BCE Inc. (NYSE:BCE) Q1 2023 Earnings Call Transcript May 4, 2023

BCE Inc. beats earnings expectations. Reported EPS is $0.85, expectations were $0.77.

Operator: Good morning ladies and gentlemen and welcome to the BCE Q1 2023 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, sir.

Thane Fotopoulos: Thank you, Mode [ph]. Good morning, everyone and thank you for joining our call. Today, I’m here with Mirko Bibic, President and CEO of BCE; our current CFO, Glen LeBlanc; and our future incoming CFO and current Treasurer and SVP of Corporate Strategy, Curtis Millen. You can find all our Q1 disclosure documents on the Investor Relations page of the bce.ca website which we posted earlier this morning. Before we begin, I want to draw your attention to our safe harbor statement on Slide 2, reminding you that today’s slide presentation and remarks made during the call will include forward-looking information and therefore, are subject to risks and uncertainties. Results could differ materially. We disclaim any obligation to update forward-looking statements, except as required by law. Please refer to BCE’s publicly filed documents for more details on our assumptions and risks. With that, I’ll turn the call over to Mirko.

Mirko Bibic: All right. Thank you, Thane. Good morning, everyone. The Bell team delivered operating results for Q1 that were in line with our planned performance for the quarter. We’ve been making some significant investments in the past 3 years and they are bearing fruit. You could see in our continued operational momentum and particularly this quarter, you can see it in our strong 3.5% consolidated revenue growth. And as expected and as we profiled internally in our quarterly budget for 2023, adjusted EBITDA decreased year-over-year due to a $67 million favorable onetime retroactive revenue adjustment at Bell Media in Q1 of last year and near-term cost pressures from inflation, strategic initiatives and the normalization of our cost structure to pre-pandemic levels.

In line with our accelerated CapEx program for 2023, we spent close to $1.1 billion [ph] in new capital in Q1 and that keeps us on pace to deliver another 650,000 new direct fiber connections and to grow our 5G service footprint to 85% of the country and it will also enable stand-alone 5G plus service for almost half of Canadians by the end of the year. The generational investments we’re making to build the best networks are consistently being recognized by third parties for superior network quality and speed for our low latency and the best overall experience. And we’re leveraging our world-leading broadband infrastructure, our focus on service excellence and customer value proposition to offer the best networks at affordable prices and to deliver economically accretive subscriber additions across all our products and you can see that in our Q1 operating results.

In wireless, we grew our base of high-value postpaid subscribers. We increased our cross-sell penetration of wireless and Internet households and we manage customer churn. Total mobile phone and connected device net adds were up 20% over last year to 97,377 and that drove healthy service revenue growth of 5.4%. Going forward, we’re seeing very good growth catalysts from accelerating, excuse me, immigration levels, penetration headroom, the ongoing transition of 5G. We’re bundling wireless with Internet service as well as retail channel expansion with partners, including Staples [ph] which we’ve talked about before and most recently, Air Canada which we announced just a couple of days ago earlier this week, rather. Against this backdrop, we’re expecting to use our proven execution and operating momentum to drive our fair share of customer growth in a competitive market.

On the fixed side of the business, fueled by a growing fiber footprint, we continue to gain a significant share of new Internet subscriber growth. We added 47,757 new net fiber-to-the-home customers in Q1 and that’s up 24% over last year. This brings the total number of fiber subscribers to approximately $2.5 million or 57% of our total retail Internet customer base. And of these, close to 1.1 million are taking speeds of 1 gigabit or better which contributed to Bell’s industry-leading consumer Internet revenue growth of 10% this quarter. These results are a testament to the power of fiber-based Internet service that provides the fastest dedicated symmetrical speeds that cable just cannot match. Bell has the broadest multi-gig footprint with 3 gigabits per second or higher speeds now available to more than 5 million locations.

And at the end of this year, 4 million of those will have access to symmetrical speeds of 8 gigabits per second. It’s a major competitive differentiator and this will keep us sustainably ahead of any of our peers. We also continue to advance our cloud capabilities through an expanded partnership with Palo Alto Networks for cloud security solutions and the acquisition of FX Innovations which is a leading Quebec-based IT services and consulting company which has a specific expertise in digital workflow automation, we announced that today and that will further accelerate our growing team of cloud-certified professional services employees. These developments are the latest building blocks and strengthening Bell’s position as a tech services leader for enterprise customers.

Let me turn to media now. Despite an advertising market that continues to face near-term headwinds across the continent, digital ad revenue was up 4% over last year and that’s a positive result, certainly when you think about the current market backdrop generally. On the customer experience front, we continue to focus on serving customers on their terms. We’ve introduced a self-serve WiFi optimization tool and we’ve improved the self-serve guides with step-by-step processes for same-day service activations and we expanded our manager appointment application. Our customer-first approach is clearly making a difference and you can see that in the latest results from the CCTS. That CCTS report that I’m referring to shows Bell as the only national service provider to experience a decrease in complaints with a 6% reduction even as complaints were up 12% across the industry.

In fact, Bell’s share [ph] of complaints has decreased 16% over the past year and impressively 55% over the past 5 years, really, really proud of the team on this and of our progress generally. We’ve achieved our financial and operating results against the backdrop of wireless prices that have remained essentially stable even as the Canadian economy continues to face sustained inflation. If you refer to the latest stat can data [ph], the price of all goods and services in aggregate has increased 4.3% over the past year. But if you look at the cost of cellular services, they’ve risen only 0.3%. And I want to highlight for you a few notable ESG accomplishments as well. You’ll see that this was the first year that Bell issued an integrated annual report.

It’s a first for a major communications company in North America. We also ran third among global telecom companies and Corporate Knights 2023 Global 100 ranking of the most sustainable corporations in the world. And we were rated highly in the sustainable investment category and that was driven by our investments in fleet electrification, electric vehicle charging stations, renewable energy alternatives and energy savings. And reflecting our ongoing efforts to engage and invest in our people, Bell was named by MediaCorp [ph] as a top family-friendly employer in Canada for the 11th consecutive year as well as 1 of the best workplaces for young people and young professionals in recognition of our graduate leadership and internship programs. I’ll turn now to following the slides.

I’m going to turn now to Slide 6, take a look at some of the operating metrics for Q1. Then I’m going to start with wireless. We added 43,289 new net postpaid mobile phone subscribers. That’s up 26.5% from last year, pretty strong result in what is typically a seasonally slower quarter for acquisitions. This was a function of an 18% increase in gross activations and that was driven by higher retail traffic as pandemic-related restrictions were still in place in the early stages of Q1 of 2022, population growth, continued 5G momentum and healthy business customer demand. Although customer churn increased year-over-year which reflected greater overall market activity, it was still well below pre-pandemic levels at 0.9%. Our ARPU was up 0.9% and that’s our eighth consecutive quarter of growth.

This was supported by further roaming revenue improvement and now sits at 129% of pre-covid levels and our continued focus on higher-value subscriber loadings. And with only 44% of postpaid customers currently on 5G capable devices, the vast majority of which are subscribing to premium unlimited data plans, we’re seeing good ARPU support going forward despite competitive pressures on base rate plan pricing and the financial impact of the ongoing shift to installment plans. As for mobile connected devices, net adds were up 45% over last year to 70,742 and that was driven by continued strong customer demand for Bell’s IoT solutions. Let’s turn to wireline now. We added 27,274 total new net retail Internet customers and that’s up 5% versus last year but that number includes the competitive loss of DSL subscribers in our nonfiber footprint.

But as I already mentioned, fiber net subscriber additions were much stronger at 47,757. We also added around 11,000 net new IPTV subscribers, that’s down slightly versus last year but we expected this, due primarily to higher customer deactivations on our 5 TV app streaming service after last year’s FIFA World Cup. Satellite TV and home phone net losses both increased modestly compared to Q1 of last year, due to a step-up in promotional offer intensity with a full return to pre-COVID levels of competition. Over at Bell Media now; our advertising demand held up reasonably well under the current circumstances and comparatively better than our peers. And this was the result of our TV broadcast of World Junior Hockey and the Super Bowl and it shows if you’ve got strong content that viewers flock to, it’s going to deliver value to advertisers and advertisers are placing value on premium sporting events.

And that also helped TSN and RDS maintain the #1 rankings in Q1 and allowed us to continue to grow in digital advertising which I mentioned before but really does bear repeating. Outlook; so in terms of our outlook for the balance of 2023 for media, the ad recession should begin to stabilize and improve gradually later in the year. Over at Crave, we continue to deliver with total subscribers up 6% over last year and we’re now more than 3.2 million subscribers. This was underpinned by a 24% increase in direct-to-consumer streaming subscribers. And we also recently launched our TSN+ streaming product which allows sports fans to access augmented feeds, multicast and other feature content that’s incremental to the premium sports content that we’re delivering across the flagship TSN platform.

On the French language TV front, we once again led all competitors in Q1 in the specialty market, including news and sports, while continuing to grow viewership with buzzworthy programming such as Survivor Quebec which premiered in early April on Bell Media’s conventional TV channel, Nuvo [ph]. Lastly, you will have seen a press release from us the other day announcing a landmark long-term and exclusive licensing deal with Warner Bros. Discovery that builds on our previous agreement from 2019. The deal ranges across many parts of their vast portfolio of content. It includes HBO and MAX Originals, the DC Universe, the Wizarding World of Harry Potter, new cable series, library table TV [ph] series pay and postpaid window rights for Warner Bros.

films and library films as well as French language rights across a wide range of content. Our valuable long-term HBO deal basically just got longer and broader and that’s going to provide further compelling content supporting our Made in Canada Crave TV service, streaming TV service, of course. In summary, a solid start to the year with results directly on plan for Q1 and results that again reflect the Bell team’s consistently strong execution. I’m confident that we’ll further extend this proven track record throughout the remainder of 2023. So, I’m going to hand it over to Glen in just a moment. But first, obviously, I want to acknowledge the news we issued this morning that Glen will retire as CFO effective September 1. Under Glen’s leadership, as you all certainly know, Bell has attained a solid financial position with a robust balance sheet, substantial cash flow and pension solvency and all of that helped us accelerate Bell’s capital expenditures to expand our fiber and wireless networks and position us competitively and strategically for years and years to come.

On behalf of everyone, I personally want to thank you, Glen, for your exemplary leadership and your valuable contributions to the company and to the executive team and to me personally. Thank you. Curtis, currently, SVP, Corporate Strategy and Treasurer, will be promoted to CFO effective September 1. Curtis has a deep background in the financial industry and strategic leadership here at Bell and he’s well positioned to take on the CFO role and work closely with Glen and with me during the remainder of 2023 and beyond to ensure a successful transition. Glen, again, a huge thank you to you. And of course, you’re not going very far. You’ll be right back here with me in August and Curtis for our Q2 results and Curtis congrats. And with that, over to you, Glen.

Glen LeBlanc: Thank you, Mirko and good morning, everyone. Before I get started, I want to express my gratitude to Mirko and the entire Bell team for 30 incredible years. As Mirko mentioned and I want to reinforce Curtis is well positioned to take on the CFO role and is a strong leader who will guide Bell through the next generation. He and I will work closely together through the remainder of 2023 to ensure a smooth transition. And now on to results; we had a positive start to the year with strong 3.5% consolidated revenue growth that was achieved despite lapping a onetime $67 million retroactive revenue adjustment at Bell Media and coping with the economic conditions that continue to impact media advertising and the B2B sector.

Normalizing for this onetime revenue adjustment from Q1 2022, revenue was up nearly 5% this quarter, a very strong result, driven by continued robust wireless and Internet growth and a notable recovery in the business data equipment sales. While this revenue strength did not flow to the bottom line this quarter, our EBITDA results are very much expected and fully reflected in our internal forecast, given the aforementioned onetime revenue adjustment that Bell Media last year, as well as the known near-time incremental cost pressures from inflation or strategic initiatives, higher TV content and programming costs and normalization of cost structure to pre-COVID levels. Adjusting for just the media one-timer then normalizing for the TV hockey schedules this year, underlying consolidated EBITDA growth in Q1 was close to 2%.

Net earnings and adjusted EPS were also down year-over-year, mainly the result of the lower expected EBITDA, increased interest expense due to higher rates, higher depreciation and amortization expense as more capital assets are being put into service, consistent with our accelerated broadband network build-out plan. Our net earnings results this quarter also included an asset impairment charge related to the consolidation of real estate space due to Bell’s hybrid work policy. As for free cash flow, our Q1 result was anticipated and right in line with our quarterly budget, reflecting the timing of working capital which will largely reverse by the end of the year, higher interest paid and the timing of tax installment payments as well as higher CapEx. On CapEx, the year-over-year increase was just timing related to the continued — related as we continue to project a $300 million-plus step down in 2023.

Turning to our new Bell CTS segment on Slide 9 that amalgamates our former wireless and wireline operations. Service revenue grew 2.1%, fueled mainly by continued strong mobile phone and Internet — retail Internet subscriber growth, further roaming improvement and an improved B2B performance trajectory. In fact, Q1 was Bell Business Markets best quarterly service revenue performance since Q3 of 2020. The financial contribution from our acquisitions of Distributal and eBox [ph] were largely offset in the quarter by lower sales of international wholesale long distance minutes which can be quite lumpy and the sale of Createch [ph] in March of last year. On the product side, very strong growth, with revenue up 24% year-over-year. This was attributable to higher business data equipment sales and improved product availability compared to the shortages we experienced last year as well as a greater sales mix to higher-value mobile phones and more overall contracted device transactions.

Notwithstanding the close to 5% increase in total CTS revenues, Q1 EBITDA growth was more modest at 1.3%. This was the result of some near-term expected cost pressures that I described earlier which contributed to an 8.1% increase in operating costs this quarter. As we cycle through some of these added costs, we expect a stronger EBITDA growth trajectory for the balance of 2023 as was contemplated in our quarterly budget that we profiled for the year. Over to Bell Media on Slide 10. As projected and in line with our budget, total revenue was down in Q1, decreasing 5.5% year-over-year despite the ongoing ad recession that’s reflected global advertising markets — that’s affecting global advertising market. Advertising revenue for Q1 held up better than we expected, going into the quarter and much better than our peers.

This can be attributed to a diverse asset mix and focused execution on our digital first transformation strategy. Subscriber revenue declined 4% due to the aforementioned onetime retroactive revenue adjustment that we lapped from last year which was also a major contributor to the 36.5% decline in Bell Media’s EBITDA this quarter. Normalizing for this onetimer from Q1 ’22, EBITDA was down only 6%. That’s pretty good performance given the macroeconomic context and the very much anticipated given the normalization of hockey schedules this year and the content cost inflation for premium sports and entertaining programming. Turning to the balance sheet on Slide 11; our consistently strong operational and financial performance supports our robust balance sheet and liquidity position which totaled $3.7 billion at the end of Q1.

A debt maturity schedule remains very well structured with an average debt to maturity of around 13 years and a low after-tax cost of debt of just 2.9%. Additionally, our balance sheet strength is further enhanced by a sizable pension solvency surplus amounting to $3.7 billion and substantial recurring free cash flow generation that is reliable and well protected from macro uncertainty. Let’s turn to Slide 12. BCE’s fundamentals and competitive position remain as strong as ever. With the financial results we delivered in Q1, we are right on our internal plan which may not have been obvious to the Street as we don’t provide quarterly guidance. Together with continued operating momentum across the business and our consistent proven execution in a competitive marketplace, I am reconfirming all of our guidance targets for 2023.

And on that note, Thane, I’ll turn it back over to you.

Thane Fotopoulos: Okay, great. Thanks, Glen. So before we start the Q&A, I want to remind everyone that due to some time constraints this morning because of our AGM that’s taking place right after this call to keep limit yourselves [indiscernible] and ask your questions and most efficiently as possible, so we can get to everybody in the queue. So on that, I would — we’re ready to take our first question.

Q&A Session

Operator: [Operator Instructions] Our first question is from Drew McReynolds [ph] from RBC.

Operator: Following question is from Maher Yaghi from Scotiabank.

Operator: Our following question is from Aravinda Galappatthige. Please go ahead — from Canaccord Genuity.

Operator: Following question is from Vince Valentini from TD Cowen.

Operator: Our following question is from Tim Casey from BMO.

Operator: Following question is from Jerome Dubreuil from Desjardins.

Operator: A following question is from David Barden from Bank of America.

Operator: Our following question is from Stephanie Price from CIBC.

Operator: The following question is from Sebastiano Petti from JPMorgan.

Operator: Perfect. So I would now like to turn the meeting back over to you.

Thane Fotopoulos: Great. So thank you all for your participation this morning. And for usual, I will be available along with [indiscernible] any questions and clarifications that you may have as a result of our announcements this morning. Well, thank you very much and have a great day.

Glen LeBlanc: Thank you, everyone.

Mirko Bibic: Thank you.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.