August 4, 2011 / 12:03 PM / 6 years ago

UPDATE 4-BCE pays high price for smartphone growth

* Bell Canada parent pays more for new wireless customers

* Net income drops 2.5 pct after one-time payment

* Revenue rises 11.6 pct to C$4.96 bln with CTV inclusion

* Fewer net postpaid wireless subscribers added than rival

* Shares fall 2 pct by early afternoon

(Recasts, updates share move)

By Alastair Sharp

TORONTO, Aug 4 (Reuters) - The parent of Bell Canada added fewer new wireless customers in the second quarter than a year earlier and spent more to sign them up and retain existing ones, sending its shares down 2 percent on Thursday.

Shares of BCE, Canada’s largest phone company, dropped even though operating earnings topped expectations thanks to strength in its new media unit, formed after last year’s C$1.3 billion ($1.34 billion) purchase of CTV, Canada’s biggest private broadcaster. Total revenue rose 11.6 percent.

That was not enough to impress investors, especially on a day when the broader market tumbled.

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

The squeeze on margins reflects intensifying competition in the Canadian wireless market. Newcomers are luring value-conscious consumers with discount plans, while BCE and rivals are pushing hard for lucrative smartphone users, often subsidizing Apple’s iPhone and other expensive handsets.

Bell’s new activations cost C$400 each in the second quarter, up 19.4 percent. while its postpaid customers paid a average monthly bill of C$63.18 a month, a decline caused by pricing pressure on voice rates.

At the same time net postpaid subscriber additions dropped to about 94,000 and BCE lost nearly 58,000 prepaid customers. Wireless churn, or the number of customers leaving, increased.

By comparison, Rogers Communications (RCIb.TO), Canada’s leading wireless carrier, added 135,000 net wireless subscribers - most of them postpaid.

Average prepaid bills at Bell also fell as users upgraded to postpaid plans. The higher portion of Bell’s customers on postpaid contracts meant its overall revenue per wireless customer rose.

MOBILE CONTENT

Net profit dropped 2.5 percent to C$590 million, or 76 Canadian cents a share, in the second quarter, after a one-off payment to the telecom and broadcast regulator related to the CTV purchase.

Its adjusted earnings came in at 86 Canadian cents a share, while revenue rose to C$4.96 billion.

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

The new Bell Media unit, the cornerstone of its strategy of combining content and the means of transmitting it, was a bright spot.

The company, which has moved quickly to offer sports, news and entertainment on its mobile devices since the CTV acquisition, said it was benefiting from strong advertising and subscriber revenues. All told, 300,000 customers have signed up to get CTV content on their Bell mobile devices.

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

That said, Bell’s Internet protocol-based Fibe TV product has been a disappointment so far, with only about 6,000 net new customers signed up during the quarter.

Executives said on Thursday the company would promote Fibe more aggressively in the second half of the year as the necessary infrastructure now covers most of Toronto and Montreal, two of Canada’s largest cities.

“Wireless trends are worrying and Bell remains well behind when it comes to IPTV and its associated dilution,” said Dvai Ghose from Canaccord Genuity. He prefers Telus (T.TO), Canada’s No.3 telecom, which is ahead of Bell in rolling out a similar product.

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

BCE shares dropped 2 percent to $35.97 on the Toronto Stock Exchange by midday Wednesday. Before the results, the stock had risen 3 percent for the year.

$1=$0.97 Canadian Reporting by Alastair Sharp; editing by Peter Galloway

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