/FIRST ADD - MO084 - BCE INC. EARNINGS/
/FIRST ADD - MO084 - BCE INC. EARNINGS/
Financial Results Analysis
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This section provides detailed information and analysis about our
performance in Q4 2004 compared to Q4 2003. It focuses on our
consolidated operating results and provides financial information for
each of our reportable operating segments.
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OPERATING REVENUES
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Q4 Q4 % FY FY %
2004 2003 change 2004 2003 change
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Consumer 1,911 1,868 2.3% 7,502 7,203 4.2%
Business 1,535 1,516 1.3% 5,851 5,827 0.4%
Aliant 506 527 (4.0%) 2,033 2,059 (1.3%)
Other Bell
Canada 511 468 9.2% 1,939 2,015 (3.8%)
Inter-segment
eliminations (160) (133) (20.3%) (538) (490) (9.8%)
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Bell Canada 4,303 4,246 1.3% 16,787 16,614 1.0%
Other BCE 800 697 14.8% 2,861 2,597 10.2%
Inter-segment
eliminations (114) (125) 8.8% (455) (474) 4.0%
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Total operating
revenues 4,989 4,818 3.5% 19,193 18,737 2.4%
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BY SEGMENT
To view BCE chart Segment Revenues YTD please click here.
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Consumer
To view BCE chart Consumer Revenues QTR please click here.
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To view BCE chart Consumer Revenues FY please click here.
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Consumer revenues in the fourth quarter grew by 2.3% to $1,911 million and 4.2% to $7,502 million on a full-year basis reflecting continued strength in our wireless, Internet access and video businesses driven by strong gains in the subscribers for these services. Growth in these revenue streams more than offset steady rates of decline in long distance and local and access revenues.
Wireless
Consumer wireless revenues for Q4 2004 and on a full-year basis grew by 15.9% and 15.2%, respectively, compared to the same periods in 2003. These increases were achieved through strong subscriber growth, particularly as a result of the sales programs initiated during the first 4 months of the year. Although revenue performance was solid, we believe that our call centre's focus on handling billing inquiries following the implementation of our new billing platform somewhat diminished our ability to sell more services to our customers and delayed the implementation of planned price increases.
Video
To view BCE chart Video Revenues QTR please click here.
http://files.newswire.ca/175/VideoQTRa.jpg
To view BCE chart Video Revenues FY please click here.
http://files.newswire.ca/175/VideoFYa.jpg
To view BCE chart Video Subscribers please click here.
http://files.newswire.ca/175/VideoSub.jpg
Video revenues for the fourth quarter 2004 grew to $219 million and to $850 million for the full year, reflecting increases of 9.5% and 12.0%, respectively, compared to the same periods last year driven by year over year growth in our subscriber base and average revenue per unit (ARPU). Our total video customer base reached 1,503,000, up 8.4% compared to 1,387,000 customers at the end of 2003.
Growth in video was driven by net activations of 43,000 in the fourth quarter and 116,000 for the full year, which were significantly higher than the 35,000 and 83,000 achieved for the same periods in 2003. The growth in net activations was stimulated by the continued success of the Bell Bundle, as well as initiatives focussed on churn containment which resulted in the lowest churn level since 2001. One of the initiatives is Bell ExpressVu's move to provide services to new DTH customers strictly on a contract basis. As of August 1, 2004, all new DTH customers must opt for a one or two-year contract.
ARPU per month of $49 for video services increased $1 for the quarter and $3 for the full year compared to the same periods last year. The increase in ARPU for the quarter was mainly driven by the elimination of promotional programming discounts in Q3 2004, more customers paying for a second receiver, and higher pay per view revenues. The increase in ARPU for the year was also positively impacted by the $2 to $3 rate increase on specific programming packages introduced on February 1, 2003 and the introduction of the $2.99 system access charge for all customers effective April 28, 2003.
Our focus on customer retention resulted in a reduction in churn for both the quarter and full year when compared to the same periods last year. Churn for the quarter was 0.8% reflecting a 0.2 percentage point improvement when compared to Q4 2003. Churn for the full year was 1.0% reflecting a 0.1 percentage point improvement compared to full year 2003.
Data
Consumer data revenues grew 20% for the quarter and 21% on a full-year basis. This was driven by growth of 22% in our High-Speed Internet subscriber base and a 49% increase in revenues from our Sympatico.MSN.ca web portal.
Consumer DSL net additions this quarter were up slightly over last year despite increased competitive activity. Bell Sympatico value-added services such as MSN Premium, Security Services and Home Networking added 171,000 subscriptions this quarter and 337,000 on a full-year basis. Our MSN Premium subscriptions this quarter have increased 118% over Q3 2004.
Wireline
Local and access revenues declined slightly for the quarter and on a full- year basis compared to the same periods last year. Lower NAS revenues and related SmartTouch feature revenues partly offset higher revenues from wireline insurance and maintenance plans.
Long distance revenues in Q4 2004 and on a full-year basis were down compared to the same periods in 2003 primarily as a result of volume declines in domestic, overseas and US minutes reflecting competition from non- traditional long distance providers, partially offset by strong sales of pre paid cards. Fourth quarter 2004 wireline revenues also decreased relative to Q4 2003 due to the pricing impact of the $5 Long Distance Bundle which had an increased take rate during the quarter.
The reduction in higher priced overseas minutes and the impact of the $5 Long Distance Bundle also led to a lower average wireline revenue per minute in Q4 2004 and on a full-year basis.
Business
To view BCE chart Business Revenues QTR please click here.
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To view BCE chart Business Revenues FY please click here.
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Business segment revenues were $1,535 million this quarter and $5,851 million for the year, or 1.3% and 0.4% higher, respectively, compared to the same periods in 2003. In each case, increases in wireless revenues driven by subscriber growth and terminal sales and other revenues were offset by declines in long distance, data and local and access revenues.
On November 19, 2004, we completed the acquisition of the Canadian operations of 360networks. The Business segment includes the financial results for the retail portion of this acquisition from that date.
Enterprise
Revenues from enterprise customers decreased this quarter as declines in long distance and data revenues more than offset increases in wireless and terminal sales and other revenues. On a full-year basis, the revenue decline also reflected lower local and access services. Data revenues declined reflecting the completion of the Hydro-Quebec outsourcing contract.
Despite the overall decline in data revenue from enterprise customers, our IP-based connectivity and VAS revenues continued to grow significantly. IP- based connectivity and VAS service revenues grew from 22% of enterprise data revenues in 2003 to 43% in 2004. By year-end, over 65% of our Enterprise customers utilized some element of our VAS portfolio.
On December 10, 2004, we announced the signing of a seven-year, $140 million, exclusive out-sourcing agreement with Manulife Financial for the provisioning and management of its IP-based voice and data services. The outsourcing arrangement will lever our VAS capabilities by using BCE Connexim, Bell Canada's outsourcing and professional services unit, providing an end-to- end solution that reduces and simplifies Manulife Financial's transition to IP. Our outsourcing capabilities play a key role in our strategy of securing the connectivity business of our enterprise customers and preventing possible disintermediation by systems integrators.
Other significant contract wins this quarter included a three-year, $66 million contract with Federation des Caisses Desjardins du Quebec for a point-of-sale solution across Canada to perform debit transactions, a five- year, $28 million contract with Ministere du developpement economique et regional du Quebec for its portal, and a five-year, $5.8 million contract with La Senza Inc. which will be our first customer to deploy a full IP VPN network to its 300 sites.
SMB
Revenues from SMB customers increased this quarter and for the year as increases in data, wireless and terminal sales and other revenues more than offset revenue declines in long distance and local and access. Recent business acquisitions, such as Accutel Conferencing Systems Inc. (Accutel) and Charon, contributed to revenue growth, as did our continued growth in DSL high-speed Internet access services and value-added solutions services. Subscriptions to VAS increased by 18,000 this quarter and we closed the year at 83,000. Long distance revenues declined due to competitive pricing pressures and lower usage in our payphone business. Local and access revenues were also lower in our payphone business.
Bell West
Bell West continued to grow its customer base leading to increase in local and access and long distance revenues both this quarter and on a full- year basis. In 2001, we were awarded a contract by the GOA to build a next generation network (SuperNet) to bring high-speed Internet and broadband capabilities to rural communities in Alberta. Mechanical construction of the network was completed in December 2004. Data revenues increased this quarter reflecting higher GOA construction revenue compared to Q4 of 2003. On a year over year basis, data revenues declined as a result of lower GOA construction revenue in the amount of approximately $43 million as this contract nears completion.
Aliant
To view BCE chart Aliant Revenues QTR please click here.
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To view BCE chart Business Revenues FY please click here.
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Aliant segment revenues of $506 million for the quarter and $2,033 million for the year declined 4.0% and 1.3%, respectively, compared to the same periods last year. The labour disruption that commenced on April 23, 2004 and concluded on September 20, 2004 negatively impacted revenues for the quarter by an estimated $14 million bringing the total estimated revenue impact for the year to about $40 million. The strike resulted in fewer new installations and wireless and Internet activations, slower product sales, lower data growth and the offering of promotional long distance rates. Strong wireless and Internet services growth for the quarter and on a year-to-date basis was more than offset by declines in other areas due to the on going impact of regulatory restriction and competition.
Aliant's wireless revenue grew 13.5% in the quarter and 15.4% on a year- to-date basis over the same periods last year. The growth was driven by a year- over-year increase of 9.6% in Aliant's wireless customer base, including a 26% increase in digital customers, reflecting a positive response to the extensive dealer-supported network, attractive pricing offers and the expansion of digital cellular service into new areas. In addition, ARPU was up $3 on a year- to-date basis compared to last year, reflecting the impacts of a higher percentage of customers subscribing to digital service, higher usage and increased customer adoption of features.
Intense long distance competition, the difficulty in maintaining win-back efforts during the labour disruption and substitution of long distance calling with Internet and wireless options by customers resulted in long distance revenue declines for the quarter and the year. Consumer minute volumes were down due to customer losses to competition and the capping of minutes on certain long-distance plans in late 2003. Business long distance pricing declines continued to reflect the impact of competitive pressures, as did long distance volume declines, in addition to a reduction of contact centre activity.
Data revenues for the quarter and on a full year basis declined slightly as higher Internet revenues were more than offset by other data revenue declines from the scaleback of marketing and sales efforts during the labour disruption and the continued rationalization of circuit networks by customers. The continued increase in Internet revenues stemmed from increased popularity of enhanced services and year-over-year subscriber growth of 6%, reflecting 21% growth in Aliant's high-speed Internet customer base. The higher subscriber base reflected the expansion of high-speed Internet service into new areas, attractive introductory offers, an emphasis on bundling with other products and services as well as dealer and on-line sales channels initiatives.
Terminal sales and other revenues declined for the quarter and for the year as a result of slower product sales during the labour disruption and the divestiture of non-core operations in the second and third quarters, which resulted in a reduction in IT service revenue.
Other Bell Canada
Other Bell Canada segment revenues for the quarter were $511 million, or 9.2% higher, compared to the same period last year. Higher revenues in our Wholesale unit resulting mainly from the acquisition of the Canadian operations of 360networks in the fourth quarter this year and increased long distance revenues due to higher switched minute volumes more than offset the impact of competitive pricing pressures.
On a full year basis, revenues were $1,939 million, or 3.8% lower, compared to last year reflecting declines in the Wholesale unit stemming from lower long distance and data revenues resulting from price competition, and from customers migrating services to their own network facilities. Last year we also decided to exit certain contracts and promotional offers for international switched minutes that had low margins.
Other BCE
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Q4 Q4 % FY FY %
2004 2003 change 2004 2003 change
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Bell Globemedia 405 375 8.0% 1,420 1,363 4.2%
Telesat 102 99 3.0% 362 345 4.9%
CGI 274 208 31.7% 1,019 838 21.6%
Other 19 15 26.7% 60 51 17.6%
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Other BCE
revenues 800 697 14.8% 2,861 2,597 10.2%
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Other BCE segment revenues were $800 million this quarter and $2,861 million for the year or 14.8% and 10.2% higher compared to the same periods in 2003. In each case, revenue growth was driven by CGI's acquisition of AMS in May 2004, as well as higher revenues at Bell Globemedia and Telesat.
Bell Globemedia's revenue grew 8.0% to $405 million this quarter and by 4.2% to $1,420 million for the year. Television advertising grew by 8.1% this quarter and by 8.0% for the year reflecting the strength of CTV's schedule, which included 16 of the top 20 shows this fall. The NHL lockout had a positive impact on advertising on CTV's conventional television channels, as hockey sponsors sought alternate advertising opportunities which helped offset the loss of advertising on hockey broadcasts on our specialty channels TSN and RDS.
Bell Globemedia's subscriber revenue grew 11.6% this quarter and by 2.4% in 2004 compared to 2003 reflecting specialty channel subscription growth and subscription and newstand cover price increases at The Globe and Mail. Production and other revenue declined 4.3% this quarter and 13.8% for the year as a result of the sale of a 50% interest in Dome Productions Inc. in January 2004.
Telesat had revenues of $102 million this quarter or 3.0% higher than the same period in 2003 as higher telecommunications revenues more than offset declines in consulting fees. On a full-year basis, Telesat had revenues of $362 million or 4.9% higher than 2003 as a result of higher telecommunications and Infosat revenues offsetting lower consulting fees. On October 1, 2004, Telesat's Anik F2 satellite began commercial service and became 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.
Our share of CGI's revenues was $274 million this quarter and $1,019 million on a full-year basis, or 32% and 22% higher respectively driven mainly as a result of CGI's acquisition of AMS in May 2004.
BY BELL CANADA CONSOLIDATED PRODUCT LINES
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Q4 Q4 % FY FY %
2004 2003 change 2004 2003 change
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Local and
access 1,397 1,401 (0.3%) 5,572 5,601 (0.5%)
Long distance 560 602 (7.0%) 2,327 2,544 (8.5%)
Wireless 742 658 12.8% 2,818 2,461 14.5%
Data 963 955 0.8% 3,640 3,717 (2.1%)
Video 219 200 9.5% 850 759 12.0%
Terminal sales
and other 422 430 (1.9%) 1,580 1,532 3.1 %
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Total Bell
Canada
Consolidated 4,303 4,246 1.3% 16,787 16,614 1.0%
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Local and access
To view BCE chart Local and Access Revenues QTR please click here.
http://files.newswire.ca/175/LocalQTRa.jpg
To view BCE chart Local and Access Revenues FY please click here.
http://files.newswire.ca/175/LocalFYa.jpg
Local and access revenues of $1,397 million for the quarter and $5,572 million for the full year declined slightly by 0.3% and 0.5% compared to the respective periods last year mainly as a result of lower network access services (NAS) and lower SmartTouch feature revenues, partly offset by revenue gains from wireline insurance and maintenance plans.
NAS in service declined by 146,000 or 1.1% over the fourth quarter of 2003 as a result of continued pressure from growth in high-speed Internet access which reduces the need for second telephone lines, losses from competition, and customers substituting wireline with wireless telephone service.
Long Distance
To view BCE chart Long Distance Revenues QTR please click here.
http://files.newswire.ca/175/LDQTRa.jpg
To view BCE chart Long Distance Revenues FY please click here.
http://files.newswire.ca/175/LDFYa.jpg
Long distance revenues were $560 million for the quarter and $2,327 million on a full-year basis, reflecting year-over-year decreases of 7.0% and 8.5%, respectively, compared to the same periods in 2003. These declines stemmed from lower long distance revenues in both our Consumer and Business markets. The Consumer segment reflected lower minute volumes and lower domestic rates, as well as the pricing impact of increased subscriptions to the $5 Long Distance Bundle. The Business segment was impacted by volume and price declines resulting from competitive pressures.
Overall, minute volumes this quarter declined 2.7% to 4,559 million and 5.6% to 18,070 million on a full-year basis compared to the same periods last year. ARPM also decreased in the quarter to $0.109, reflecting a decrease of 10.7% impacted mainly from the acceleration of our bundle take-up rate. On a full-year basis, ARPM declined slightly by $0.007 compared to last year.
Wireless
To view BCE chart Wireless Net Subscriber Additions please click here.
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To view BCE chart Wireless Subscribers please click here.
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To view BCE chart Wireless Revenues QTR please click here.
http://files.newswire.ca/175/WirelessQTRa.jpg
To view BCE chart Wireless Revenues FY please click here.
http://files.newswire.ca/175/WirelessFYa.jpg
Wireless service revenues of $742 million for the quarter and $2,818 million on a full-year basis increased 12.8% and 14.5%, respectively, over the same periods last year. Revenue increases were driven by subscriber growth of 11.6%, as well as an ARPU increase of $1 per month for the full-year results. Revenue growth was impacted by our call centre's focus on handling the high volume of billing inquiries after the migration to a new billing platform, diminishing our ability to sell more services to our customers and to implement planned price increases.
Our total cellular and PCS subscriber base reached 4,925,000 at the end of the fourth quarter. Net additions of 217,000 for the fourth quarter were higher than the net additions of 189,000 in Q4 2003. For the year, net activations were 513,000, essentially unchanged over last year. Despite the transfer to the new billing platform and increased competitive pressures, we achieved solid subscriber growth through focussed marketing campaigns and strong churn management. As a result, blended churn of 1.4% and postpaid churn of 1.2% in Q4 2004 were unchanged compared to the same period last year. On a full-year basis, blended churn of 1.3% and postpaid churn of 1.1% improved by 0.1 and 0.2 percentage points, respectively, over 2003. Including paging subscribers, our total wireless customer base totalled 5,352,000.
For the quarter, gross activations from post-paid rate plans decreased to 71% of the total gross activations due to a very successful Grab 'n Go prepaid offer. On a full-year basis, 75% of gross activations came from post-paid rate plans, compared with 80% for 2003. We ended the year with 76% of our total cellular and PCS subscriber base consisting of post-paid customers, unchanged from the end of Q4 2003.
Total ARPU of $50 for the quarter was unchanged over Q4 2003, while post-paid ARPU was down $1 over the same period last year. Post-paid ARPU was impacted by issues surrounding the migration of customers to the new billing system including delayed price increases, billing adjustments and the cancelling of late payment fees. Prepaid ARPU of $13 for Q4 2004 was up $1 over last year due to increased revenues from higher usage. On a full-year basis, both blended ARPU of $49 and post-paid ARPU of $61 increased $1 over the same periods last year, driven by increased revenues from value-added services, such as Message Centre and Call Display, data and long distance services, as well as higher usage.
To further strengthen our wireless data revenues, we announced plans to rollout the fastest and most advanced wireless data network in Canada through EVDO technology. This will allow users to download data on their mobile devices up to six times faster than the fastest wireless network currently available in Canada. With speeds of up to 2.4 Mbps, customers will be able to use data-rich content and run applications such as e-mail, video messaging, gaming, video conferencing, telematics and streaming entertainment.
Data
To view BCE chart Data Revenues QTR please click here.
http://files.newswire.ca/175/DataQTRa.jpg
To view BCE chart Data Revenues FY please click here.
http://files.newswire.ca/175/DataFYa.jpg
To view BCE chart DSL High Speed Subscribers please click here.
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Data revenues of $963 million in Q4 2004 increased slightly by 0.8% compared to $955 million in the same period last year. The improvement was a result of growth in high-speed Internet services, revenues related to acquisitions and revenues from the GOA contract, which more than offset declines from the completion of the Hydro-Quebec outsourcing contract and price competition. On a full-year basis, data revenues of $3,640 million in 2004 were 2.1% lower than 2003, as growth in high-speed Internet services and revenues related to acquisitions were more than offset by lower construction revenues related to the GOA contract, declines resulting from competitive pricing and volume pressures including wholesale customers migrating their traffic onto their own networks, the completion of the Hydro-Quebec contract, and our exit from the low margin cabling business.
The number of high-speed Internet subscribers increased by 91,000 this quarter and by 350,000 on a full-year basis to reach a total subscriber count of 1,808,000. While net additions this quarter were slightly up compared to Q4 2003, on a full-year basis, net additions were slightly down, due to an increasingly competitive environment. Total dial-up customers amounted to 743,000 at the end of this year compared to 869,000 at the end of 2003.
Video
See discussion under Consumer Segment
Terminal sales and other
Terminal sales and other revenues were $422 million this quarter or 1.9% lower compared to the same period last year mainly as a result of lower revenues related to equipment sales, particularly wireless handsets, due to higher discounting during the holiday season, slower product sales at Aliant as a result of the labour disruption and Aliant's divestiture of non-core assets in the second and third quarters resulting in lower Aliant IT service revenue. On a full-year basis terminal sales and other revenues were $1,580 million, up 3.1% compared to 2003 mainly as a result of higher equipment sales (wireless handsets, satellite dishes and receivers) and growth from the acquisitions made during the year, which more than offset declines from slower product sales at Aliant.
OPERATING INCOME
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Q4 Q4 % FY FY %
2004 2003 change 2004 2003 change
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Consumer 464 471 (1.5%) 2,119 2,019 5.0%
Business 183 199 (8.0%) 896 781 14.7%
Aliant 23 108 (78.7%) 268 415 (35.4%)
Other Bell
Canada 61 152 (59.9%) (588) 621 (194.7%)
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Bell Canada
Consolidated 731 930 (21.4%) 2,695 3,836 (29.7%)
Other BCE 104 83 25.3% 281 285 (1.4%)
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Total operating
income 835 1,013 (17.6%) 2,976 4,121 (27.8%)
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CONSOLIDATED
To view BCE chart Consolidated Operating Income QTR please click here.
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To view BCE chart Consolidated Operating Income FY please click here.
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Our operating income of $835 million for the fourth quarter and $2,976 million for the year reflected declines of $178 million and $1,145 million, respectively, compared to the same periods last year. These decreases resulted from the recognition of restructuring and other items of $126 million in the quarter and $1,224 million for the year mainly related to Bell Canada's and Aliant's employee departure programs and other charges consisting primarily of closure costs for excess facilities and asset write- downs.
In June 2004, Bell Canada announced a two-phase voluntary employee departure program. Under this program, 5,052 employees or approximately 11% of Bell Canada's workforce elected to receive a package. By year end, approximately 4,900 employees had left the company.
During the fourth quarter, Aliant offered a voluntary early retirement program to eligible employees. The offer was accepted by 693 employees, or 8% of Aliant's workforce. Of these employees, about 400 had left the company by January 1, 2005, with the remainder scheduled to leave through the early part of 2005.
Excluding the impact of the restructuring and other items, operating income of $961 million for the quarter was down $65 million compared to the same period last year. This decline resulted mainly from increases in operating expenses, amortization expense and a higher net benefit plans cost which more than offset the contribution from higher revenues. The higher operating expenses for the quarter were driven by higher costs of acquisition related to subscriber increases in wireless, higher salaries mainly from the 2.8% wage increase effective December 1, 2004 for CEP members, higher contact centre agent costs to support increased call handling times associated with our new wireless billing conversion, as well as the negative residual impact of Aliant's labour disruption.
On a full year basis, operating income excluding the impact of the restructuring and other items reached $4,200 million, reflecting an increase of $65 million stemming from operating income growth in our Consumer and Business segments as well as improvements in Bell Globemedia and Telesat in the Other BCE segment, driven by the underlying growth in these sectors.
Wireless costs of acquisition (COA) of $402 per gross activation in the quarter and $411 on a full-year basis improved by $43 and $15, respectively, over the same periods last year, driven primarily from more targeted and cost-effective advertising campaigns.
COA for video services for the quarter of $537 per gross activation improved $44 compared to the same period last year as a result of lower set-top box pricing, partly offset by a higher number of customers taking second receivers as a result of our 2TV bundle and free installation promotion. For the year, video COA of $571 per gross activation was up $39 due to more customers taking a second receiver and aggressive retail pricing by competitors.
Amortization expense of $803 million for the quarter increased $28 million primarily due to a higher capital asset base and accelerated full amortization of the wireless legacy prepaid platform. Amortization expense of $3,108 million for the full year was stable compared to 2003. The impact of our higher capital asset base was offset by lower amortization from an increase in the estimated useful life of Bell Canada's internal use software from 3 to 4 years, effective October 1, 2003.
Net benefit plans cost totalled $67 million for the quarter and $256 million year-to-date, increases of $21 million and $81 million compared to the same periods last year. These increases resulted primarily from a higher accrued benefit obligation based on our most recent actuarial valuation.
BY SEGMENT
Consumer
To view BCE chart Consumer Segment Operating Income QTR please click
here.
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To view BCE chart Consumer Segment Operating Income FY please click here.
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The Consumer segment achieved operating income of $464 million in the quarter, or 1.5% lower, and $2,119 million for the year, or 5.0%, higher compared to the same periods in 2003. For the full year, growth reflected the increase in revenues partially offset by increased operating expenses related to salaries, cost of goods sold and higher net benefit plans cost compared to the full year of 2003. For the fourth quarter, the decline in operating income was caused by the accelerated full amortization of the wireless legacy prepaid platform and the costs of activating more subscribers.
In addition, higher costs were driven by the increase in the number of contact centre agents to support increased customer handling time associated with the Bell Bundle and increased call volumes resulting from the implementation of the new billing platform.
Business
To view BCE chart Business Segment Operating Income QTR please click
here.
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To view BCE chart Business Segment Operating Income FY please click here.
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On a full-year basis, despite essentially flat revenue growth, business segment operating income was $896 million, or 14.7% higher than 2003. Our strategy of driving the shift to IP with improved profitability through ongoing productivity has traction and is delivering.
Business segment operating income this quarter was $183 million or 8.0% lower than the same period last year reflecting some unusual pressures which included:
- the completion of the Hydro-Quebec contract in Q4 2003. At the end of
the contract, there were some additional asset sales to Hydro-Quebec
that exacerbated the impact of this contract in Q4.
- the costs of the mobility billing conversion.
- costs associated with the workforce realignment due to the
restructuring program executed during the quarter which led to the
departure of 2,000 employees associated with the Business segment. The
costs were primarily related to preparation and training for Q1 2005,
especially in customer service network operations which suffered the
bulk of the departures.
In the Enterprise unit operating income declined for the quarter mainly as a result of the completion of the Hydro-Quebec contract in 2003, and cost pressures, in part due to the impact of the implementation of the wireless billing system. On a full-year basis, the Enterprise unit achieved strong operating income growth reflecting our focus on more profitable contracts, as well as overall productivity which led to reductions in cost of goods sold, partly offset by higher operating expenses of acquired businesses during the year (Infostream and Elix).
Our SMB unit incurred higher salary expenses and cost of goods sold related to its increased revenues from business acquisitions (Accutel and Charon).
Bell West incurred lower cost of goods sold related to the GOA contract this quarter and on a full-year basis. Salary expenses at Bell West are higher this year reflecting a growing workforce.
Aliant
Aliant's operating income for the fourth quarter was $23 million and was $268 million for the year reflecting declines of $85 million, or 79%, and $147 million, or 35%, respectively, compared to the same periods last year.
The estimated impact of the labour disruption on operating income during the fourth quarter and on a year-to-date basis was approximately $13 million and $68 million, respectively. Operating expenses were negatively impacted by the labour disruption by an estimated $31 million year-to-date. Costs incurred during the labour disruption consisted primarily of security requirements and property repairs to enable operations to continue with relatively few interruptions and to ensure the safety of employees, up-front costs to train and equip management employees for their new roles and overtime costs to meet increased customer demand during the third and fourth quarters, a traditionally busy period.
During the fourth quarter, Aliant offered a voluntary early retirement program to eligible employees. The offer resulted in a charge of $67 million, or $24 million after taxes and non-controlling interest, in the fourth quarter.
In addition, the year-over-year operating income declines reflected higher operating expenses from growth in wireless and Internet services relating to costs of acquisition, increased customer service levels, an increase in net benefit plans cost, normal wage and annual salary adjustments and higher amortization expense resulting from a higher proportion of capital spending in broadband and wireless assets in recent years that have shorter depreciable lives. These increases were partly offset by lower operating costs stemming from the Xwave restructuring in 2003 and the divesture of non-core operations in the second and third quarters.
Other Bell Canada
Operating income for the Other Bell Canada segment was $61 million this quarter, or 60% lower than the comparable period in 2003, reflecting restructuring and other charges of $56 million related mostly to the relocation of employees and closure of excess real estate facilities as well as higher salary costs and higher cost of goods sold within our Wholesale unit.
On a full-year basis, the Other Bell Canada segment had operating losses of $588 million compared to operating income of $621 million in 2003 due to restructuring and other items of $1,147 million related mostly to the voluntary employee departure program announced in June 2004. Underlying operating performance, before restructuring items, decreased by 29% this quarter and 9.7% on a full-year basis compared to the same periods last year. The decrease reflected higher costs associated with increased volumes of cross-border carrier exchange traffic and repricing for data and long distance services.
Other BCE
Operating income for the Other BCE segment grew by 25% this quarter to $104 million. Growth in operating income at Bell Globemedia, Telesat and CGI offset higher corporate expenses. On a full-year basis, the Other BCE segment had operating income of $281 million, 1.4% lower than 2003 as higher corporate expenses more than offset higher operating income at Bell Globemedia, Telesat and CGI.
Both Bell Globemedia's and Telesat's operating income grew due to revenue growth and cost savings. CGI's operating income grew reflecting its acquisition of AMS. Corporate expenses increased reflecting higher net benefit plans cost and an increased level of corporate activities.
OTHER ITEMS
<<
-------------------------------------------------------------------------
Q4 Q4 % FY FY %
2004 2003 change 2004 2003 change
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 835 1,013 (17.6%) 2,976 4,121 (27.8%)
Other income 18 127 (85.8%) 411 175 134.9%
Interest expense (247) (266) 7.1% (1,005) (1,105) 9.0%
-------------------------------------------------------------------------
Pre-tax earnings
from continuing
operations 606 874 (30.7%) 2,382 3,191 (25.4%)
Income taxes (199) (331) 39.9% (710) (1,119) 36.6%
Non-controlling
interest (40) (57) 29.8% (174) (201) 13.4%
-------------------------------------------------------------------------
Earnings from
continuing
operations 367 486 (24.5%) 1,498 1,871 (19.9%)
Discontinued
operations (2) (86) 97.7% 26 (56) 146.4%
-------------------------------------------------------------------------
Net earnings
before
extraordinary
gain 365 400 (8.8%) 1,524 1,815 (16.0%)
Extraordinary
gain 69 - n.m. 69 - n.m.
-------------------------------------------------------------------------
Net earnings 434 400 8.5% 1,593 1,815 (12.2%)
Dividends on
preferred
shares (17) (14) (21.4%) (70) (64) (9.4%)
Premium on
redemption of
preferred shares - - - - (7) n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings
applicable to
common shares 417 386 8.0% 1,523 1,744 (12.7%)
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EPS 0.45 0.41 9.8% 1.65 1.90 (13.2%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m.: not meaningful
>>
EPS improved by $0.04 to $0.45 in Q4 2004, compared to Q4 2003. Factors increasing EPS included non-recurring items of $0.01 relating to net gains on investments and restructuring and other items, higher future income taxes of $0.04 in Q4 2003 following the increase in corporate tax rate made by the Ontario government, an increase in other miscellaneous income of $0.03 and a decline in interest expense of $0.01. Factors decreasing EPS resulted from a shortfall in EBITDA of $0.02, an increase in amortization expense of $0.02 and an increase in net benefit plans cost of $0.01.
For 2004, EPS decreased by $0.25 to $1.65, compared to 2003. Non- recurring items of $0.37 relating to restructuring and other items and net gains on investments, an increase in net benefit plans cost of $0.05, lower foreign exchange gains of $0.03 and a decline in other miscellaneous income of $0.02 contributed to the decrease. These decreases were offset partly by improvements in EBITDA of $0.11, a decline in interest expense of $0.07 and the impact of the increase in the Ontario tax rate.
OTHER INCOME
Other income of $18 million in Q4 2004 decreased $109 million compared to the same period last year. The decline mainly relates to a decrease in net gains on investments as a 3.66% interest in YPG General Partner Inc. was sold in Q4 2003 for a gain of $120 million partly offset by a $44 million loss from the write-down of a number of our cost-accounted investments. In addition, interest income was lower due to lower average cash balances in 2004.
For the full year 2004, other income increased by $236 million to $411 million, compared to the same period last year. The increase mainly relates to:
- a gain of $108 million from the sale of Bell Canada's remaining 3.24%
interest in YPG General Partner Inc. for net cash proceeds of
$123 million. Capital loss carryforwards fully sheltered the taxes on
the gain.
- a gain of $217 million from the sale of BCE Inc.'s 15.96%
interest in MTS for net cash proceeds of $584 million. On August 1,
2004, as a result of a corporate reorganization, the MTS shares were
transferred from Bell Canada to BCE Inc. This reorganization ensured
that capital loss carryforwards at BCE Inc. would be available to
fully shelter the taxes on the gain.
These were partly offset by a $120 million gain from the sale of a 3.66% interest in YPG General Partner Inc. for net cash proceeds of $135 million in Q4 2003.
We also had higher miscellaneous income in 2004, partly offset by higher foreign exchange gains in 2003. In April 2003, we entered into forward contracts to hedge U.S.$200 million of long-term debt at Bell Canada that had not been hedged previously. This removed the foreign currency risk on the principal amount of that debt, which has minimized the effect of foreign exchange in 2004.
INTEREST EXPENSE
Interest expense of $247 million in Q4 2004 and $1,005 million for the full year of 2004 showed a 7.1% and a 9.0% decline, respectively, compared to the same periods last year due to $815 million of debt repayments (net of issues) year-over-year. The decline in average debt levels was driven mainly by positive free cash flows. The average interest rate on our outstanding debt in Q4 2004 and on for the full year was 7.1% which is comparable to the same periods last year.
INCOME TAXES
Income tax expense of $199 million in Q4 2004 and $710 million for 2004 represents a 40% and 37% reduction, respectively, compared to the same periods last year mainly from:
- lower pre-tax earnings
- no tax on the gains on sale of MTS and YPG General Partner Inc. in Q3
2004 due to the availability of capital loss carryforwards, partly
offset by restructuring charges in Q3 2004 related to future lease
costs for excess facilities which are not tax deductible
- $14 million of additional future income tax expense in Q4
2003 when the Ontario government raised corporate tax rates to 14% for
2004 and subsequent years
- the reduction in the statutory income tax rate to 34.3% in 2004 from
35.4% in 2003 also contributed to a reduction in the effective tax
rate in the quarter.
As a result of these items, the effective tax rate was 29.8% for the full year of 2004 compared to 35.1% in the same period last year.
NON-CONTROLLING INTEREST
Non-controlling interest of $40 million in Q4 2004 represents a 30% decrease compared to the same period last year. The decrease was due to lower earnings at Aliant as a result of the restructuring charge, partly offset by the impact of purchasing MTS's interest in Bell West.
For the full year of 2004, non-controlling interest of $174 million was 13.4% lower compared to the same period last year. The decrease resulted from:
- a higher net loss at Bell West due to the loss on the GOA SuperNet
contract in Q2 2004
- lower earnings at Aliant as a result of the strike and the
restructuring charge partly offset by
- higher earnings at Bell Globemedia and Bell Nordiq.
DISCONTINUED OPERATIONS
The net gain from discontinued operations of $26 million in 2004 consisted of:
- a gain of $58 million on the sale of our 63.9% interest in Emergis in
the second quarter partly offset by
- our share of Emergis' operating losses of $44 million.
The net loss from discontinued operations of $56 million in 2003 consisted of a loss of $160 million relating to Emergis' sale of its U.S. Health operations in the fourth quarter.
The loss was partly offset by:
- net gains of $56 million on our share of Aliant's sales of its
emerging business and remote communication segments
- net gains of $39 million from the use of available loss carryforwards
that were applied against taxes payable on Bell Canada's sale of its
3.24% interest in YPG General Partner Inc. and Aliant's sale of its
investment in Stratos Global Corporation (Stratos).
- our share of operating gains from the discontinued businesses of $9
million.
EXTRAORDINARY GAIN
We purchased the Canadian operations of 360networks in the fourth quarter of 2004 for $293 million in cash. The fair value of the net assets acquired exceeded the purchase price by approximately $227 million. This resulted in negative goodwill which is presented as an extraordinary gain in the statement of operations. For accounting purposes, the excess was eliminated by:
- reducing the amounts assigned to the acquired non-monetary assets
(e.g. capital and intangible assets) to nil
- recognizing the balance of $69 million as an extraordinary gain.
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
-------------------------------------------------------------------------
At December 31 2004 2003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt due within one year 1,276 1,519
Long-term debt 11,809 12,381
Less: Cash and cash equivalents (380) (585)
-------------------------------------------------------------------------
Total net debt 12,705 13,315
Non-controlling interest 2,914 3,403
Total shareholders' equity 14,032 13,573
-------------------------------------------------------------------------
Total capitalization 29,651 30,291
-------------------------------------------------------------------------
Net debt to capitalization 42.8% 44.0%
-------------------------------------------------------------------------
Outstanding share data at end of period (in millions)
Common shares 925.9 924.0
Stock options 28.5 25.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Our net debt to capitalization ratio was 42.8% at the end of 2004, an improvement from 44.0% at the end of 2003. This reflected lower net debt and higher total shareholders' equity, partly offset by lower non-controlling interest.
Net debt was reduced by $610 million to $12,705 million in 2004. This was driven mainly by $898 million of free cash flow generated in 2004 and approximately $1 billion of net cash proceeds from the disposition of our 15.96% interest in MTS ($584 million), our 63.9% interest in Emergis ($315 million) and our remaining 3.24% interest in YPG General Partner Inc. ($123 million). We invested $1.3 billion in acquisitions in 2004.
Non-controlling interest declined by $489 million driven by Bell Canada's purchase of MTS's 40% interest in Bell West and the sale of our investment in Emergis.
Total shareholders' equity increased $459 million to $14,032 million in 2004. This was mainly a result of $413 million of net earnings in excess of the dividends declared on common and preferred shares in 2004.
<<
SUMMARY OF CASH FLOWS
-------------------------------------------------------------------------
Q4 2004 Q4 2003 FY 2004 FY 2003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash from operating activities 1,307 1,598 5,519 5,968
Capital expenditures (1,046) (1,079) (3,364) (3,167)
Other investing activities (9) (7) 124 62
Cash dividends paid on
preferred shares (21) (22) (85) (61)
Cash dividends paid by
subsidiaries to non-controlling
interest (49) (47) (188) (184)
-------------------------------------------------------------------------
Free cash flow before common
dividends 182 443 2,006 2,618
Cash dividends paid on
common shares (277) (259) (1,108) (1,029)
-------------------------------------------------------------------------
Free cash flow (95) 184 898 1,589
Business acquisitions (347) (42) (1,299) (115)
Business dispositions - - 20 55
Change in investments accounted
for under the cost and
equity methods (38) 156 655 163
Net issuance of equity
instruments 16 5 32 172
Net repayment of debt
instruments (523) (1,480) (740) (1,781)
Financing activities of
subsidiaries with third
parties 1 (15) (50) 24
Cash provided by (used in)
discontinued operations (3) 338 193 355
Other financing activities (17) (41) (51) (46)
-------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (1,006) (895) (342) 416
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
CASH FROM OPERATING ACTIVITIES
Cash from operating activities decreased 18.2% or $291 million to $1,307 million in Q4 2004, compared to Q4 2003. This was the result of a $187 million increase in restructuring cash payments relating mainly to the voluntary employee departure program and changes in working capital, partially offset by higher cash collections at Bell Mobility as accounts receivable returned to more normal levels in Q4.
For the full year of 2004, cash from operating activities decreased 7.5%, or $449 million, to $5,519 million, compared to 2003. This was mainly the result of the receipt of one-time cash tax refunds of $440 million for the full year of 2003, a $129 million increase in restructuring cash payments and changes in working capital, partly offset by the settlement payment of $75 million from MTS.
CAPITAL EXPENDITURES
We continue to make investments to expand and update our networks and to meet customer demand for new services. Capital expenditures were $1,046 million in Q4 2004, or 21% of revenues. This was relatively stable compared with capital expenditures of $1,079 million, or 22.4% of revenues, for the same period last year. For the full year of 2004, capital expenditures were $3.4 billion, or 17.5% of revenues, up from $3.2 billion, or 16.9% of revenues, for the same period last year. The increase reflects a mix of higher spending in the growth businesses and reduced spending in the legacy areas. In addition, the construction of Telesat's new satellites contributed to the increase in capital expenditures for the full year of 2004. Declines in capital spending at Aliant resulted from the work disruption.
Bell Canada's capital intensity ratio (capital expenditures divided by operating revenues) decreased to 22.9% in Q4 2004 compared to 23.3% in Q4 2003. For the full year of 2004, Bell Canada's capital intensity ratio increased to 18.0%, compared to 17.4% for the full year of 2003. Bell Canada's capital expenditures accounted for 90% of our capital expenditures for the full year of 2004 and 91% of our capital expenditures for the full year of 2003.
OTHER INVESTING ACTIVITIES
Cash from other investing activities of $124 million for the full year of 2004 included $179 million of insurance proceeds that Telesat received for a malfunction on the Anik F1 satellite.
Cash from other investing activities of $62 million for the full year of 2003 included:
- $83 million of proceeds from the settlement of dividend rate swaps.
These swaps hedged dividend payments on some of BCE Inc.'s preferred
shares.
- $68 million of insurance proceeds that Telesat and ExpressVu received
for a malfunction on the Nimiq 2 satellite.
COMMON DIVIDENDS
We paid a dividend of $0.30 per common share in Q4 2004. This was the same as the dividend we paid in Q4 2003.
We realized a cash benefit of $18 million in Q4 2003 ($73 million for the full year of 2003) because we issued treasury shares to fund BCE Inc.'s dividend reinvestment plan instead of buying shares on the open market. Effective Q1 2004, we started buying all of the shares needed for the dividend reinvestment plan on the open market to avoid dilution. This removed any further cash benefits related to issuing treasury shares. As a result, total cash dividends paid on common shares increased 6.9% or $18 million to $277 million in Q4 2004, compared to Q4 2003 and 7.7% or $79 million to $1,108 million for the full year of 2004, compared to 2003.
BUSINESS ACQUISITIONS
We invested $347 million in business acquisitions in Q4 2004. This consisted of:
- Bell Canada's acquisition of the Canadian operations of 360networks
for $293 million
- other business acquisitions at Bell Canada, CGI and Aliant totalling
$54 million.
Business acquisitions of $1.3 billion for the full year of 2004
included:
- Bell Canada's acquisition of MTS's 40% interest in Bell West for
$646 million
- business acquisitions at Bell Canada of $138 million, which
included purchases by Enterprise and SMB
- our 28.9% proportionate share of the cash paid for CGI's acquisition
of AMS of $171 million.
We invested $115 million in business acquisitions for the full year of
2003. This consisted mainly of:
- our proportionate share of the cash paid for CGI's acquisition of
Cognicase Inc.
- Bell Canada's purchase of an additional 30% interest in Connexim
Limited Partnership, bringing its total interest to 100%.
BUSINESS DISPOSITIONS
We received $55 million for business dispositions for the full year of 2003 for Bell Canada's sale of its 89.9% ownership interest in Certen Inc. (Certen). Bell Canada received $89 million in cash, which was reduced by $34 million of Certen's cash and cash equivalents at the time of sale.
CHANGE IN INVESTMENTS ACCOUNTED FOR UNDER THE COST AND EQUITY METHODS
In Q3 2004, we sold our remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million and our 15.96% interest in MTS for net cash proceeds of $584 million.
In Q4 2003, we sold a 3.66% interest in YPG General Partner Inc. for net cash proceeds of $135 million. In Q4 2003, Bell Globemedia also sold its 14.5% interest in Artisan Entertainment Inc. for cash proceeds of $24 million.
EQUITY INSTRUMENTS
In 2003, BCE Inc. issued 20 million Series AC preferred shares for $510 million and redeemed 14 million Series U preferred shares for $357 million, which included a $7 million premium on redemption.
DEBT INSTRUMENTS
We made $523 million of debt repayments (net of issuances) in Q4 2004 and $740 million of debt repayments (net of issuances) for the full year of 2004. The repayments were mainly at Bell Canada, BCE Inc. and Bell Globemedia. At Bell Canada, the repayments included the Series EB debentures for $200 million, the Series DZ debentures for $126 million, the Series M-15 debentures for $500 million and the Series DU debentures for $126 million. In 2004, BCE Inc. redeemed all of its outstanding Series P retractable preferred shares for $351 million. The issuances were mainly at Bell Canada and Bell Globemedia. Bell Canada issued Series M-17 debentures for $450 million and Bell Globemedia issued $300 million of senior notes.
CASH RELATING TO DISCONTINUED OPERATIONS
For the full year of 2004, cash provided by discontinued operations of $193 million consisted mainly of the net cash proceeds of $315 million from the sale of our investment in Emergis which were partly offset by the deconsolidation of Emergis' cash on hand of $137 million at December 31, 2003.
For the full year of 2003, cash provided by discontinued operations of $355 million consisted mainly of net cash proceeds of $320 million on Aliant's sale of its 53.2% interest in Stratos.
CREDIT RATINGS
In June 2004, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. (S&P), upgraded BCE Inc.'s preferred shares rating. The table below lists BCE Inc.'s and Bell Canada's key credit ratings at February 1, 2005.
<<
-------------------------------------------------------------------------
BCE Inc. Bell Canada
-------------------------------------------------------------------------
-------------------------------------------------------------------------
S&P DBRS(1) Moody's S&P DBRS(1) Moody's
(2) (2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commer-
cial
paper A-1 (mid)/ R-1 (low)/ P-2/ A-1 (mid)/ R-1 (mid)/ P-2/
stable stable stable stable stable stable
Extendable
commer-
cial
notes A-1 (mid)/ R-1 (low)/ - A-1 (mid)/ R-1 (mid)/ -
stable stable stable stable
Long-
term
debt A-/ A/ Baa1/ A/ A (high)/ A3/
stable stable stable stable stable stable
Preferred
shares P-2 Pfd-2/ P-2 Pfd-2
(high)/ (high)/ (high)/
stable stable - stable stable -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Dominion Bond Rating Service Limited (DBRS)
(2) Moody's Investors Service Inc. (Moody's)
>>
LIQUIDITY
Our ability to generate cash in the short and long term and to provide for planned growth and to fund development activities, depends on our sources of liquidity and on our cash requirements.
Our sources of liquidity and cash requirements remain substantially unchanged from those described in the 2003 MD&A, except as discussed below.
Dividends
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 payable on April 15, 2005, we expect to pay quarterly dividends on BCE Inc.'s common shares of approximately $305 million, based on the revised dividend policy. This assumes that there are no significant changes to the number of outstanding common shares. These quarterly dividends equal $0.33 per common share, based on approximately 925 million common shares outstanding at December 31, 2004.
Commitment under CRTC deferral account
The deferral account is a mechanism resulting 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 relating to the deferral account to be approximately $202 million at December 31, 2004.
Provision for contract loss
In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. During the second quarter of 2004, as part of our regular update of the estimated costs to complete construction of the network, potential cost overruns were identified. We recorded a provision of $110 million for this contract in the second quarter of 2004. Mechanical construction of the network was completed in December 2004 and an additional provision of $18 million was recorded in the fourth quarter of 2004. Acceptance of the network by the Government of Alberta was due by January 24, 2005. Bell Canada is currently in discussions with the Government of Alberta to extend acceptance until the end of the third quarter of 2005 by which time acceptance is now expected to be completed. There is a risk that we could incur higher than currently anticipated costs in completing the acceptance of the network by the Government of Alberta.
RECENT DEVELOPMENTS IN LEGAL PROCEEDINGS
This section provides a description of new legal proceedings involving BCE and of recent developments in certain of the legal proceedings involving BCE described in the 2003 AIF as subsequently updated in BCE Inc.'s 2004 First Quarter MD&A dated May 4, 2004 (BCE 2004 First Quarter MD&A), BCE Inc.'s 2004 Second Quarter MD&A dated August 3, 2004 (BCE 2004 Second Quarter MD&A) and BCE Inc.'s 2004 Third Quarter MD&A dated November 2, 2004 (BCE 2004 Third Quarter MD&A).
LAWSUITS RELATED TO TELEGLOBE INC. (TELEGLOBE)
BNP Paribas (Canada)
On December 23, 2004, BNP Paribas (Canada), one of the plaintiffs in the Teleglobe lending syndicate lawsuit action against BCE Inc., filed a statement of claim with the Ontario Superior Court of Justice. The action is against BCE Inc. and five former directors of Teleglobe Inc. The statement of claim alleges oppression against the former directors and breach of contract against BCE Inc. BNP Paribas (Canada) seeks US$50 million in damages. Teleglobe Inc. was at the relevant time a subsidiary of BCE Inc. Pursuant to standard policies and subject to applicable law, the five former directors of Teleglobe Inc. are entitled to seek indemnification from BCE Inc. in connection with this lawsuit.
While the final outcome of any legal proceeding cannot be predicted with certainty, based upon information currently available, BCE Inc. is of the view that it, and the other defendants, have strong defences in respect of the foregoing lawsuit and they intend to vigorously defend their position.
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.
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 its consequences, the actual effect of any event on our business could be materially different from what we currently anticipate. In addition, this description of risks does not include all possible risks, and there may be other risks that we are currently not aware of.
Bell Canada is our most important subsidiary, which means our financial performance depends in large part on how well Bell Canada performs financially. The risks that could affect Bell Canada and its subsidiaries are more likely to have a significant impact on our financial condition, results of operations and business than the risks that could affect other BCE group companies.
RISKS THAT COULD AFFECT ALL BCE GROUP COMPANIES
STRATEGIES AND PLANS
We plan to achieve our business objectives through various strategies and plans. The strategy for Bell Canada companies (which includes Bell Canada, Aliant and their respective subsidiaries) is to lead change in the industry and set the standard for IP-based communications while continuing to deliver on our goals of innovation, simplicity and service, and efficiency. The key elements of the strategies and plans of the Bell Canada companies include:
- evolving from multiple service-specific networks to a single IP-based
network
- providing new services to meet customers' needs by introducing
innovative technologies, including Voice over Internet Protocol
(VoIP), very high speed digital subscriber line (VDSL), as well as the
rollout of our next generation EVDO (Evolution, Data Optimized)
wireless data network that will deliver higher speed wireless data
services to customers, and providing professional services to
customers in related areas such as network management security and
network enabled business applications
- maintaining and improving customer satisfaction by simplifying all
aspects of the customer's experience, including call centres, billing
and contact at the point of sale
- increasing the number of customers who buy multiple products by
focusing our marketing and sales efforts by customer segment. This
includes offering bundled services to consumers and service packages
to businesses.
- lowering costs by improving efficiency in all areas of product and
service delivery, including installation, activation and call centres.
Our strategic direction involves significant changes in our processes, in how we approach our markets, and in how we develop and deliver products and services. This means we will need to be responsive in adapting to these changes. It also means that a shift in employee skills will be necessary.
We will need to spend capital to implement our strategies and to carry out our plans. However, the actual amounts of capital required and the actual returns from these investments could differ materially from our current expectations. At this time, we cannot accurately determine the effect that moving to a single IP-based network could have on our results of operations. We also cannot be certain that Bell Canada will meet its targeted timing to complete the network conversion.
If we are unable to achieve our business objectives, our financial performance, including our growth prospects, could be hurt. This could have a material and negative effect on our results of operations.
ECONOMIC AND MARKET CONDITIONS
Our business is affected by general economic conditions, consumer confidence and spending, and the demand for, and the prices of, our products and services. When there is a decline in economic growth, and in retail and commercial activity, there tends to be a lower demand for our products and services. During these periods, customers may delay buying our products and services, or reduce or discontinue using them.
Weak economic conditions may negatively affect our profitability and cash flows from operations. They could also negatively affect the financial condition and credit risk of our customers, which could increase uncertainty about our ability to collect receivables and potentially increase our bad debt expenses.
INCREASING COMPETITION
We face intense competition from traditional competitors, as well as from new entrants to the markets we operate in. We compete not only with other telecommunications, media, television, satellite and information technology service providers, but also with other businesses and industries. These include cable, software and Internet companies, a variety of companies that offer network services, such as providers of business information systems and system integrators, and other companies that deal with, or have access to, customers through various communications networks.
Many of our competitors have substantial financial, marketing, personnel and technological resources. Other competitors have recently emerged, or may emerge in the future, from restructurings with reduced debt and a stronger financial position. This means that they could have more financial flexibility to price their products and services at competitive rates.
Competition affects our pricing strategies and reduces our revenues and profitability. It could also affect our ability to retain existing customers and attract new ones. Competition puts us under constant pressure to keep our prices competitive. It forces us to continue to reduce costs, manage expenses and increase productivity. This means that we need to be able to anticipate and respond quickly to the constant changes in our businesses and markets.
We already have several domestic and foreign competitors, but the number of well resourced foreign competitors with a presence in Canada could increase in the future. Over the past two years, the Canadian government has reviewed the foreign ownership restrictions that apply to telecommunications carriers and to broadcasting distribution undertakings (BDUs). Removing or easing the limits on foreign ownership could result in foreign companies entering the Canadian market by making acquisitions or investments. This could result in greater access to capital for our competitors or the arrival of new competitors with global scale, which would increase competitive pressure. It is impossible to predict the outcome or to assess how any change in foreign ownership restrictions may affect us because the government has not completed its review of these matters.
We expect competition to increase given advanced applications and related services that are delivered over IP. This could lead to customers buying these applications and related services from competitors and the Bell Canada companies providing only IP access services to these customers. This result could materially and negatively affect our financial performance.
Wireline and Long Distance
We experience significant competition in long distance from dial-around providers, pre-paid card providers, VoIP service providers and others, and from traditional competitors, such as inter-exchange carriers and resellers. These alternative technologies, products and services are now making significant inroads in our legacy services which typically represent our higher margin business. Contracts for long distance services to large business customers are very competitive. Customers may choose to switch to competitors that offer lower prices to gain market share and are less concerned about the quality of service or impact on their earnings.
We also face increasing cross-platform competition as customers substitute traditional services with new technologies. For example, our wireline business competes with VoIP services, wireless and Internet services, including chat services, instant messaging and e-mail. Certain wireless providers, for example, are now specifically targeting our wireline business in their marketing campaigns. We also expect to face competitive pressure from cable companies as they implement voice services over their networks and from other emerging competitors such as electrical utilities. Several Canadian cable companies have announced plans to introduce voice telephony services in 2005. We expect competition to intensify as growth in Internet and wireless services continues and new technologies are developed.
We have announced our intention to launch our own Consumer VoIP services, but there is no assurance that they will attract a sustainable customer base. VoIP service providers are competing in the marketplace to take business away from our products and services. Competition from VoIP service providers is already reducing our current share of local and long distance services, and could have a material and negative effect on our future revenues and profitability.
Certain VoIP technology implementations do not require service providers to own or rent physical networks, which gives other competitors increased access to this market. As competition from these service providers develops, it could have a material and negative effect on our future revenues and profitability.
Technology substitution, and VoIP in particular, has reduced barriers to entry in the industry. This has allowed competitors with far lower investments in financial, marketing, personnel and technological resources to rapidly launch new products and services and to gain market share. This trend is expected to accelerate in the future, which could materially and negatively affect our financial performance.
These competitive factors suggest that our wireline accesses and long distance volumes will continue to decline in the future. Continued decline will lead to reduced economies of scale in those businesses and, in turn, lower margins. Our strategy will be to mitigate these declines by building the business for newer growth services, but the margins on newer services will likely be less than the margins on legacy services. If the legacy services decline faster than the rate of growth of our newer services, our financial performance will be negatively and materially affected.
Internet Access
Cable companies and independent Internet service providers (ISPs) have increased competition in the broadband and Internet access services business. In particular, competition from cable companies has focused on increased bandwidth and discounted pricing on bundles. Competition has led to pricing for Internet access in Canada that is among the lowest in the world.
In addition, service providers that are funded by regional electrical utilities may continue to develop and market services that compete directly with Bell Canada's Internet access and broadband services. Developments in wireless broadband services may also result in increased competition in certain geographic areas. This could materially and negatively affect the financial performance of our Internet access services business.
Wireless
The Canadian wireless telecommunications industry is also highly competitive. We compete directly with other wireless service providers that have aggressive product and service introductions, pricing and marketing, and with wireline service providers. We expect competition to intensify as new technologies, products and services (such as VoIP) are developed.
The acquisition of Microcell Telecommunications Inc. by Rogers Wireless Inc. may lead to stronger competition in the wireless business from both companies. This could affect industry pricing and other factors which could materially and negatively affect the financial performance of the Bell Canada companies.
Video
Bell ExpressVu competes directly with another direct-to-home (DTH) satellite television provider and with cable companies across Canada. These cable companies have recently upgraded their networks, operational systems and services, which could improve their competitiveness. This could materially and negatively affect the financial performance of Bell ExpressVu.
IMPROVING PRODUCTIVITY AND CONTAINING CAPITAL INTENSITY
We continue to implement several productivity improvements while containing our capital intensity. There will be a material and negative effect on our profitability if we do not continue to successfully implement these productivity improvements, reduce costs and manage capital intensity while maintaining the quality of our service. For example, we must reduce the price of certain services offered by the Bell Canada companies, that are subject to regulatory price caps, each year between 2002 and 2006. In addition, we have reduced our prices in some business data services that are not regulated in order to remain competitive and we may have to continue doing so in the future. The profits of the Bell Canada companies will decline if they cannot lower their expenses at the same rate. There would also be a material and negative effect on our profitability if market factors or other regulatory actions result in lower revenues and we cannot reduce our expenses at the same rate.
Many productivity improvements require capital expenditures to implement systems that automate or assist in our operations. There is no assurance that these investments will be effective in delivering the planned productivity improvements.
ANTICIPATING TECHNOLOGICAL CHANGE
We operate in markets that are experiencing constant technological change, evolving industry standards, changing client needs, frequent new product and service introductions, and short product life cycles.
Our success will depend in large part on how well we can anticipate and respond to changes in industry standards and client needs, and how quickly and efficiently we can introduce new products, services and technologies, and upgrade existing ones.
We may face additional financial risks as we develop new products, services and technologies, and update our networks to stay competitive. Newer technologies, for example, may quickly become obsolete or may need more capital than expected. Development could be delayed for reasons beyond our control. Substantial investments usually need to be made before new technologies prove to be commercially viable. There is also a significant risk that current regulation could be expanded to apply to newer technologies. A regulatory change could delay our launch of new services and restrict our ability to market these services if, for example, new pricing rules or marketing or bundling restrictions were introduced or existing ones extended.
The Bell Canada companies are in the process of moving their core circuit- based infrastructure to IP technology. This should allow them to:
- offer integrated voice, data and video services
- offer a range of valuable network enabled business solutions to large
business customers
- improve capital efficiency
- improve operating efficiency, including our efficiency in introducing
and supporting services.
As part of this move, the Bell Canada companies also plan to discontinue certain services that are based on circuit-based infrastructure. This is a necessary component of improving capital and operating efficiencies. In some cases, this could be delayed or prevented by customers or regulatory actions. If the Bell Canada companies cannot discontinue these services as planned, they will not be able to achieve improvements as expected.
There is no assurance that we will be successful in developing, implementing and marketing new technologies, products, services or enhancements in a reasonable time, or that they will have a market. There is also no assurance that efficiencies will increase as expected. New products or services that use new or evolving technologies could make our existing ones unmarketable or cause their prices to fall.
LIQUIDITY
Our ability to generate cash and to maintain capacity to meet our financial obligations and provide for planned growth depends on our cash requirements and on our sources of liquidity.
Our cash requirements may be affected by the risks associated with our contingencies, off-balance sheet arrangements, derivative instruments and assumptions built in our business plan.
In general, we finance our capital needs in four ways:
- from cash generated by our operations or investments
- by borrowing from commercial banks
- through debt and equity offerings in the capital markets
- by selling or otherwise disposing of assets.
Financing through equity offerings would dilute the holdings of existing equity investors. An increased level of debt financing could lower our credit ratings, increase our borrowing costs and give us less flexibility to take advantage of business opportunities.
Our ability to raise financing depends on our ability to access the capital markets and the syndicated commercial loan market. The cost of funding depends largely on market conditions, and the outlook for our business and our credit ratings at the time capital is raised. If our credit ratings are downgraded, our cost of funding could significantly increase. In addition, participants in the capital and syndicated commercial loan markets have internal policies limiting their ability to invest in, or extend credit to, any single borrower or group of borrowers or to a particular industry.
BCE Inc. and some of its subsidiaries have entered into renewable credit facilities with various financial institutions. They include facilities serving as back-up facilities for issuing commercial paper. There is no assurance that these facilities will be renewed at favourable terms.
We need significant amounts of cash to implement our business plan. This includes cash for capital expenditures to provide our services, dividend payments and payment of our contractual obligations, including repayment and refinancing of our outstanding debt.
Our plan in 2005 is to generate enough cash from our operating activities to pay for capital expenditures and dividends. We expect to pay contractual obligations maturing in 2005 from cash on hand, from cash generated from our operations or by issuing debt. If actual results are different from our business plan or if the assumptions in our business plan change, we may have to raise more funds than expected by issuing debt or equity, borrowing from banks or selling or otherwise disposing of assets.
If we cannot raise the capital we need upon acceptable terms, we may have to:
- limit our ongoing capital expenditures
- limit our investment in new businesses
- try to raise additional capital by selling or otherwise disposing of
assets.
Any of these possibilities could have a material and negative effect on our cash flow from operations and growth prospects.
RELIANCE ON MAJOR CUSTOMERS
An important amount of revenue earned by the BCE group of companies, including Bell Canada, comes from a small number of major customers. If we lose contracts with these major customers and cannot replace them, it could have a material and negative effect on our financial results.
MAKING ACQUISITIONS
Our growth strategy includes making strategic acquisitions and entering into joint ventures. There is no assurance that we will find suitable companies to acquire or to partner with, or that we will have the financial resources needed to complete any acquisition or to enter into any joint venture. There could also be difficulties in integrating the operations of acquired companies with our existing operations or in operating joint ventures.
LITIGATION, REGULATORY MATTERS AND CHANGES IN LAWS
Pending or future litigation, regulatory initiatives or regulatory proceedings could have a material and negative effect on our businesses, operating results and financial condition. Changes in laws or regulations or in how they are interpreted, and the adoption of new laws or regulations, including changes in, or the adoption of, new tax laws that result in higher tax rates or new taxes, could also materially and negatively affect us. Any claim by a third party, with or without merit, that a significant part of our business infringes on its intellectual property could also materially and negatively affect us.
Please see the BCE 2003 AIF for a detailed description of:
- the principal legal proceedings involving BCE
- certain regulatory initiatives and proceedings affecting the Bell
Canada companies.
Please see Recent Developments in Legal Proceedings in the BCE 2004 First Quarter MD&A, BCE 2004 Second Quarter MD&A, BCE 2004 Third Quarter MD&A and in this MD&A for a description of recent developments, since the BCE 2003 AIF, in the principal legal proceedings involving us.
In addition, please refer to the discussion in this MD&A under Risks that could affect certain BCE group companies - Bell Canada companies - Changes to wireline regulations for a description of certain regulatory initiatives and proceedings that could affect the Bell Canada companies.
FUNDING AND CONTROL OF SUBSIDIARIES
BCE Inc. and Bell Canada are currently funding, directly or indirectly, and may, in the future, continue to fund the operating losses of some of their subsidiaries, but they are under no obligation to continue doing so. If BCE Inc. or Bell Canada decides to stop funding any of its subsidiaries and that subsidiary does not have other sources of funding, this would have a material and negative effect on the subsidiary's results of operations and financial condition and on the value of its securities.
In addition, BCE Inc. and Bell Canada do not have to remain the majority holder of, or maintain their current level or nature of ownership in, any subsidiary, unless they have agreed otherwise. The announcement of a decision by BCE Inc. or Bell Canada to change the nature of its investment in a subsidiary, to dispose of some or all of its interest in a subsidiary, or any other similar decision could have a material and negative effect on the subsidiary's results of operations and financial condition and on the value of its securities.
If BCE Inc. or Bell Canada stops funding a subsidiary, changes the nature of its investment or disposes of all or part of its interest in a subsidiary, stakeholders or creditors of the subsidiary might decide to take legal action against BCE Inc. or Bell Canada, respectively. For example, certain members of the lending syndicate of Teleglobe Inc. (Teleglobe), a former subsidiary of BCE Inc., and other creditors of Teleglobe have launched lawsuits against BCE Inc. following its decision to stop funding Teleglobe. You will find a description of these lawsuits in the BCE 2003 AIF under Legal proceedings we are involved in as updated in the BCE 2004 First Quarter MD&A, BCE 2004 Second Quarter MD&A, BCE 2004 Third Quarter MD&A and in this MD&A under Recent Developments in Legal Proceedings. While we believe that these kinds of claims have no legal foundation, they could negatively affect the market price of BCE Inc.'s or Bell Canada's securities. BCE Inc. and Bell Canada could have to devote considerable management time and resources in responding to any such claim.
PENSION FUND CONTRIBUTIONS
Most of our pension plans had pension fund surpluses as of our most recent actuarial valuation. As a result, we have not had to make regular contributions to the pension funds in the past few years.
The decline in the capital markets in 2001 and 2002, combined with historically low interest rates and early retirement programs recently offered to employees, have significantly reduced the pension fund surpluses. This has negatively affected our net earnings.
Our pension plan assets had returns slightly above our expectations in 2004. There is no assurance that similar returns will continue. If returns on pension plan assets decline again in the future or if interest rates further decrease, the surpluses would also continue to decline. This could have a material and negative effect on our results of operations. Following the completion of the next periodic actuarial valuation, we might have to significantly increase our contributions to our pension funds in 2005 which could have a material and negative effect on BCE Inc.'s earnings per share.
RENEGOTIATING LABOUR AGREEMENTS
Approximately 41% of our employees are represented by unions and are covered by collective agreements.
The following important collective agreements have expired:
- the collective agreements relating to CTV Television Inc. employees
at Calgary/Edmonton, representing approximately 150 employees and at
Ottawa, representing approximately 65 employees, expired on
September 30, 2004 and December 31, 2004, respectively. Negotiations
continue regarding the renewal of both collective agreements.
The following important collective agreements expire on or before
December 31, 2005:
- the collective agreement between the Canadian Telecommunications
Employees' Association (CTEA) and Bell Canada representing
approximately 10,000 clerical and associated employees. This
collective agreement will expire on May 31, 2005. Negotiations are
scheduled to begin in February 2005.
- certain collective agreements, representing approximately 170 CTV
Television Inc employees, will expire as follows: Sault Ste. Marie
on April 8, 2005, RDS Montreal on April 15, 2005, Cape Breton, New
Brunswick, North Bay, and Saskatoon on August 31, 2005; and the
collective agreement representing approximately 395 Globe and Mail
employees will expire on July 1, 2005.
Renegotiating collective agreements could result in higher labour costs and work disruptions, including work stoppages or work slowdowns. Difficulties in renegotiations or other labour unrest could significantly hurt our businesses, operating results and financial condition. Although Bell Canada has a program to implement a number of measures seeking to minimize disruptions and ensure that customers continue to receive normal service during labour disruptions, there can be no assurance that service to Bell Canada's customers would not be adversely affected should a strike occur.
EVENTS AFFECTING OUR NETWORKS
Network failures could materially hurt our business, including our customer relationships and operating results. Our operations depend on how well we protect our networks, our equipment, our applications and the information stored in our data centres against damage from fire, natural disaster, power loss, hacking, computer viruses, disabling devices, acts of war or terrorism, and other events. Our operations also depend on the timely replacement and maintenance of our networks and equipment. Any of these events could cause our operations to be shut down indefinitely.
Our network is connected with the networks of other telecommunications carriers, and we rely on them to deliver some of our services. Any of the events mentioned in the previous paragraph, as well as strikes or other work disruptions, bankruptcies, technical difficulties or other events affecting the networks of these other carriers, could also hurt our business, including our customer relationships and operating results.
VOLUNTARY DEPARTURE PROGRAMS
In 2004, we announced an early retirement program and early departure program for Bell Canada employees. We estimate annual savings of approximately $390 million relating to these programs from lower salaries, bonuses and non-pension benefits. There is a risk that the amount we expect to save each year from these programs will be lower than anticipated due to various factors including the incurrence of outsourcing, replacement and other costs.
END FIRST, SECOND AND FINAL ADD TO FOLLOW
Source: BCE INC.
CONTACT: PRNewswire - Feb.2
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Profile: intent
posted by EntertainmentNews @ 3:14 AM
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