Yahoo Finance BCE Inc. (NYSE:BCE) Q1 2024 Earnings Call Transcript
BCE Inc. (NYSE:BCE) Q1 2024 Earnings Call Transcript May 2, 2024
BCE Inc. reports earnings inline with expectations. Reported EPS is $0.53 EPS, expectations were $0.53. BCE Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Welcome to the BCE Q1 2024 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.
Thane Fotopoulos: Thank you, Matthew, and good morning, everyone, and thank you for joining our call. I’m here, as usual, with Mirko Bibic, President and CEO of BCE; and our CFO, Curtis Millen. You can find all of 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 turn the call over to Mirko.
Mirko Bibic: Thank you, Thane, and good morning, everyone. So, backed by the Bell team’s consistent execution, leading networks and products and cost discipline, we effectively navigated a dynamic competitive environment and a sluggish economy to achieve operational results in line with our internal plan for the quarter. And as expected, and as we profiled in our quarterly budget at the start of the year, revenue was down slightly year-over-year. This was the result of a favorable one-time revenue adjustment at Bell Media in Q1 of 2023 that did not repeat this year and some marginal revenue loss at the source as certain stores began their transition to Best Buy Express, which we’ve discussed in the past. Normalizing for these two items, revenue was basically flat this quarter.
Notably, adjusted EBITDA and margin for Q1 were higher than forecasted. BCE’s margin expanded 0.8 percentage points to 42.7%, which demonstrates the team’s focus on driving operational efficiencies across the organization, realigning costs to address near-term competitive and economic pressures, and effectively balancing growth with profitability in a highly competitive marketplace. So, in terms of operating results, fiber continues to be on a roll. We’re gaining share in all our markets because we have a superior product with a symmetrical speed advantage over cable and that drove our best Q1 retail internet net additions in 17 years, and it contributed to a 22% year-over-year increase in households subscribing to mobility and internet service bundles where we have fiber.
On wireless, we did a great job striking the right balance between volume growth and economics in what was a very competitive Q1. This is evidenced by strong growth in total gross mobile phone activations, which increased 25% over last year, together with healthy consumer service revenue growth of 4%, reflecting our focus on premium brand customer loadings and careful price plan management. Of note, our industry is delivering the highest quality services at decreasing prices despite persistent inflation. The latest StatsCan data shows that the price of all goods and services in aggregate across the Canadian economy has increased 2.9% over the past year, while the costs of cellular and internet access services have declined 26.2% and 15.5%, respectively, and this downward trend was also corroborated by this week’s Federal Government annual price study.
And we’re continuing to bring more affordable wireless options to Canadians. Bell recently entered into a retail partnership with Loblaw to launch no name mobile in No Frills grocery stores across the country, which is being powered by PC Mobile and will run on Bell’s network. In business enterprise, we’re continuing to invest in new IT products and services to significantly advance our capabilities in the growth vectors I’ve been talking about recently, namely cloudification, security, and managed automation. And the growth strategy has accelerated with our acquisition of FX Innovation last year and partnerships with ServiceNow, Google, Microsoft, AWS and Palo Alto Networks. You can see it in our results. In fact, when excluding the favorable acquisition impact of FX Innovation, our business solutions services revenue grew 12% organically this quarter.
Building on this, we recently announced new partnerships with Microsoft to bring Bell’s voice network to Microsoft Teams and with SentinelOne, a global leader in AI-powered security to provide advanced data protection services for Canadian businesses. And just a couple of weeks ago, we announced the launch of Google Cloud Contact Centre AI, which is a cutting-edge suite of AI solutions for contact center transformations that enables intelligent customer and agent experience leveraging generative AI-infused technology. These are just the latest building blocks in strengthening Bell’s position as a tech services leader for enterprise customers in Canada. I’ll turn now to media. We have weathered near-term pressures relatively better than peers, as you can see by positive year-over-year advertising revenue growth for Bell Media this quarter, and underpinning this result are Bell Media’s leading assets and our focus on live sports content.
And more importantly, we’re the only Canadian media company that’s pivoting to digital at scale, which is reflected in the impressive 72% increase in digital ad revenue in Q1. This strong performance was fueled by Bell Media’s programmatic advertising marketplace, where growing customer usage of our expanded SAM TV sales tool led to a doubling of revenue this quarter, as well as by ad-supported subscription tiers on Crave and our addressable TV functionality. And investments to sustain this strategic shift to digital are continuing with an expanded distribution footprint for Crave on Amazon Prime Video, where initial sales have been very strong. And the recent launch of 10 fast channels spanning news, sports and entertainment. I’m now going to turn to Slide 5 of our presentation.
We added 45,247 new net postpaid mobile phone subscribers. That’s up 4.5% from last year and that represents our best Q1 performance in six years. It’s a strong result considering the competitive environment where we balance market share with economics, demonstrating our network quality and distribution and brand strength, rather than promotional discounting to drive the subscriber acquisition. And this disciplined approach can be seen in ARPU result as well, which remains stable year-over-year. It’s a good outcome, especially in light of the more aggressive pricing we saw in the market during the quarter. Further expansion of our 5G customer base is also helping us to support ARPU. At the end of Q1, 56% of all postpaid customers were on 5G capable devices and that’s up from 44% last year.
Now over to wireline. It was another strong RGU quarter. We delivered our highest Q1 retail internet net ads since 2007, up 13.9% versus last year to 31,078. In particular, we saw very strong market share growth in Quebec. Moreover, where we have fiber, our bundle sales continue to grow and they exceed our internal budget targets. In Q1 alone, new customers subscribing to mobility and internet service bundles increased 39% year over year. It was also another very good quarter for Bell IPTV, which added 14,174 net new subscribers. That’s up 30% from last year. This strong performance reflects the pull-through benefit of fiber internet, our TV product leadership and our strategy of making content available where the consumer demands it as evidenced by our five app streaming service, which delivered its highest number of Q1 activations since launch.
In rounding out our wireline subscriber results, home phone net loss has improved 6.3%, reflecting fewer customer deactivations as that customer base gets smaller over time. And also note that starting this quarter, we are no longer reporting satellite TV subscribers as that business is not financially material in the overall context of BCE. Lastly, turning to Bell Media. As I’ve already mentioned, total advertising revenue is up year-over-year on the strength of digital, marking our first quarter of growth since Q4 2022. And although Q1 was better than we anticipated, the ad market improvement is expected to be uneven. Digital revenues increased 33%, now comprise 41% of media revenues, compared to 29% last year and underpinning the strong result with strong growth in usage of our programmatic ad marketplace, as well as continued expansion of our Crave direct-to-consumer streaming subscriber base.
TSN and RDS maintain their number one rankings in Q1, thanks in part to this year’s Super Bowl, which had record ad sales and viewership, underscoring the value of premium content to advertisers. CTV also remained Canada’s top network in winter, while on the French-language side, Bell Media led all competitors in the entertainment and pay specialty market, and Noovo continued to grow market share with full-day audiences, increasing 4% over Q1 of last year. In summary, our performance this quarter reflects a focused company in the midst of transition with financial results for Q1 that were on plan. We remain laser-focused on day-to-day execution to serve our customers, to grow subscribers profitably and to prudently manage costs as we said we would at the beginning of the year.
And with that, I’m going to turn the call over to Curtis, who will provide more details on our financial results.
Curtis Millen: Thank you, Mirko, and good morning, everyone. I’ll begin on Slide 7 with BCE’s consolidated financial results. Adjusted EBITDA was up 1.1%, which drove an 80.1% and for back to the 2% reduction in operating costs. Total revenue was down 0.7%. If you adjust for the one-time retro benefit of Bell Media last year and loss of revenue from source this year, revenue was up. We’ve actioned a number of costs and efficiency initiatives, including a sizable workforce restructuring that remains on track to generate in-year savings of $150 million to $200 million. Of this total, only a small amount was realized in Q1. As these OpEx benefits ramp up progressively and are fully realized, we anticipate stronger EBITDA growth in the back half of 2024.
Despite higher EBITDA, net earnings declined in Q1, reflecting a large severance charge related to the workforce restructuring, as well as a non-cash mark-to-market equity derivative loss due to the decrease in BCE’s share price this quarter. Consistent with our guidance assumptions for the year, adjusted EPS was down versus last year. This was the result of higher financing costs, increased depreciation and amortization expense due to a higher capital asset base and over $50 million in gains from sale of land in Q1 of 2023 related to our real estate optimization strategy. In line with our plan to reduce capital investments by $500 million in 2024, CapEx was down $84 million this quarter. The year-over-year quarterly step-down in spending will be more pronounced for the rest of the year as we advance spending in Q1, given favorable construction conditions this winter.
Our Q1 free cash flow was flat compared to last year, reflecting higher EBITDA, lower CapEx and a related positive change in working capital attributable due to lower supplier payments. These factors were offset by the timing of cash tax installments and severance paid to employees who departed the company in Q1. Turning to Bell CTS on Slide 8. Service revenue was fueled by some of the highest Q1 mobile phone and retail internet net subscriber loadings in years, which drove both wireless and residential internet revenue growth of 3%. We also saw continued business solutions strength supported by our acquisition of FX Innovation. When excluding the favorable impact of that acquisition, business solutions revenue still grew a strong 12% organically.
Great result that speaks to our market momentum in the key growth areas of cloud-based computing, managed automation and security solutions. However, overall revenue performance in the quarter was moderated by aggressive wireless rate plan pricing and higher residential service bundle discounts, reflecting a more intense competitive market environment compared to last year. Wireline product revenue was down notably this quarter, decreasing 35% as sales volumes normalized following an exceptional year in 2023 due to the global supply chain recovery. CTS EBITDA grew 1.7% yielding a 45.5% margin. That’s an increase of 70 points over last year and the direct result of our focus on cost management and disciplined customer growth. Over to Bell Media on Slide 9.
Total advertising revenue was up 1.6%. This performance, it was better than our peers, can be attributed in large part to Bell Media’s diversified asset mix, which comprises out-of-home and radio properties that return to growth this quarter, premium programming such as live sports content and strong execution of our digital-first media strategy. Notwithstanding the advertising improvement, total media revenue was down 7.1% and EBITDA decreased 11.4% due mainly to the one-time retroactive subscriber fee adjustment in Q1 of 2023. Excluding this one-time item, Q1 EBITDA was up 15% over last year. Notably, OpEx was down 6.2% in Q1 mainly on restructuring cost savings and lower TV programming costs. However, content costs are expected to increase in future quarters with the normalization of content deliveries from the major U.S. studios now that the Hollywood strikes have been settled.
Turning to Slide 10. Our balance sheet is healthy with $4.7 billion of available liquidity and pension plan solvency surpluses totaling close to $3.9 billion at the end of Q1. Our debt maturity schedule also remains well-structured with an average term-to-maturity of approximately 13.2 years and an after-tax cost of debt that remains below current interest rates at around 3.2%. In February, we took advantage of strong market conditions to tap the U.S. public debt markets, raising the Canadian equivalent of approximately $1.9 billion, which effectively completed our refinancing requirements for 2024 maturities. Our leverage ratio remains manageable at 3.6 times adjusted EBITDA. We updated our internal target leverage policy to 3 times adjusted EBITDA.
We believe this new target objective is reflective of our operational size and strength, an optimized cost of capital, and is aligned with the expectations of stable. While currently in excess of this level, it is consistent with a strong balance sheet, ample financial flexibility and investment-grade credit rates. To wrap up on Slide 11, we remain confident in our proven ability to deliver under any circumstances, backed by the best networks and products, our digital transformation journey, consistent operational execution and cost discipline. With Q1 consolidated financial results that met our internal plan, I’m reconfirming all our financial guidance targets for 2024. I will now turn the call back over to Thane for the operator to begin the Q&A portion of this.
Thane Fotopoulos: Thanks, Curtis. So, before we start, I want to remind everyone that due to time constraints this morning because of our Annual General Meeting that’s taking place right after this call, to please limit yourselves to one question and a brief follow-up, so that we can get to as many in the queue as possible. With that, Matthew, we’re ready to take our first question.
Operator: Thank you. The first question is from Tim Casey from BMO Capital Markets. Please go ahead.
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