------------------------------------------------------------------
ARPU ($/month) 51 50 2.0% 49 49 -
Postpaid 63 63 - 60 61 (1.6%)
Prepaid 14 12 16.7% 13 12 8.3%
Cellular & PCA Gross
Activations (k) 358 281 27.4% 1,016 811 25.3%
Postpaid 243 213 14.1% 717 622 15.3%
Prepaid 115 68 69.1% 299 189 58.2%
Churn (average
per month) 1.5% 1.2% (0.3)pts 1.6% 1.3% (0.3)pts
Postpaid 1.5% 1.0% (0.5)pts 1.5% 1.1% (0.4)pts
Prepaid 1.6% 1.9% 0.3 pts 1.8% 1.9% 0.1 pts
Cellular & PCS Net
Activations (k)(1) 123 109 12.8% 306 296 3.4%
Postpaid(1) 50 95 (47.4%) 162 242 (33.1%)
Prepaid 73 14 n.m. 144 54 n.m.
Cellular & PCS
Subscribers (k) 5,231 4,708 11.1% 5,231 4,708 11.1%
Postpaid 3,886 3,595 8.1% 3,886 3,595 8.1%
Prepaid 1,345 1,113 20.8% 1,345 1,113 20.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m.: not meaningful
>>
(1) In Q1 2005, we cancelled 45,000 non-paying postpaid customer accounts
due to some residual issues stemming from our 2004 billing system
migration.
Blended ARPU progressively improved each month of the third quarter,
reaching $51 per month compared with $50 in Q3 2004. Despite a higher number
of new prepaid activations, this improvement was achieved primarily as a
result of price increases for certain services and features (including 911,
411, outbound text messaging, out-of-bundle minutes, reinstatement of
connection fees on low-end consumer rate plans and introduction of hardware
upgrade fees), a higher penetration of value-added services, increased data
usage, and the continued strong wireless performance of our Business segment
whose customers typically subscribe to higher-priced plans and utilize more
long distance, roaming and data services. On a year-to-date basis, blended
ARPU remained stable at $49 per month.
Although our postpaid ARPU for the third quarter remained stable versus
last year, at $63 per month, it increased on a sequential basis by $2. Year-
over-year, higher value-added service and data revenues, fuelled by the
growing popularity of text messaging and mobile Internet browser usage, were
offset by lower out-of-bundle airtime usage, resulting from the popularity of
certain price plans with an unlimited local use feature. The sequential
increase in postpaid ARPU in Q3 2005 was driven by the success of some new
higher-priced plans targeted at heavy users and Blackberry(TM) customers,
continued traction of our '10-4' service, and the price increases that we
implemented at the beginning of the quarter. On a year-to-date basis, postpaid
ARPU declined by $1 to $60 per month, compared with the first nine months of
2004. The decrease can be attributed mainly to both the higher take-up rate of
lower-priced plans and the application of customer billing and retention
credits in Q1 2005.
Prepaid ARPU increased to $14 per month this quarter and to $13 per month
year-to-date, compared with $12 per month for the same periods last year. The
improvement for Q3 2005 can be explained by the addition of higher-than-
average ARPU subscribers from Solo and Virgin Mobile and higher overall usage
brought about by a change in our prepaid pricing structure during Q1 2005.
Year-to-date, higher prepaid ARPU for 2005 was also due to changes in the
recognition of deferred revenues in Q2 2005 related to unused prepaid minutes
expiring.
Data
To view BCE chart Data Revenues please click here.
http://files.newswire.ca/175/Q3_05_E21.jpg
To view BCE chart High-Speed Edition Subscribers please click here.
http://files.newswire.ca/175/Q3_05_E22.jpg
Our data revenues increased by 9.4% this quarter and by 9.0% on a year-to-
date basis to $1,001 million and $2,918 million, respectively, compared with
the same periods last year. In the third quarter, we continued to benefit from
growth in our high-speed Internet customer base and our ICT (or VAS) and VCIO
strategies in our Enterprise and SMB business units. Data revenues also were
impacted favourably by the sales of certain customer contracts and fibre and
access capacity in our Enterprise and wholesale units. The year-to-date
improvement was driven primarily by growth in high-speed Internet, ICT (or
VAS) and IP-based services, as well as to business acquisitions completed over
the last twelve months. In addition, the year-to-date results also reflected a
one-time benefit from the early termination of a cross-border facilities
contract in Q2 2005. For 2005, the year-over-year increases in both the
quarter and year-to-date were partially offset by lower construction revenues
from the GOA contract, a decline in legacy data revenues, price competition
and the CDN decision which adversely affected revenues by $16 million in Q3
and $47 million year-to-date.
The number of high-speed Internet subscribers increased by 106,000 this
quarter and by 326,000 on a year-to-date basis, with a total subscriber count
of 2,134,000. Stronger high-speed Internet net additions both this quarter and
year-to-date were driven by the introduction of our Basic Lite service in the
Ontario market, as well as by footprint expansion, focused selling efforts,
and improved retention strategies. The introduction of lower-priced, high-
speed services that are geared towards the price sensitive segments of the
market (such as our Basic Lite service) has expanded the overall high-speed
market, stimulating high-speed service growth and accelerating the rate of
erosion of dial-up Internet services. Our high-speed Internet access footprint
in Ontario and Québec reached 85% of homes and business lines passed at the
end of the third quarter, compared with 81% at the same time last year.
Total dial-up customers decreased to 621,000 at the end of the quarter
from 775,000 at the end of Q3 2004, as dial-up customers migrated to higher-
speed Internet services.
Video
See discussion under Consumer Segment.
Terminal sales and other
Terminal sales and other revenues were $397 million this quarter, or
8.2% higher than Q3 2004, and $1,214 million year-to-date, or 4.8% higher than
the same period last year. In each case, the increase was due mainly to the
favourable impact from several acquisitions (including those of Group Telecom
and Entourage), growth in hardware sales primarily at Aliant and recovery from
the Aliant labour disruption in 2004. This was offset partially by the impact
of consumer promotions on wireless handset revenues despite an increase in the
volume of devices sold. On a year-to-date basis, the increase was also due to
higher equipment sales to business customers.
Other Items
Other income (expense)
Other expense of $1 million in Q3 2005 represents a decrease of
$334 million over Q3 2004. The difference resulted mainly from:
- net gains on investments in Q3 2004 of $217 million on the sale of BCE
Inc.'s 15.96% interest in MTS and $108 million on the sale of Bell
Canada's remaining 3.4% interest in YPG General Partner Inc. (YPG)
- a $13 million charge in Q3 2005 relating to the tax loss monetization
program between Bell Canada and BCI (see Related Party Transactions)
partly offset by:
- an increase in foreign exchange gains.
On a year-to-date basis, other income decreased by $363 million to
$30 million, which was further impacted by a $20 million charge in Q2 2005
relating to the tax loss monetization program between Bell Canada and BCI.
Interest expense
Interest expense of $247 million in Q3 2005 and $741 million on a
year-to-date basis in 2005 represents declines of 2.4% and 2.2%, respectively,
compared to the same periods last year. This was mainly from lower average
interest rates from the refinancing of debt at lower rates.
Income taxes
Income taxes of $193 million in Q3 2005 reflected a significant increase
compared to an income tax credit of $44 million for the same period last year.
On a year-to-date basis, income taxes increased by $176 million to
$687 million compared to the first nine months of 2004. The increases were
primarily from:
- higher pre-tax earnings
- tax savings realized in Q3 2004 on the $325 million of gains on the
sale of MTS and YPG due to the availability of capital loss
carryforwards, partly offset by $45 million of restructuring charges
that were not tax-affected
partly offset by:
- $99 million of savings resulting from the tax loss monetization program
between Bell Canada and BCI (see Related Party Transactions).
Non-controlling interest
Non-controlling interest of $57 million in Q3 2005 represents an increase
of 21%, compared to the same period last year, which is mainly due to higher
net earnings at Aliant and Bell Globemedia.
Non-controlling interest of $193 million on a year-to-date basis in 2005
represents a 44% increase over the same period last year. It was reduced in
2004 by the $110 million provision on the contract with the Government of
Alberta recorded in Q2 2004, as MTS owned a 40% interest in Bell West until
August 2004.
Discontinued operations
Discontinued operations of $28 million on a year-to-date basis in 2004
consist mainly of a $26 million net gain on the sale of our 64% interest in
Emergis Inc. (Emergis).
------------------------
Financial and Capital Management
This section tells you how we manage our cash and capital resources to
carry out our strategy and deliver financial results. It provides an
analysis of our financial condition, cash flows and liquidity on a
consolidated basis.
Capital Structure
<<
Q3 2005 Q4 2004
-------------------------------------------------------------------------
Debt due within one year 1,263 1,276
Long-term debt 12,630 11,809
Less: Cash and cash equivalents (475) (380)
-------------------------------------------------------------------------
Total net debt 13,418 12,705
Non-controlling interest 2,892 2,908
Total shareholders' equity 14,610 14,024
-------------------------------------------------------------------------
Total capitalization 30,920 29,637
-------------------------------------------------------------------------
Net debt to capitalization 43.4% 42.9%
-------------------------------------------------------------------------
Outstanding share data (in millions)
Common shares 927.3 925.9
Stock options 26.9 28.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Our net debt to capitalization ratio was 43.4% at the end of Q3 2005,
compared to 42.9% at the end of 2004. This resulted from higher net debt,
partly offset by an increase in total shareholders' equity.
Net debt increased by $713 million to $13,418 million in the first nine
months of 2005. The increase is attributed to $450 million of obligations
under capital leases relating to the renewal of a number of lease financing
arrangements and $396 million in cash invested in business acquisitions and
other investments.
Total shareholders' equity increased $586 million to $14,610 million in
the first nine months of 2005. This represents net earnings after the
dividends we declared on common and preferred shares in the first nine months
of 2005.
Cash Flows
The table below is a summary of the flow of cash in to and out of BCE.
<<
YTD YTD
Q3 2005 Q3 2004 2005 2004
-------------------------------------------------------------------------
Cash flows from operating
activities 1,686 1,828 4,075 4,212
Capital expenditures (968) (811) (2,619) (2,318)
Other investing activities - (2) (26) 133
Cash dividends paid on
common shares (306) (277) (889) (831)
Cash dividends paid on
preferred shares (21) (21) (64) (64)
Cash dividends paid by
subsidiaries to
non-controlling interest (47) (44) (157) (139)
-------------------------------------------------------------------------
Free cash flow 344 673 320 993
Business acquisitions (62) (646) (180) (952)
Business dispositions - 4 - 20
Increase in investments (75) (12) (216) (20)
Decrease in investments - 707 7 713
Net issuance of equity
instruments 12 8 25 16
Net issuance (repayment)
of debt instruments (76) 85 270 (217)
Financing activities of
subsidiaries with third
parties (21) (4) (59) (51)
Other financing activities (27) (18) (82) (34)
Cash provided by discontinued
operations - 12 10 196
-------------------------------------------------------------------------
Net increase in cash and
cash equivalents 95 809 95 664
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Cash from operating activities
Cash from operating activities decreased 7.8%, or $142 million, to
$1,686 million in Q3 2005, compared to Q3 2004. This was mainly a result of:
- a decrease in receipts from securitization of accounts receivable of
$145 million
- a $75 million settlement payment from MTS in Q3 2004
partly offset by:
- a decrease in taxes paid of $107 million resulting from a refund
received in Q3 2005.
Cash from operating activities decreased 3.3%, or $137 million, to
$4,075 million in the first nine months of 2005. Year-to-date cash from
operating activities was further impacted by:
- an increase of $106 million in payments relating to the employee
departure programs at Bell Canada and Aliant
- an increase of $83 million in pension and other benefit plan payments,
due mainly to Aliant's voluntary contribution of $60 million in Q1 2005
- a net increase in income taxes paid of $61 million, primarily related
to the final instalment for 2004 paid in Q1 2005
which were substantially offset by:
- an improvement in cash earnings coming from higher EBITDA
- an improvement in accounts receivable collections, partly due to 2004
being impacted negatively by the implementation of a new wireless
billing platform.
Free cash flow
Our free cash flow this quarter was $344 million, down from free cash
flow of $673 million in the third quarter of last year. The decrease is due
mainly to:
- a decrease of $142 million in cash from operating activities, as
described above
- an increase in capital expenditures of $157 million
- an increase in dividends paid of $32 million.
Year-to-date free cash flow of $320 million, down from free cash flow of
$993 million, was impacted further by Telesat insurance proceeds of
$179 million received in the first nine months of 2004.
Capital expenditures
Capital expenditures were $968 million in Q3 2005, or 20.0% of revenues.
This was 19.4% higher than the capital expenditures of $811 million, or 17.0%
of revenues, in Q3 2004. On a year-to-date basis, capital expenditures were
$2,619 million in the first nine months of 2005, or 17.7% of revenues. This
was 13.0% higher than the capital expenditures of $2,318 million, or 16.3% of
revenues, in the same period last year. The increases reflect the strategic
investments in the Consumer segment, which include the FTTN expansion, the
initial deployment of EVDO in certain of our markets, information technology
(IT) efficiency projects to deliver cost savings, growth-related spending to
support higher customer demand, as well as a return to more normal spending
levels at Aliant after its labour disruption in 2004.
Other investing activities
Cash from other investing activities increased by $2 million in Q3 2005,
compared to Q3 2004, and decreased by $159 million in the first nine months of
2005, compared to the same period last year. In 2004, cash from other
investing activities included insurance proceeds that Telesat received for a
malfunction on the Anik F1 satellite, amounting to $136 million in Q2 2004 and
$179 million in the first nine months of 2004.
Cash dividends paid on common shares
We paid a dividend of $0.33 per common share in Q3 2005, which is $0.03
more than the dividend we paid in Q3 2004. On a year-to-date basis, we paid
$0.99 per common share in the first nine months of 2005, compared to $0.90 per
common share in the same period in 2004.
In December 2004, the board of directors of BCE Inc. approved an increase
of 10% or $0.12 per common share in the annual dividend on BCE Inc.'s common
shares. As a result, starting with the quarterly dividend paid on April 15,
2005, we expect to pay quarterly dividends on BCE Inc.'s common shares of
approximately $306 million, based on the revised dividend policy. This assumes
that there are no significant changes in the number of outstanding common
shares. The total quarterly dividends equal $0.33 per common share, based on
approximately 927 million common shares outstanding at September 30, 2005.
Business acquisitions
We invested $62 million in business acquisitions in Q3 2005 and
$180 million in the first nine months of 2005. This consisted mainly of Bell
Canada's acquisition of Nexxlink in the first half of the year for $68 million
and a number of other businesses.
We invested $646 million in business acquisitions in Q3 2004 and
$952 million in the first nine months of 2004. This consisted of:
- our purchase of MTS' 40% interest in Bell West in Q3 2004 for
$646 million to give Bell Canada 100% ownership of Bell West
- our 28.9% proportionate share of the cash paid for CGI's acquisition of
American Management Systems Incorporated (AMS) for $168 million
- Bell Canada's purchase of:
- a 100% interest in Infostream Technologies Inc.
- 100% of the assets required to carry on the business of Charon
Systems Inc.
- a 100% interest in Accutel Conferencing Systems Inc. (Canada) and
certain branches of Accutel Conferencing Systems (U.S.)
- a 75.8% interest in Elix Inc.
Increase in investments
Cash flows used for investments increased by $63 million to $75 million
in Q3 2005, compared to the same period last year, due to an increase in
highly liquid short-term investments.
On a year-to-date basis, cash flows used for investments increased by
$196 million to $216 million for the first nine months of 2005, compared to
the same period last year. Year-to-date investment activity in 2005 reflects
an investment by Bell Canada in Q1 2005 of US $100 million, for an approximate
12% interest, in Clearwire Corporation, a privately held company that offers
advanced IP-based wireless broadband communications services.
Debt instruments
We repaid $76 million of debt, net of issues, in Q3 2005. The repayments
included $150 million in debentures at Bell Canada, decreased borrowings in
notes payable and bank advances of $65 million, and a $25 million reduction in
Bell Globemedia's borrowings under its credit facilities. The issuances
consisted of $200 million in debentures at Bell Canada.
On a year-to-date basis in 2005, we issued $270 million of debt, net of
repayments. The issuances included $900 million in debentures at Bell Canada
and $150 million in medium-term notes at Aliant. The repayments included
$750 million in debentures at Bell Canada.
We issued $85 million of debt, net of repayments, in Q3 2004. The issues
included a net increase of $173 million in notes payable and bank advances.
The repayments included a $60 million reduction in Bell Globemedia's
borrowings under its credit facilities.
On a year-to-date basis in 2004, we repaid $217 million of debt, net of
issues. The issuances were mainly at Bell Canada, which issued $450 million in
debentures, and Bell Globemedia, which issued $300 million of senior notes and
drew $50 million under its credit facilities. BCE Inc. repaid $351 million in
retractable preferred shares and Bell Canada repaid $624 million in debentures
and $114 million of bank debt.
Cash relating to discontinued operations
Cash provided by discontinued operations was $196 million in the first
nine months of 2004. This consisted mainly of net cash proceeds of
$315 million from the sale of Emergis and $285 million from the sale of
Emergis' U.S. health operations and $96 million of cash generated from
Emergis' operations. This was partly offset by the deconsolidation of Emergis'
cash on hand of $512 million at December 31, 2003.
Credit Ratings
The table below lists our key credit ratings at November 1, 2005. On
May 4, 2005, S&P(1) and DBRS(2) confirmed their ratings for BCE Inc. and Bell
Canada, but revised their outlooks from stable to negative. On May 16, 2005,
Moody's(3) confirmed its ratings for BCE Inc. and Bell Canada, but revised its
outlook from stable to negative.
<<
BELL
BCE INC. CANADA
S&P DBRS MOODY'S S&P DBRS MOODY'S
-------------------------------------------------------------------------
Commercial A-1 R-1 P-2/ A-1 R-1 P-2/
paper (mid) (low)/ stable (mid) (mid)/ stable
stable negative
Extendable A-1 R-1 - A-1 R-1 -
commercial (mid) (low)/ (mid) (mid)/
notes stable negative
Long-term A-/ A/ Baa1/ A/ A (high)/ A3/
debt negative negative negative negative negative negative
Preferred P-2 Pfd-2/ - P-2 Pfd-2 -
shares (high) negative (high) (high)/
negative
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Standard & Poor's, a division of The McGraw Hill Companies, Inc.
(2) Dominion Bond Rating Services Limited
(3) Moody's Investors Service Inc.
>>
Related Party Transaction
BCI loss utilization transaction
On April 15, 2005, 3787915 Canada Inc., a wholly-owned subsidiary of Bell
Canada, acquired $17 billion in preferred shares from 3787923 Canada Inc., a
wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds to
advance $17 billion to BCI through a subordinated interest-free loan. BCI then
advanced $17 billion to 3787915 Canada Inc. by way of a subordinated
interest-bearing demand loan, the funds being used to repay a daylight loan
granted to 3787915 Canada Inc. to make the initial preferred share investment.
The dividend rate on the preferred shares was equal to 5.1%, which was
essentially the same as the interest rate on the loan.
3787915 Canada Inc. had the legal right and intention to offset the
demand loan payable to BCI and the investment in preferred shares of 3787923
Canada Inc. As a result, these items and the related interest expense and
dividend income were presented on a net basis. The tax savings of $99 million,
resulting from the interest expense, were presented as a reduction of income
tax expense.
This transaction was unwound on August 18, 2005, and was part of a tax
loss consolidation strategy that followed the transaction steps laid out in an
advance tax ruling granted by the Canada Revenue Agency to Bell Canada and
BCI. The transaction also received the approval of the Ontario Superior Court
of Justice, which is supervising BCI's voluntary plan of arrangement pursuant
to which BCI is monetizing its assets and resolving outstanding claims against
it, with the ultimate objective of distributing the net proceeds to its
shareholders and dissolving the company.
BCI will be compensated for the use of its losses by Bell Canada through
a capital contribution of $87 million that will be made by BCE Inc. for 88% of
the tax savings. BCE Inc.'s ownership interest in BCI remains at 62%. As a
result:
- BCE Inc.'s carrying value of its investment in BCI was increased to
reflect the increase in BCE Inc.'s share of the expected proceeds upon
BCI's eventual liquidation
- a charge to other income was recorded to reflect the non-controlling
interest's portion of the capital contribution to be made by BCE Inc.
Liquidity
Our sources of liquidity and cash requirements remain substantially
unchanged from those described in the BCE 2004 MD&A.
Commitment under the deferral account
The deferral account resulted from the CRTC's second price cap decision
of May 2002, which requires us to fund initiatives such as service
improvements, reduced customer rates and/or customer rebates. We estimate our
commitment under the deferral account to be approximately $148 million at
September 30, 2005 and anticipate that it will be reduced to approximately
$130 million by December 31, 2005, primarily due to the impact of the CDN
decision. We expect to clear most of this amount in 2006 by implementing the
initiatives that are approved by the CRTC for this purpose.
------------------------
Recent Developments in Legal Proceedings
This section provides a description of recent developments in certain of
the legal proceedings involving BCE described in the BCE 2004 AIF, filed
by BCE Inc. with the Canadian securities commissions (available on BCE
Inc.'s website at www.bce.ca and on SEDAR at www.sedar.com ) and with the
U.S. Securities and Exchange Commission (SEC) under Form 40-F (available
on EDGAR at www.sec.gov ), as subsequently updated in BCE Inc.'s
2005
First Quarter MD&A dated May 3, 2005 (BCE 2005 First Quarter MD&A) and
BCE Inc.'s 2005 Second Quarter MD&A dated August 2, 2005 (BCE 2005 Second
Quarter MD&A) also filed by BCE Inc. with the Canadian securities
commissions (available on BCE Inc.'s website and on SEDAR) and with the
SEC under Form 6-K (available on EDGAR).
Lawsuits related to Bell Canada International Inc. (BCI)
6.75% and 6.50% Debenture holders lawsuit
On September 1, 2005, BCE and BCI announced that the Ontario Superior
Court of Justice (Court) had approved the agreement reached on August 18, 2005
dismissing a class action lawsuit by former holders of BCI's $250 million
6.75% convertible unsecured subordinated debentures against BCI, BCE and
certain current and former directors of BCI. The Court approval provided for
the dismissal of the action as against all defendants and completely disposed
of the litigation without any payment by any such defendants in respect of
damages.
A similar action commenced by the Caisse de dépôt et placement du Québec
(Caisse) with respect to the Caisse's holdings of BCI's $150 million 6.50%
convertible unsecured subordinated debentures has been disposed of on the same
basis, pursuant to an agreement previously reached with the Caisse and
approved by the Court.
------------------------
Risks That Could Affect Our Business
This section describes general risks that could affect all BCE group
companies and specific risks that could affect BCE Inc. and certain of
the other BCE group companies.
For a more complete description of the risks that could affect our
business, please see the section entitled Risks That Could Affect Our
Business set out on pages 32 to 41 of the BCE 2004 AIF, as updated in the
section entitled Risks That Could Affect Our Business set out on pages
23 to 26 of the BCE 2005 First Quarter MD&A and on pages 30 to 34 of the
BCE 2005 Second Quarter MD&A, as further updated in this MD&A.
Please also refer to the BCE 2004 AIF for a detailed description of:
- the principal legal proceedings involving BCE;
- certain regulatory initiatives and proceedings concerning the Bell
Canada companies.
Please see Recent Developments in Legal Proceedings, at pages 22 and 23
of the BCE 2005 First Quarter MD&A, at page 30 of the BCE 2005 Second
Quarter MD&A and in this MD&A, for a description of recent developments,
since the BCE 2004 AIF, in the principal legal proceedings involving us.
In addition, please see Risks That Could Affect Certain BCE Group
Companies - Bell Canada companies - Changes to Wireline Regulation in the
section entitled Risks That Could Affect Our Business at pages 25 and 26
of the BCE 2005 First Quarter MD&A, at pages 32 to 34 of the BCE 2005
Second Quarter MD&A and in this MD&A, for a description of recent
developments, since the BCE 2004 AIF, in the principal regulatory
initiatives and proceedings concerning the Bell Canada companies.
A risk is the possibility that an event might happen in the future that
could have a negative effect on the financial condition, results of operations
or business of one or more BCE group companies. Part of managing our business
is to understand what these potential risks could be and to minimize them
where we can.
Because no one can predict whether an event will happen or what its
consequences may be, the actual effect of any event on our business could be
materially different from what we currently anticipate. In addition, the risks
described below and elsewhere in this MD&A do not include all possible risks,
and there may be other risks of which we are currently not aware.
In the BCE 2004 AIF, we provided a detailed review of the risks that
could affect our financial condition, results of operations or business and
that could cause actual results to differ materially from those expressed in
our forward-looking statements. This detailed description of risks, as updated
in the BCE 2005 First Quarter MD&A and the BCE 2005 Second Quarter MD&A, is
further updated in this MD&A. These risks include risks associated with:
- our ability to implement our strategies and plans in order to produce
the expected benefits and growth prospects, including meeting targets
for revenue, Galileo program savings, earnings per share, free cash
flow and capital intensity;
- our ability to implement the significant changes in our processes, in
how we approach our markets, and in how we develop and deliver products
and services, required by our strategic direction;
- the intensity of competitive activity from both traditional and new
competitors, Canadian or foreign, including cross-platform competition,
which is increasing following the introduction of new technologies such
as Voice over Internet Protocol (VoIP) which have reduced barriers to
entry that existed in the industry, and its impact on our ability to
retain existing, and attract new, customers, and on pricing strategies
and financial results;
- general economic and market conditions and the level of consumer
confidence and spending, and the demand for, and prices of, our
products and services;
- our ability to improve productivity and contain capital intensity while
maintaining quality of services;
- our ability to anticipate, and respond to, changes in technology,
industry standards and client needs and migrate to and deploy new
technologies, including VoIP, and offer new products and services
rapidly and achieve market acceptance thereof;
- the availability and cost of capital required to implement our business
plan and fund capital and other expenditures;
- our ability to find suitable companies to acquire or to partner with;
- the impact of pending or future litigation and of adverse changes in
laws or regulations, including tax laws, or in how they are
interpreted, or of adverse regulatory initiatives or proceedings,
including decisions by the CRTC affecting our ability to compete
effectively;
- the risk of litigation should BCE Inc. or Bell Canada stop funding a
subsidiary or change the nature of its investment, or dispose of all or
part of its interest, in a subsidiary;
- the risk of increased pension plan contributions;
- our ability to effectively manage labour relations, negotiate
satisfactory labour agreements, including new agreements replacing
expired labour agreements, while avoiding work stoppages, and maintain
service to customers and minimize disruptions during strikes and other
work stoppages;
- events affecting the functionality of our networks or of the networks
of other telecommunications carriers on which we rely to provide our
services;
- our ability to improve and upgrade, on a timely basis, our various IT
systems and software on which many aspects of our businesses, including
customer billing, depend;
- stock market volatility;
- the risk that licences on which we rely to provide services might be
revoked or not renewed when they expire;
- our ability to retain major customers;
- the risk that the amount of the expected annual savings relating to
Bell Canada's 2004 employee voluntary departure program will be lower
than anticipated due to various factors including the incurrence of
outsourcing, replacement and other costs;
- health concerns about radio frequency emissions; and
- launch and in-orbit risks and the ability to obtain appropriate
insurance coverage at favourable rates, concerning Telesat's
satellites, certain of which are used by Bell ExpressVu to provide
services.
Updates to the Description of Risks
The following are updates to the description of risks contained in the
section entitled Risks That Could Affect Our Business set out on pages 32 to
41 of the BCE 2004 AIF as updated at pages 23 to 26 in the BCE 2005 First
Quarter MD&A and at pages 30 to 34 of the BCE 2005 Second Quarter MD&A. For
ease of reference, the updates to the description of risks below have been
presented under the same headings and in the same order contained in the
section entitled Risks That Could Affect Our Business set out in the BCE 2004
AIF.
Risks that could affect certain BCE group companies
Bell Canada companies
Changes to Wireline Regulation
Competitor Digital Network Service
As indicated in the BCE 2004 AIF, the CRTC released Decision 2005-6 on
February 3, 2005 concerning Competitor Digital Network (CDN) services. On
May 10, 2005, the CRTC directed competitors to identify their CDN-eligible
demand to the incumbent telephone companies by June 27, 2005 and for the
incumbent telephone companies to file updates to their deferral account by
July 25, 2005 to take into account the impact of Decision 2005-6. On July 25,
2005, Bell Canada provided an update to the March 29, 2005 draw-down estimates
but advised the CRTC that, due to the amount of time needed to complete the
assessment of the CDN-eligible demand information provided by competitors,
Bell Canada would not be in a position to provide a final estimate of the
deferral account draw-down amounts before September 23, 2005. In a letter
dated September 1, 2005, the CRTC postponed the due date for the filing of
updated estimates until certain outstanding issues related to CDN services
currently before the CRTC are resolved. The CRTC also stated that it will
provide direction to the incumbent telephone companies regarding the deadline
to provide the updated deferral account estimates when it releases its
decision regarding the issues being examined in Public Notice 2004-1: Review
and disposition of deferral accounts for the second price cap period, which is
expected before the end of the year.
Application Seeking Consistent Regulation and Regulatory Framework for
VoIP
Pursuant to the CRTC Decision 2005-28 released on May 12, 2005, Bell
Canada filed VoIP tariffs for the following services with the CRTC. Bell
Canada offers an access-independent VoIP service for the small business market
called Business IP Voice (access-independent service customers can use any
high-speed internet access service to connect with the Bell service), and an
access-dependent consumer service called Bell Digital Voice (access-dependent
service customers must use Bell's wireline access service), in selected areas.
Both of these services have received interim approval by the CRTC.
Furthermore, on October 20, 2005, the CRTC provided interim approval of an
application by Bell Canada to price Bell Digital Voice at different rates in
the province of Québec than in Ontario.
Wireless Number Portability
As indicated in the BCE 2004 AIF, the Government of Canada in its 2005
Budget announced that it intended to ask the CRTC to implement in Canada
portability between wireless services and between wireless and wireline
services. Number portability will enable customers to retain the same phone
number when changing service provider within the same local serving area. On
April 21, 2005, the Canadian Wireless Telecommunications Association (CWTA),
of which Bell Mobility is a member, announced that the members of the CWTA
agreed to implement such portability in Canada. On September 12, 2005, the
CWTA released a comprehensive report, developed by independent consultant
PricewaterhouseCoopers (PwC), which identified the many tasks and issues that
need to be addressed. The PwC report suggests that the implementation of such
portability, as defined by the Government of Canada, can be implemented on a
national basis by September 2007. On September 16, 2005 the CRTC issued
Telecom Public Notice CRTC 2005-14, Implementation of Wireless Number
Portability, which deals with a number of preliminary regulatory issues that
are required to enable portability to proceed. The Public Notice also invites
comments on the PwC proposed implementation target of September 2007. Bell
Canada filed its comments on October 6, 2005.
Application to Change Bundling Rates
On September 2, 2005, Bell Canada applied to the CRTC for a modification
of the bundling rules applicable to customer-specific arrangements (CSAs),
which are arrangements tailored to a particular customer's needs for the
purpose of customizing the offering in terms of rate structure and levels.
At present, the CRTC requires that a CSA involving both tariffed and non-
tariffed services (Mixed CSAs) be filed for approval with the CRTC before it
can be provided to customers. Bell Canada's proposal would exempt a Mixed CSA
from the bundling rules and associated tariff requirements, provided that the
revenues from a CSA exceed the price of the tariffed components of the CSA and
provided that the CSA is not part of a practice designed to circumvent
tariffs.
Bell Canada Proposals to Telecom Policy Review Panel
On April 11, 2005 the Minister of Industry announced the creation of the
Telecom Policy Review Panel (Panel) to conduct a review of Canada's
telecommunications policy and regulatory framework, and make recommendations.
The Government of Canada has asked the Panel to deliver a final report by the
end of 2005.
The Panel itself called for submissions on all the issues within its
mandate. On August 15, 2005, Bell Canada submitted its recommendations to the
Panel including a proposal for the adoption of a comprehensive "next
generation" regulatory framework that relies on market forces to the maximum
extent possible as a means to ensure the telecommunications industry's
continued role as a key enabler of Canada's overall economic performance. The
proposal included detailed suggestions for significant changes to the
Telecommunications Act and related statutes, and for the realignment of
responsibilities for the CRTC, Industry Canada and the Competition Bureau. The
proposal also recommended that the Minister of Industry issue a policy
direction to the CRTC which would result in significant regulatory reform.
There can be no guarantee that the Panel will adopt any or all of Bell
Canada's proposals, and even if they were adopted, that the Minister of
Industry and Parliament would implement the Panel's recommendations.
Furthermore, a number of intervenors to the Panel have opposed the regulatory
reforms suggested by Bell Canada and advocated different reforms including
significantly expanding the extent of wholesale regulation of Bell Canada and
other incumbent telephone companies' facilities. There is a risk that the
Panel could follow those recommendations and propose that they be adopted by
the Minister of Industry and Parliament.
Licences for Broadcasting
On August 2, 2005, Bell Canada acquired certain assets and the
residential cable business of Cable VDN Inc. operating in Montréal. Bell
Canada advised the CRTC that it was commencing operations in the Montréal
service area under its Québec licence and that under this licence it was
continuing the cable operations of Cable VDN Inc.
Licences and Changes to Wireless Regulation
As indicated in the BCE 2004 AIF, companies must have a spectrum licence
to operate cellular, PCS and other radio-telecommunications systems in Canada.
In October 2001, the Minister of Industry announced plans for a national
review of Industry Canada's procedures for approving and placing wireless and
radio towers in Canada, including a review of the role of municipal
authorities in the approval process. The final report from the National
Antenna Tower Policy Review Committee was filed with Industry Canada in
September 2004. Industry Canada released its report in February 2005. Among
other things, the report recommends that the authority to regulate the siting
of antennae and supporting structures remain exclusively with the Government
of Canada. In August 2005, Industry Canada convened a meeting of the wireless
carriers and broadcasters and presented a revised draft policy for comment.
The wireless and broadcasting industries both have a number of concerns with
the draft policy and are now working with Industry Canada to attempt to
resolve these concerns. It is not possible to predict at this time if or when
the final policy will be issued. If the final policy requires more municipal
or public consultation in the approval process, there is a risk that it could
significantly slow the expansion of wireless networks in Canada. This could
have a material and negative effect on the operations of the Bell Canada
companies.
Access to Bell Canada Loops for CLEC's Customers Served Via Remotes
On September 2, 2005, Rogers Telecom Inc. (Rogers) submitted an
application pursuant to Part VII of the CRTC Telecommunications Rules of
Procedure requesting that the CRTC direct Bell Canada to make unbundled loops,
which are transmission paths between the users' premises and the central
office that are provided separately from other components, available to
competitors in a timely manner in certain specified areas where Rogers is
present. On October 3, 2005, Bell Canada provided its response to the Rogers'
application. In Bell Canada's response it explained the reasons why in some
areas where competitors are present and the competitors' potential end
customer is served via a Bell Canada remote, unbundled loops should not have
to be provided unless Bell Canada is compensated by competitors for the costs
it incurs on their behalf.
The cost to equip Bell Canada's network in order to provide unbundled
loops to competitors in locations where a potential competitor's end customer
is currently served via a Bell Canada remote could be significant should the
CRTC grant Rogers' request. It is anticipated that the CRTC will institute a
further process to examine this matter prior to rendering a decision.
Telesat
During the third quarter of 2005, Telesat confirmed the insurance renewal
on Nimiq 1. Nimiq 1 is now insured until the second quarter of 2006 for
approximately its book value.
As indicated in the BCE 2004 AIF, in August 2001, the manufacturer of the
Anik F1 satellite advised Telesat of a gradual decline in power on the
satellite. This power decline required Telesat to construct and launch another
satellite to maintain continuity of service to its customers. Anik F1R was
successfully launched in September 2005 in time to ensure that service to Anik
F1's customers was not interrupted. Anik F1R is insured until the third
quarter of 2006 for approximately its book value.
Our Accounting Policies
We have prepared our consolidated financial statements according to
Canadian GAAP. See Note 1 to the consolidated financial statements for more
information about the accounting principles we used to prepare our financial
statements.
The key estimates and assumptions that management has made under these
principles and their impact on the amounts reported in the financial
statements and notes remain substantially unchanged from those described in
the BCE 2004 MD&A.
We have not had any significant changes in the accounting standards or
our accounting policies other than those described in the BCE 2004 MD&A.
Consolidated Statements of Operations
<<
FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(in $ millions, except
share amounts) (unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues 4,951 4,778 14,790 14,195
-------------------------------------------------------------------------
Operating expenses (3,052) (2,842) (8,952) (8,462)
Amortization expense (803) (769) (2,368) (2,305)
Net benefit plans cost (Note 4) (108) (61) (315) (189)
Restructuring and
other items (Note 5) (31) (1,081) (32) (1,098)
-------------------------------------------------------------------------
Total operating expenses (3,994) (4,753) (11,667) (12,054)
-------------------------------------------------------------------------
Operating income 957 25 3,123 2,141
Other income (expense) (1) 333 30 393
Interest expense (247) (253) (741) (758)
-------------------------------------------------------------------------
Pre-tax earnings from
continuing operations 709 105 2,412 1,776
Income taxes (Note 6) (193) 44 (687) (511)
Non-controlling interest (57) (47) (193) (134)
-------------------------------------------------------------------------
Earnings from continuing
operations 459 102 1,532 1,131
Discontinued operations - (2) (1) 28
-------------------------------------------------------------------------
Net earnings 459 100 1,531 1,159
Dividends on preferred shares (18) (18) (53) (53)
-------------------------------------------------------------------------
Net earnings applicable to
common shares 441 82 1,478 1,106
-------------------------------------------------------------------------
Net earnings per common
share - basic
Continuing operations 0.48 0.09 1.60 1.17
Discontinued operations - - - 0.03
Net earnings 0.48 0.09 1.60 1.20
Net earnings per common
share - diluted
Continuing operations 0.48 0.09 1.60 1.16
Discontinued operations - - - 0.03
Net earnings 0.48 0.09 1.60 1.19
Dividends per common share 0.33 0.30 0.99 0.90
Average number of common
shares outstanding -
basic (millions) 927.0 924.6 926.6 924.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Deficit
FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(in $ millions) (unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Balance at beginning of period,
as previously reported (5,005) (5,368) (5,424) (5,837)
Accounting policy
change (Note 1) - (8) (8) (8)
-------------------------------------------------------------------------
Balance at beginning of period,
as restated (5,005) (5,376) (5,432) (5,845)
Net earnings 459 100 1,531 1,159
Dividends declared on
preferred shares (18) (18) (53) (53)
Dividends declared on
common shares (306) (277) (918) (832)
Other (1) - 1 -
-------------------------------------------------------------------------
Balance at end of period (4,871) (5,571) (4,871) (5,571)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheets
SEPTEMBER DECEMBER
30, 31,
(in $ millions) (unaudited) 2005 2004
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 475 380
Accounts receivable 1,951 2,096
Other current assets 1,501 1,212
-------------------------------------------------------------------------
Total current assets 3,927 3,688
Capital assets 22,217 21,398
Other long-term assets 2,682 2,656
Indefinite-life intangible assets 2,973 2,916
Goodwill 8,577 8,413
Non-current assets of discontinued operations 104 50
-------------------------------------------------------------------------
Total assets 40,480 39,121
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 3,557 3,692
Interest payable 266 183
Dividends payable 325 297
Debt due within one year 1,263 1,276
-------------------------------------------------------------------------
Total current liabilities 5,411 5,448
Long-term debt 12,630 11,809
Other long-term liabilities 4,850 4,932
Non-current liabilities of discontinued operations 87 -
-------------------------------------------------------------------------
Total liabilities 22,978 22,189
-------------------------------------------------------------------------
Non-controlling interest 2,892 2,908
-------------------------------------------------------------------------
Shareholders' equity
Preferred shares 1,670 1,670
-------------------------------------------------------------------------
Common shareholders' equity
Common shares 16,806 16,781
Contributed surplus 1,076 1,061
Deficit (4,871) (5,432)
Currency translation adjustment (71) (56)
-------------------------------------------------------------------------
Total common shareholders' equity 12,940 12,354
-------------------------------------------------------------------------
Total shareholders' equity 14,610 14,024
-------------------------------------------------------------------------
Total liabilities and shareholders' equity 40,480 39,121
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows
FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS
(in $ millions) (unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash flows from operating activities
Earnings from continuing
operations 459 102 1,532 1,131
Adjustments to reconcile earnings
from continuing operations to cash
flows from operating activities:
Amortization expense 803 769 2,368 2,305
Net benefit plans cost 108 61 315 189
Restructuring and other items 31 1,081 32 1,098
Net gains on investments - (325) (34) (331)
Future income taxes 111 (183) 285 (96)
Non-controlling interest 57 47 193 134
Contributions to employee
pension plans (33) (32) (161) (88)
Other employee future benefit
plan payments (24) (13) (69) (59)
Payments of restructuring
and other items (24) (12) (153) (39)
Operating assets and
liabilities 198 333 (233) (32)
-------------------------------------------------------------------------
Cash flows from operating
activities 1,686 1,828 4,075 4,212
-------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (968) (811) (2,619) (2,318)
Business acquisitions (62) (646) (180) (952)
Business dispositions - 4 - 20
Increase in investments (75) (12) (216) (20)
Decrease in investments - 707 7 713
Other investing activities - (2) (26) 133
-------------------------------------------------------------------------
Cash flows used in investing
activities (1,105) (760) (3,034) (2,424)
-------------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in notes
payable and bank advances (65) 173 121 123
Issue of long-term debt 200 10 1,191 1,410
Repayment of long-term debt (211) (98) (1,042) (1,750)
Issue of common shares 12 8 25 16
Issue of equity securities by
subsidiaries to non-controlling
interest 1 - 1 7
Redemption of equity securities
by subsidiaries from
non-controlling interest (22) (4) (60) (58)
Cash dividends paid on
common shares (306) (277) (889) (831)
Cash dividends paid on
preferred shares (21) (21) (64) (64)
Cash dividends paid by
subsidiaries to non-controlling
interest (47) (44) (157) (139)
Other financing activities (27) (18) (82) (34)
-------------------------------------------------------------------------
Cash flows used in
financing activities (486) (271) (956) (1,320)
-------------------------------------------------------------------------
Cash provided by
continuing operations 95 797 85 468
Cash provided by
discontinued operations - 12 10 196
-------------------------------------------------------------------------
Net increase in cash and
cash equivalents 95 809 95 664
Cash and cash equivalents at
beginning of period 380 577 380 722
-------------------------------------------------------------------------
Cash and cash equivalents
at end of period 475 1,386 475 1,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
------------------------
Notes to Consolidated Financial Statements
Note 1: Significant accounting policies
The interim consolidated financial statements should be read in
conjunction with BCE Inc.'s annual consolidated financial statements for
the year ended December 31, 2004, on pages 82 to 121 of BCE Inc.'s 2004
annual report.
These notes are unaudited.
All amounts are in millions of Canadian dollars, except where noted.
We, us, our and BCE mean BCE Inc., its subsidiaries and joint ventures.
We have prepared the consolidated financial statements in accordance with
Canadian generally accepted accounting principles (GAAP) using the same basis
of presentation and accounting policies as outlined in Note 1 to the annual
consolidated financial statements for the year ended December 31, 2004, except
as noted below.
Comparative figures
We have reclassified some of the figures for the comparative periods in
the consolidated financial statements to make them consistent with the
presentation for the current period.
We have restated financial information for previous periods to reflect:
- the change in Aliant Inc.'s (Aliant) method of recognizing revenues and
expenses from its directory business effective January 2005, as
described below
- the change in classification to discontinued operations for minor
business dispositions.
Change in accounting policy
Effective January 1, 2005, we defer and amortize revenues and expenses
from Aliant's directory business over the period of circulation, which is
usually 12 months. Prior to January 1, 2005, we recognized revenues and
expenses from Aliant's directory business on the publication date. The impact
on our consolidated statements of operations for the three months and nine
months ended September 30, 2005 and the comparative periods was negligible. We
did not restate the statements of operations for prior periods. At
December 31, 2004, the restatement of the balance sheet resulted in:
- a decrease of $23 million in accounts receivable
- an increase of $1 million in other current assets
- a decrease of $8 million in accounts payable and accrued liabilities
- a decrease of $6 million in non-controlling interest
- an increase of $8 million in the deficit.
Note 2: Segmented information
The table below is a summary of financial information by segment.
<<
FOR THE PERIOD ENDED THREE MONTHS NINE MONTHS
SEPTEMBER 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating revenues
Consumer External 1,902 1,893 5,620 5,552
Inter-segment 27 15 55 39
-------------------------------------------------------------------------
1,929 1,908 5,675 5,591
-------------------------------------------------------------------------
Business External 1,471 1,400 4,361 4,139
Inter-segment 45 40 132 177
-------------------------------------------------------------------------
1,516 1,440 4,493 4,316
-------------------------------------------------------------------------
Aliant External 482 467 1,454 1,421
Inter-segment 38 30 108 106
-------------------------------------------------------------------------
520 497 1,562 1,527
-------------------------------------------------------------------------
Other Bell Canada External 459 435 1,317 1,294
Inter-segment 41 51 147 134
-------------------------------------------------------------------------
500 486 1,464 1,428
-------------------------------------------------------------------------
Inter-segment eliminations -
Bell Canada (139) (125) (401) (378)
-------------------------------------------------------------------------
Bell Canada 4,326 4,206 12,793 12,484
-------------------------------------------------------------------------
Other BCE External 638 583 2,039 1,789
Inter-segment 94 96 276 263
-------------------------------------------------------------------------
732 679 2,315 2,052
-------------------------------------------------------------------------
Inter-segment eliminations -
Other (107) (107) (318) (341)
-------------------------------------------------------------------------
Total operating revenues 4,951 4,778 14,790 14,195
-------------------------------------------------------------------------
Operating income (loss)
Consumer 479 569 1,557 1,655
Business 213 245 674 713
Aliant 105 71 291 245
Other Bell Canada 111 (898) 349 (649)
-------------------------------------------------------------------------
Bell Canada 908 (13) 2,871 1,964
Other BCE 49 38 252 177
-------------------------------------------------------------------------
Total operating income 957 25 3,123 2,141
Other income (expense) (1) 333 30 393
Interest expense (247) (253) (741) (758)
Income taxes (193) 44 (687) (511)
Non-controlling interest (57) (47) (193) (134)
-------------------------------------------------------------------------
Earnings from continuing
operations 459 102 1,532 1,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------------------
Note 3: Business acquisitions
The consolidated financial statements include the results of acquired
businesses from the date they were acquired.
During the first nine months of 2005, we made a number of business
acquisitions which included 100% of the outstanding common shares of Nexxlink
Technologies Inc., provider of integrated IT solutions, and several other
providers of value-added and security services.
The table below provides a summary of business acquisitions made during
the first nine months of 2005. The purchase price allocation for all 2005
acquisitions is based on estimates. The final purchase price allocation for
each business acquisition is expected to be complete within 12 months of the
acquisition date.
Of the goodwill acquired:
- $99 million relates to the Business segment, $23 million relates to the
Consumer segment, $17 million relates to the Other Bell Canada segment
and $17 million relates to the Other BCE segment
- $43 million is deductible for tax purposes.
-------------------------------------------------------------------------
Consideration received:
Non-cash working capital (14)
Capital assets 104
Other long-term assets 3
Indefinite-life intangible assets 20
Goodwill 156
Long-term debt (61)
Other long-term liabilities (16)
-------------------------------------------------------------------------
192
Cash and cash equivalents at acquisition 19
-------------------------------------------------------------------------
Net assets acquired 211
-------------------------------------------------------------------------
Consideration given(1):
Cash 194
Acquisition costs 5
Non-cash 12
-------------------------------------------------------------------------
211
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Contingent payments of $11 million that may be paid out should
certain criteria specified in the agreements be met are not included
in the consideration given. If the contingencies are realized, the
amounts will be allocated to goodwill.
Note 4: Employee benefit plans
The table below shows the components of the net benefit plans cost.
THREE MONTHS NINE MONTHS
FOR THE PENSION OTHER PENSION OTHER
PERIOD BENEFITS BENEFITS BENEFITS BENEFITS
ENDED
SEPTEMBER 30 2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Current service
cost 64 58 9 7 185 182 26 23
Interest cost on
accrued benefit
obligation 219 201 27 26 657 604 82 78
Expected return
on plan assets (235) (237) (3) (2) (709) (714) (8) (7)
Amortization of
past service
costs 2 2 - - 7 7 1 -
Amortization of
net actuarial
losses 26 8 - 1 77 24 - 1
Amortization of
transitional
(asset)
obligation (2) (11) 6 7 (5) (33) 19 22
Increase (decrease)
in valuation
allowance (6) 1 - - (18) 2 - -
Other 1 - - - 1 - - -
-------------------------------------------------------------------------
Net benefit
plans cost 69 22 39 39 195 72 120 117
-------------------------------------------------------------------------
Comprised of:
Defined benefit
plans cost 62 16 39 39 176 58 120 117
Defined
contribution
plans cost 7 6 - - 19 14 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The table below shows the amounts we contributed to the defined benefit
and defined contribution plans and the payments made to beneficiaries under
other employee future benefit plans.
THREE MONTHS NINE MONTHS
FOR THE PENSION OTHER PENSION OTHER
PERIOD BENEFITS BENEFITS BENEFITS BENEFITS
ENDED
SEPTEMBER 30 2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------
Aliant 20 16 1 1 121 54 4 3
Bell Canada 6 5 23 12 20 14 65 56
Bell Globemedia 5 8 - - 14 13 - -
BCE Inc. 2 3 - - 6 7 - -
-------------------------------------------------------------------------
Total 33 32 24 13 161 88 69 59
-------------------------------------------------------------------------
Comprised of:
Contributions
to defined
benefit plans 31 26 24 13 152 74 69 59
Contributions
to defined
contribution
plans 2 6 - - 9 14 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 5: Restructuring and other items
THREE MONTHS NINE MONTHS
2005 2004 2005 2004
-------------------------------------------------------------------------
Employee departure programs (31) (985) (30) (985)
Provision for contract loss - - - (110)
Settlement with Manitoba
Telecom Services Inc. - - - 75
Other charges - (96) (2) (78)
-------------------------------------------------------------------------
Restructuring and other items (31) (1,081) (32) (1,098)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Employee departure programs
The table below provides an update on the liability relating to the
employee departure programs which were implemented in 2004.
BELL CONSOL-
CANADA ALIANT IDATED
-------------------------------------------------------------------------
Balance in accounts payable and accrued
liabilities at December 31, 2004 120 67 187
Less:
Cash payments (53) (53) (106)
Reversal of excess provision (25) - (25)
-------------------------------------------------------------------------
Balance in accounts payable and accrued
liabilities at September 30, 2005 42 14 56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Restructuring and other items of $31 million in the third quarter of 2005
and $32 million on a year-to-date basis in 2005 consisted mainly of:
- charges of $22 million in the third quarter of 2005 and $24 million on
a year-to-date basis in 2005 related to new restructuring initiatives
for the involuntary departure of approximately 300 employees
- charges of $9 million in the third quarter of 2005 and $31 million on a
year-to-date basis in 2005 for relocating employees and closing real
estate facilities that are no longer needed because of the reduction in
the workforce from the 2004 employee departure program.
These charges were partly offset by a $25 million reversal of
restructuring provisions in the first quarter of 2005 that were no longer
necessary since the actual payments made to employees were lower than
estimated.
Note 6: Income taxes
Bell Canada International Inc. (BCI) loss utilization transaction
On April 15, 2005, 3787915 Canada Inc., a wholly-owned subsidiary of Bell
Canada, acquired $17 billion in preferred shares from 3787923 Canada Inc., a
wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds to
advance $17 billion to BCI through a subordinated interest-free loan. BCI then
advanced $17 billion to 3787915 Canada Inc. by way of a subordinated interest-
bearing demand loan, the funds being used to repay a daylight loan granted to
3787915 Canada Inc. to make the initial preferred share investment. The
dividend rate on the preferred shares was equal to 5.1%, which was essentially
the same as the interest rate on the loan.
3787915 Canada Inc. had the legal right and intention to offset the
demand loan payable to BCI and the investment in preferred shares of
3787923 Canada Inc. As a result, these items and the related interest expense
and dividend income were presented on a net basis. The tax savings of
$99 million, resulting from the interest expense were presented as a reduction
of income tax expense.
This transaction was unwound on August 18, 2005, and was part of a tax
loss consolidation strategy that followed the transaction steps laid out in an
advance tax ruling granted by the Canada Revenue Agency to Bell Canada and
BCI. The transaction also received the approval of the Ontario Superior Court
of Justice, which is supervising BCI's voluntary plan of arrangement pursuant
to which BCI is monetizing its assets and resolving outstanding claims against
it, with the ultimate objective of distributing the net proceeds to its
shareholders and dissolving the company.
BCI will be compensated for the use of its losses by Bell Canada through
a capital contribution of $87 million that will be made by BCE Inc. for 88% of
the tax savings. BCE Inc.'s ownership interest in BCI remains at 62%. As a
result:
- BCE Inc.'s carrying value of its investment in BCI was increased to
reflect the increase in BCE Inc.'s share of the expected proceeds upon
BCI's eventual liquidation
- a charge to other income was recorded to reflect the non-controlling
interest's portion of the capital contribution to be made by BCE Inc.
Note 7: Stock-based compensation plans
Restricted share units (RSUs)
The table below is a summary of the status of RSUs.
<<
NUMBER OF
RSUs
-------------------------------------------------------------------------
Outstanding, January 1, 2005 1,996,522
Granted 490,927
Dividends credited 73,927
Expired/forfeited (79,472)
-------------------------------------------------------------------------
Outstanding, September 30, 2005 2,481,904
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months and nine months ended September 30, 2005, we
recorded compensation expense for RSUs of $19 million and $31 million,
respectively. For the three months and nine months ended September 30, 2004,
we recorded compensation expense for RSUs of $7 million and $17 million,
respectively.
BCE Inc. stock options
The table below is a summary of the status of BCE Inc.'s stock option
programs.
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
-------------------------------------------------------------------------
Outstanding, January 1, 2005 28,481,679 $32
Granted 773,824 $29
Exercised (1,348,062) $18
Expired/forfeited (990,769) $34
-------------------------------------------------------------------------
Outstanding, September 30, 2005 26,916,672 $33
-------------------------------------------------------------------------
Exercisable, September 30, 2005 16,561,534 $34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assumptions used in stock option pricing model
The table below shows the assumptions used to determine the stock-based
compensation expense using the Black-Scholes option pricing model.
FOR THE PERIOD ENDED THREE MONTHS NINE MONTHS
SEPTEMBER 30 2005 2004 2005 2004
-------------------------------------------------------------------------
Compensation expense ($ millions) 6 9 17 23
Number of stock
options granted 60,600 139,700 773,824 5,589,476
Weighted average fair value
per option granted ($) 2 3 3 3
Weighted average assumptions
Dividend yield 4.3% 4.3% 4.5% 4.0%
Expected volatility 16% 26% 22% 27%
Risk-free interest rate 3.4% 3.7% 3.4% 3.1%
Expected life (years) 3.7 3.5 3.5 3.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Note 8: Commitments and contingencies
Teleglobe lending syndicate lawsuit
As described in Note 24 to BCE's audited Consolidated Financial
Statements for the year ended December 31, 2004, a lawsuit was filed in the
Ontario Superior Court of Justice (Court) on July 12, 2002 against BCE Inc. by
certain of the members of the Teleglobe and Teleglobe Holdings (U.S.)
Corporation lending syndicate. BNP Paribas (Canada), which had advanced
approximately US$50 million to Teleglobe, filed a notice of discontinuance
with the Court on May 3, 2005 and is therefore no longer a plaintiff in this
action. Following such discontinuance, the damages sought by the remaining
plaintiffs amount to approximately US$1.04 billion (down from approximately
US$1.09 billion), plus interest and costs, representing approximately 83%
(down from approximately 87%) of the US$1.25 billion that the members of the
lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.)
Corporation.
For further information: Pierre Leclerc, Media Relations,
(514) 391-2007, 1 877 391-2007, pierre.leclerc@bell.ca;
Thane Fotopoulos,
Investor Relations, (514) 870-4619, thane.fotopoulos@bell.ca;
To request a free copy of this organization's annual report, please go to
http://www.newswire.ca and click on reports@cnw. |
