Bell Aliant’s fastest-growing business and now represents more than 1/3 of its total revenue
FTTH NETWORK
806,000
HOMES AND BUSINESSES
FIBREOP TV CUSTOMERS
158,044
+63% COMPARED TO 2012
FIBREOP INTERNET CUSTOMERS
183,971
+64% COMPARED TO 2012
BELL ALIANT RESULTS REVENUE
2013 2012 $ CHANGE % CHANGE
Local and access 1,109 1,168 (59) (5.1%)
Long distance 286 322 (36) (11.2%)
Data 887 809 78 9.6%
Wireless 97 94 3 3.2%
Equipment and other 131 134 (3) (2.2%)
Total external revenues 2,510 2,527 (17) (0.7%)
Inter-segment revenues 249 234 15 6.4%
Total revenue 2,759 2,761 (2) (0.1%)
Local and access Long distance Data Wireless
Equipment and other
46�1%
$1,272 IN 2013
46�8%
$1,292 IN 2012
5 BUSINESS SEGMENT ANALYSIS BELL ALIANTMD&A
Bell Aliant operating revenues remained relatively stable in 2013, decreasing 0�1%, as growth in data revenues was offset by lower local and access and long distance revenues�
• Local and access revenues decreased 5�1% in 2013, as a result of the ongoing reduction in Bell Aliant’s NAS customer base and the effect of competition and bundling services
• Long distance revenues were down 11�2% in 2013� The decline was the result of lower NAS and lower overall conversation minutes, due to substitution of traditional wireline service with e-mail, wireless calling and VoIP services, as well as customer migration from per-minute plans to flat rate plans
• Data revenues increased 9�6% in 2013, due to strong growth in Internet and IPTV revenues, as well as to higher IP connectivity revenues� Higher Internet revenues were driven by customer
growth, reflecting continued steady demand for FibreOP services, as well as growth in residential Internet ARPU resulting from increased customer adoption of higher bandwidth plans and price increases� Higher IPTV service revenues were driven by growth in Bell Aliant’s FibreOP TV customer base and the expiry of promotional pricing offers
• Wireless revenues were 3�2% higher in 2013 as a result of wireless customer growth over the past year, partly offset by a modest decrease in ARPU reflecting aggressive competitive pricing
• Equipment and other revenues decreased 2�2% in 2013, as a result of lower telecommunications equipment sales and rentals
OPERATING COSTS AND EBITDA
2013 2012 $ CHANGE % CHANGE
Operating costs (1,487) (1,469) 18 1.2%
EBITDA 1,272 1,292 (20) (1.5%)
EBITDA margin 46.1% 46.8% (0.7%)
Bell Aliant operating costs increased 1�2% in 2013, reflecting increased marketing and sales expenses attributable to growth in FibreOP customers and higher TV content costs resulting from IPTV customer growth� Lower general and administrative expenses, driven by procurement savings and productivity initiatives, partly offset the increase in operating costs compared to 2012�
Bell Aliant EBITDA decreased 1�5% in 2013, mainly as a result of higher operating costs� EBITDA margin declined by 7 basis points in 2013 to 46�1% as continued declines in higher-margin voice revenues and higher operating costs were not offset fully by growth in lower-margin data service revenues�
BELL ALIANT OPERATING METRICS
2013 2012 CHANGE % CHANGE
NAS LINES
Residential 1,462,462 1,571,199 (108,737) (6.9%)
Business 890,858 920,171 (29,313) (3.2%)
Total 2,353,320 2,491,370 (138,050) (5.5%)
NAS NET LOSSES
Residential (108,737) (107,671) (1,066) (1.0%)
Business (29,313) (29,734) 421 1.4%
Total (138,050) (137,405) (645) (0.5%)
HIGH-SPEED INTERNET
High-speed Internet net activations 33,679 22,894 10,785 47.1%
High-speed Internet subscribers 952,093 918,414 33,679 3.7%
FibreOP Internet customers included
in High-Speed Internet customers 183,971 112,203 71,768 64.0%
TV
Net subscriber activations 55,063 45,960 9,103 19.8%
Total Subscribers 178,083 123,020 55,063 44.8%
FibreOP TV 158,044 96,831 61,213 63.2%
WIRELESS
Subscribers 146,698 143,858 2,840 2.0%
5 BUSINESS SEGMENT ANALYSIS BELL ALIANTMD&A
NAS net losses were a result of competitive losses driven by aggres-sive pricing by competitors and continued customer substitution to wireless and IP-based solutions� Despite intense competitive activity, NAS net losses were consistent with 2012 as there was improved retention in Bell Aliant’s residential FibreOP markets, as well as expansion into new markets, which moderated the decline in the residential customer NAS base� At December 31, 2013, Bell Aliant had 2,353,320 NAS lines, compared to 2,491,370 NAS lines at the end of 2012�
High-speed Internet subscriber net activations increased 47�1%, or 10,785 subscribers, in 2013 to 33,679, reflecting continued steady demand for FibreOP service bundles and wholesale customer
gains� At December 31, 2013, Bell Aliant had 952,093 high-speed Internet subscribers, which included 183,971 FibreOP customers, compared to 918,414 subscribers at the end of 2012, which included 112,203 FibreOP customers�
IPTV net activations increased 19�8%, or 9,103 subscribers in 2013, to 55,063, as a result of increased customer demand for FibreOP TV service� At December 31, 2013, Bell Aliant had 178,083 IPTV customers, which included 158,044 FibreOP TV customers, compared to 123,020 IPTV customers at the end of 2012, which included 96,831 FibreOP TV customers�
Wireless customers totalled 146,698 at December 31, 2013, representing a 2�0% increase since the end of 2012�
COMPETITIVE LANDSCAPE AND INDUSTRY TRENDS
COMPETITIVE LANDSCAPE
Cable companies are the most significant competitive threat to Bell Aliant� At the end of 2013, its competitive footprint overlap with cable companies was approximately 75�8% of residential households in Bell Aliant’s markets, representing a 1�6 percentage point increase from 2012� In addition, the rapid development of new technologies, services and products has facilitated the entry of other competitors into Bell Aliant’s markets, enabling these competitors to offer their customers an alternative to traditional voice services through wireless and IP-based technologies� Bell Aliant actively employs
marketing strategies to remain competitive in all of its operating markets and continues to innovate and develop new and enhanced services to meet the communications needs of its customers� Bell Aliant also continues to invest in its FTTH network and extend its FibreOP TV and Internet service to more communities across its operating markets�
Competition comes from substitution of wireless services, including Bell Aliant, Bell Mobility and Virgin Mobile wireless offerings, for residential local and long distance services�
COMPETITORS
Cable TV providers provide cable TV, Internet and cable telephony services, including:
• EastLink in Atlantic Canada and rural Ontario
• Rogers in Newfoundland and Labrador, New Brunswick and Ontario
• Vidéotron in rural Québec
• Cogeco in rural Québec
• Shaw in rural Ontario
• Shaw Direct, providing DTH satellite TV service nationwide
• Some smaller private cable companies in rural communities
Various other companies, such as Vonage and Primus, that offer resale or VoIP-based local, long distance and Internet services�
OTT voice and video services such as Skype, Netflix and iTunes�
Digital media streaming devices such as Apple TV and Roku�
MARKET FACTS
• There are 2�5 million households in Bell Aliant’s territory, which includes Atlantic Canada and rural Ontario and Québec
• Approximately 76% of the house-holds in its territory have a cable telephony alternative
• Over 85% of the households in its territory have access to Bell Aliant’s high-speed Internet services; Internet penetration is estimated to be between 70% to 75% across its territories
INDUSTRY TRENDS
Bell Aliant’s operations include both wireline and wireless services� Therefore, the industry trends applicable to Bell Aliant are similar to those described under sections 5�1 Bell Wireless and 5�2 Bell Wireline in this MD&A�
BUSINESS OUTLOOK AND ASSUMPTIONS
2014 OUTLOOK
Growing broadband, specifically FTTH, is the cornerstone of Bell Aliant’s strategy� Bell Aliant’s subscriber results in markets where fibre has been deployed greatly exceed performance in markets where it does not have fibre� This reinforces Bell Aliant’s objective to expand its FTTH footprint to reach 1 million locations in 2014�
Since the middle of 2012, Bell Aliant has added a substantial number of FibreOp customers to its FTTH network� As expected, this success has led to some strong competitive reactions, specifically in New Brunswick and Newfoundland and Labrador, with extreme price discounts being offered by competitors� Bell Aliant plans to compete aggressively, where necessary, to maintain and grow customers, but this competitive activity is anticipated to pressure revenue and
5 BUSINESS SEGMENT ANALYSIS BELL ALIANTMD&A
Bell Aliant believes that FTTH is the best technology to meet customer requirements for the future� Although competitive pressures experienced in 2013 may delay a return to positive revenue and EBITDA growth, Bell Aliant believes that by providing the best technology available, it has the ability to become the provider of choice in its FTTH markets and that growth in FibreOP services will more than offset declines in legacy services over time� In 2014, growth in Internet and IPTV revenues is expected to continue, but likely will be offset by ongoing declines in traditional voice revenues due to intense competition and technology substitution� Bell Aliant anticipates that net NAS declines, high-speed Internet customer net additions and IPTV customer net additions will be similar to those experienced in 2013� Other revenues also will decline in 2014 as several large projects in 2013 are not expected to recur and a contact centre subsidiary ceased operations in late 2013�
Operating expenses in 2014 are expected to remain consistent with 2013 levels, as savings from productivity initiatives and lower current service pension costs are expected to offset higher spending on TV content costs resulting from a growing TV customer base and normal inflationary pressures� As a result, EBITDA is expected to decrease in 2014�
Capital expenditures in 2014 are expected to remain at ele-vated levels� Higher spending on FTTH footprint expansion in 2014, compared to 2013, and new FibreOP customer connections
in 2014 are expected to be offset by lower spending on copper network replacement and large customer network projects that were completed in 2013� Bell Aliant intends to pass 190,000 to 200,000 incremental homes and businesses with FTTH�
As a result, free cash flow in 2014 is expected to be impacted by lower EBITDA, higher cash income taxes paid, lower cash from changes in working capital and continued elevated capital expenditures�
ASSUMPTIONS
• Economy continues to rebound
• Competitive activity in both consumer and business will continue to be intense
• Wireless substitution for wireline services will increase in Bell Aliant markets, but is expected to lag other regions of Canada
• NAS net decline stabilizing
• Steady demand for FibreOP service driving Internet and IPTV customer acquisition at similar levels as 2013
• Cost reductions achieved through productivity initiatives will continue, largely offsetting cost increases associated with growth in IPTV customers and associated TV content costs and normal inflationary pressures
KEY GROWTH DRIVERS
• Continued expansion of the FTTH network
• Increasing customer adoption of FibreOP Internet and FibreOP TV services
• Lower residential customer churn
• Increased spending by business customers
PRINCIPAL BUSINESS RISKS
This section discusses certain principal business risks which specifically affect the Bell Aliant segment� For a detailed description of the principal risks that could have a material adverse effect on our business, refer to section 9, Business Risks�
INCREASING COMPETITION COST MANAGEMENT FINANCING AND FREE CASH FLOW RISK
• The intensity of competitive activity from cable companies and other competitors IMPACT
• Aggressive offers and techno-logical substitution could lead to higher customer churn and increased retention costs through use of promotional offers to keep customers
• Inability to make continued investments in FTTH networks which enable the provision of new
RISK
• Cost structure does not support the shift in product mix towards growth services
IMPACT
• It may be difficult to improve cus-tomer service while reducing costs through productivity initiatives
• Capital investments may not be effective in delivering the planned operational efficiencies
RISK
• Unable to balance cash allocation decisions IMPACT
• Reduced flexibility in accessing the capital and/or commercial credit markets
• The level of dividends, capital expenditures or other strategic uses of cash may vary
6 FINANCIAL AND CAPITAL MANAGEMENTMD&A