BCE Inc. (BCE) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. We wanted to thank Mirko and BCE for being here today. Thank you for coming to the conference. Great to have you here in real life.

Well, that's nice to be here in real life. It's great. Nice to see you, Simon.

Thanks a lot. So before we get started, please see important disclosures on the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representative.

So Mirko, maybe start off with your 2022 priorities. I think the whole Canadian ecosystem has set out a pretty encouraging outlook for growth and for profitability for 2022. So perhaps go through the key things driving that.

Yes. Sure. So for us one of the key priorities in 2022 is clearly executing on our second year of our 2-year accelerated CapEx program and getting 5G coverage to 80% and making fiber available to 900,000 additional locations this year, which is a pretty aggressive number. It's an impressive number in the grand scheme of things. So that's obviously a priority. And then otherwise, it's continuing to deliver quarter after quarter for our customers and our shareholders. And we said we're going to do that coming out of the depths of COVID in Q2 of 2020. We've delivered on that. And the way we're doing it, really, if I -- Simon, if I go through 3 or 4 of the segments very, very quickly. On wireless, we pivoted to the high-quality smartphone loading strategy. I've talked about that a lot. I think the point I want to highlight for you today is it's -- you can have a high quality -- you can have a smartphone loading strategy. But when we say we have a high-quality smartphone loading strategy with a high-quality smartphone loading strategy, you can look at our loadings and we index heavily on the Bell brand, which is what you want because that's what's driving our service revenue and our ARPU growth. And I think we are the largest premium brand mobile carrier in Canada. On the wireline side, it's continuing to perform particularly in Internet and TV on the back of fiber. And you can see in our performance, whether or not it's revenue growth or ARPU or net add share, et cetera. The growth is impressive. On media, I'm really pleased with, I call it, the digital first strategy, but it's really driving more and more of our media revenues from our nefarious digital platforms and our ad technology, and that's working and that's been an aggressive pivot since 2020. And so those will be kind of by and large the priorities. I'll stop there, and I'm sure you'll explore some of those.

Great. I think one of the things in your guidance was it was quite wide to start the year, I think 1% to 5% of revenue, it's 2% to 5% on EBITDA. So obviously, the middle of the range is good. The high end is good. The low end is below what you did in '21. So is that just the COVID kind of factor to put some conservatism in there?

Yes, that's what we're doing, kind of widen the shoulders, particularly on the low end, just a reflection of when we issued guidance, we were still in like right in the midst of Omicron, there's the supply chain constraints, inflationary pressures. It's just -- I mean that's just -- to the extent you feel some conservatism there. It's really just to be well aware and mindful of those impacts, and we'll manage through them.

And from what I see from the headlines, things are progressing steadily. So hopefully, your conservatism with the economy is opening up, and you're seeing some normalization, are you in the last few weeks?

Yes, I think we are. I mean, Omicron certainly had an impact across the board like it did in the United States and it has in Canada. I'm not talking about Bell specifically or telecom specifically, it's across the board. And clearly, there's good news ahead. The restrictions are being lifted. The mass mandates are soon to be lifted. Customers or consumers are going to get comfortable. Travel has picked up. Yes, I'm quite optimistic for what lies ahead.

So that should help with the roaming this summer?

Yes, absolutely. I mean I think you'll see -- we came out of the last few weeks of Q4 pretty solid in terms of roaming recovery that -- we saw that continue to sustain itself through the early parts of Q1. So I'm fairly optimistic. And I think given the dynamics in some parts of the world -- the unfortunate dynamics in some parts of the world, it may have an impact on travel to Europe, we'll see. But certainly, travel to the U.S. has been strong.

Sure. Well, that's great. The -- you mentioned supply chain, any updates there?

On supply chain, look, when I talk about supply chain, I think for investors, there's 2 key things when you're thinking about Bell, one is handset supplies. And we've managed that quite well. And certainly from a competitive position, there's no issue. And the other one is would supply chain constraints have an impact on our ability to deliver on our fiber deployment objectives. I mentioned 900,000 locations passed and we've got some -- we've managed the supply fiber quite well, and I'm confident we're going to hit our target.

And any sign of kind of price hikes from the vendors?

Yes. So on the price hikes, again, that's something that's an inflationary pressures on input. The input costs are something that everyone, every stakeholder in every sector of the economy has to contend with. I like the position we're in. We're not completely immune. Of course, we have long-term supply arrangements that have helped shield a bit of that impact, particularly on the major cost inputs of our business.

Yes. And then, labor?

Same with -- yes, labor, I mean the impacts of wage inflation is baked into our guidance.

Sure. Okay. Great. So if we start with wireless, I think the elephant in the room is consolidation. So how do you see -- and it seems like the base case market assumption is that there will be a divestiture of a large part of Shaw Mobile to some third party to keep up a fourth operator as Minister Champagne was talking about the other day. So how does that impact your go-to-market and your view on the kind of the stability of the industry over time?

Look, I think when I'm asked to comment on that potential merger, where I start with is if you -- I start with how are we situated competitively. I think to me, that's the most important thing. And if you go back to kind of the day the 2 parties announced their deal to the day in the future, assuming it does get approved, during that period of time from announcement to potential completion, Bell will have built out an additional 1.5 million locations with fiber. We will have gone from essentially 0% 5G to 80% 5G coverage. So we're in a tremendous position strategically and competitively. So I think that's the first thing I'd say. As far as the fourth player, it seems pretty certain that they will have to be a divestiture of some portion, if not all, of the targets wireless assets, which is no surprise to me, frankly. And I don't see how that fourth player could be a strong competitor as Shaw Mobile or Freedom Mobile, if you wish, had been in the past. So I think, again, that speaks to how we're going to be able to deal with this at Bell Mobility competitively.

And what happens to competition at West when Rogers tries to upsell mobile? We heard a lot of that from Charter and Comcast here up selling mobile into the broadband base.

Yes, we'll see. First of all, you have to complete the merger. And you've got to integrate the 2 large companies with different cultures, and then you have to execute in the marketplace. Again, back from where we are at Bell Mobility, we are able to compete quite effectively in a 4-player market. We have not kind of had a wireline infrastructure in the West, so nothing changes for us competitively. We've done well in the West. We're the least exposed as well. So I think based on our track record of being able to compete in the West without wireline infrastructure and being the least exposed, I think, again, that positions us very well.

Great. And you talked about the quality loading that you've had. I think the industry has had a very good year. It's had a very good year in the U.S., but I think there's a concern, particularly the U.S. penetration. But it sounds like you're pretty confident about the continuation of the strong growth -- industry growth in '22 and beyond.

Certainly in 2022, and I also think beyond, by the way. And there's a bunch of reasons why -- a number of reasons why I think there's strong growth potential in wireless in Canada and for ourselves within that. Retail stores being completely open without restriction imminently or in some cases right now bodes well. We're at the very beginning of the 5G upgrade cycle and have a lot of optimism for the 5G upgrade cycle. I think it's going to drive growth immigration. Canadian government indicating that it will go back to its more customary levels of integration -- immigration, excuse me, and even more. So...

Operational growth...

Exactly. Penetration, you mentioned penetration, I think we're at 93%, 94%, 95% penetration in Canada. In the U.S. here, you're at 120%. So there's -- we'll get to those levels as well in Canada. So I think that helps as well. And then apart from subscriber growth, things like data overage decline, where at Bell Mobility, we've reached a point essentially where we're at an equilibrium point, it's neither a headwind or a tailwind, which is actually a positive. And we've managed data overage decline really rather well in the past 2.5 years and then roaming upside.

Great. And I think one of the other features across the industry here in the North America has been low churn. And there's uncertainty about how much of that is stimulus? How much of that is lockdowns? And what's your sense on the industry churn and your churn is the sort of sustained low levels sustainable?

No, I'm quite optimistic about churn as well. You've seen our churn come down appreciably. Perhaps at the beginning of 2 years ago, the first kind of step function change in churn may have been COVID-induced, but it's sticking. And it's sticking, I think, for a number of reasons. I'll speak just for us at Bell Mobility, a far better customer experience in 2 years. We've made great strides on the customer experience, and that really matters. I think the second one would be, I think we're starting to see the benefits of installment plans from a churn perspective. Customers are paying for their handsets now. And there's some discounts, of course, depending on when you buy your handset, but by and large, you're paying for your handset. The handsets are of higher quality. So customers are hanging on to them longer without churning. They don't want to get back into the market for pay another $1,500 or $1,200 for a handset. So I think that's helping churn. And then we, at Bell, are certainly doing a much better job at trying to penetrate more deeply wireline household with mobility and a mobility customer with wireline. And when you combine those 2 products together, you get a pretty sizable churn upside.

Yes. Great. So what are your bundling rates at the moment, have you disclosed those?

No. Well, it depends on -- there's no -- in terms of our penetration, no, we don't have them disclosed them, yes.

Yes. And I think Verizon last week was saying if you had premium unlimited with broadband, it was a 34 basis point reduction in there.

Oh, in terms of the churn reduction, yes, it's not far off that. Those are pretty good -- that's a pretty good benchmark, yes.

Yes. Impressive. One of the kind of religious debates this week at the conference has been fixed wireless. And I think the cable companies have been saying it's not fast enough, it won't handle the data and the telcos. At least Verizon and T-Mobile have been talking about their confidence in the solution. You use, I guess, wireless home Internet, you call it that more in a rural context. So you've got fiber. You've got 5G, where do you see wireless home Internet in the kind of the broadband ecosystem over time?

Yes. So I've been following the debate you referred to that's going on in the United States. And the part of the discussion in the United States that's most interest to me is the fact that it has no relevance to Canada, like literally no relevance. And here's why. And we -- and I'm a big believer in fixed wireless access because we just finished our program to make our wireless home Internet product available to 1 million locations in our footprint, all rural. That's the key thing. There's no way I would try to make a business in Canada with fixed wireless access competing against Tier 1 cable and no way can it compete against fiber because I think DOCSIS is going to struggle -- is struggling and will continue to struggle for a long time against fiber. So if cable can't do it, I don't know how fixed wireless access will.

And what about -- I think one of the things Verizon was talking about was SMB use cases like food trucks or construction sites or some of the more mobile scenarios where a fixed connection or hardwire connection might not be as suitable...

Yes. Well, in terms of the enterprise side, sure, I mean, if you talk about, let's say, private networks, yes, lots of potential private networks with 5G mobility, 5G wireless, fixed wireless access. But I think it's still -- the winners will be those who have the most robust converged 5G and fiber offering.

And sort of following on that theme, one of the sort of opportunities you highlighted recently is the edge, and you've got deals with AWS and deals with Google Cloud. And I think the industry -- the investors are worried about you're kind of dancing with these giant tech companies. And is there going to be a reasonable split of the economics around that? But help us understand what you see as that edge opportunity and how you can monetize that?

Yes, the key thing there is when you think about whatever the applications that are going to drive significant monetization, particularly on the enterprise side in 2, 3, 4, 5 years and beyond, augmented reality, virtual reality, industrial, metaverse, et cetera, you're going to need very low latency services. So you want the computing power at the edge of the network. You want your cell sites fiberized and, of course, the technology available at the edge of the network. And we're positioning ourselves quite nicely to capture leading share of growth in MEC. We have the most fiberized cell sites. We're going to have the lowest latency both on 5G and fiber, which can deliver even more -- better latency than wireless can and jitter. Jitter Is a very, very important but not often discuss the issue. It kind of -- you can have low latency, but you want consistently low latency, and that's the jitter. So I think we're going to lead on that. And most edge centers, most fiberized cell sites and as far as the revenue splits concern me as well, and that's why we structured. Like here's how -- concerning in the other sense, which is we wanted to make sure we structured our arrangements so that unlike 4G, the network operators and network builders captured a fair share of applications revenue that will ride on the networks. It didn't happen with 4G. It has to happen with 5G, and we positioned ourselves for that. And the arrangements we have with the hyperscalers have revenue splits that I'm very comfortable with and they're appropriate. And it's going to allow us to move up the solution stack and capture revenue.

And Verizon seemed to suggest that it's still a couple of years away from scaling. Is that what you see as a way in terms of us putting it in our model in terms of...

On MEC, yes, I would agree. So when I think of enterprise, we've got several in our kind of state and growth portfolio. We're talking about cloud, security, IoT, MEC, private networks and of course, the upgrade cycle connectivity. So those will be the sixth. And security and cloud -- security is a fairly good business today and growing fast so is IoT. MEC would be a couple of years away.

Yes. Okay. And any update on the C-band? I know Ottawa is looking at various caps and different structures for the auction. But any clarity on...

No update yet. We'll see the consultations ongoing now. I am not fairly optimistic that the auction framework will allow the players to get the appropriate amount of spectrum they need and perhaps at a lower cost than we saw for 3,500 megahertz just given the amount of spectrum that will be available and early indications of what the rules might be.

Okay. And I think a lot of global operators end up with 80 to 100 megahertz of mid-band, I think that's what Ericsson and Nokia sort of talk about as being the optimal. Is that sort of your design...

Yes, 100 is the right number, I think.

Yes. Great. Let's turn to wireline then. And I think you set up this debate. We've seen you and Telus do very well against cable competitors in the Internet space. And obviously, you've both been building a lot of fiber, but just delve a little bit into it, what is causing customers to choose fiber over cable? And where is this going to end up because you've got a lot of kind of early markets that still have a lot of penetration upside?

I think the -- I don't mean to be flippant about this, but the real answer is customers will always choose quality. And if the price is reasonably comparable, then they all 100% will choose quality, and customers are also willing to pay a premium for quality. So I think that's what's driving it. And if you think about fiber, faster download speeds because consumers clearly understand download speeds. We're on the cusp with fiber to launch multi-gigabit speeds. And then the next thing is symmetrical speeds and symmetrical multi-gigabit speeds. And that's going to be the everlasting competitive differentiator for years to come. Cable just can't deliver upload. And while some -- just from a consumer perspective, you kind of don't think of your Internet service from a download and upload perspective, I don't think most do. But you do understand that your Zoom call is not working quite as well or there's -- it's slowing down because it's not a shared pipeline. Those things are well understood, and it will be very, very difficult for cable to manage the competitive threat of multi-gigabit symmetrical speeds from fiber providers.

So a lot of the companies here have been talking about DOCSIS 4.0 has been the solution to that. But others have said, we need to go fiber as well. Do you have a sense of how this is going to turn out...

Yes. I mean every kind of assessment we've done, we don't believe that DOCSIS 4.0 will be able to deliver the same symmetrical multi-gig speeds that we can and certainly nor near as fast, it's a long process. If you think about doing it node by node, neighborhood by neighborhood, swapping out legacy modems in every home even for a customer has no interest. Some customers say, "Why are you swapping out my modem. I don't want gigabit." So that's a top order in terms of cost, time and execution. We don't have to deal with any of that.

So help us understand because when we look at your numbers, some of the U.S. companies will break out, here is the steady-state stuff and here's the new cohorts that we've been building that's 12 months old or 2 years old. When we look at your number, we're seeing a mix of that. So it's looking at penetration is a little bit diluted by some of your new builds. So what do you see is that when all of these markets get to steady state, is that 5 points of penetration, 10 points of penetration on your homes passed?

In terms of market share growth, I mean...

Well, yes, market share growth or penetration growth, yes.

When we enter a new area with -- here's how I'll answer it because you're right, we do -- we don't break it down. And the numbers you're seeing are a mix of fixed wireless access, DSL and fiber. When we enter an area with fiber network, we're gaining 30% to 35% penetration fairly quickly. And then it kind of levels off a bit, but we still continue to grow at a slightly reduced pace than the initial stages. Yes, and customers moving and then customers who are on the legacy network and finally deciding to move over. So what we do is early gains at the beginning, then we continue to kind of penetrate a market that where we've had fiber well beyond 12 or 18 months. And so what -- then with an existing fiber footprint, what you want to do is continue to penetrate and then your existing customers, you want to get on higher Tier plans and kind of do both of those to continue to drive revenue performance.

So even though Canada is pretty highly penetrated on the Internet, you still see a lot of share gain opportunity here, that means household growth as well, I guess?

Absolutely. So you have household growth. And then if you -- that's number one, it's a good point. And then if you kind of roll the tape back 10 years, the national market share split in absolute terms between cable and telcos 10 years ago would have been 65% cable, 35% telcos. And that was in an environment where there was very little fiber compared to today. So ultimately, there's no reason why that's not going to be 50-50, if not beyond 50% market share for telcos over a period of time.

And it's presumably also helping your cost structure, your calls, maintenance calls?

Yes. So what we have -- so if you looked from a top line point of view, given the market share gains and the up-tiering and pricing actions, you can see the service revenue growth for Internet that we're delivering. So on the top line, it's very strong. Where we have fiber, our service and support costs are 40% lower. Our churn can be 30 to 35 basis points lower. And the lifetime value of a fiber customer is 50% higher, and we hang on to a fiber customer at least 2 years longer. So the economics are quite compelling. And then that's just today. And when I look ahead to being even better at driving customers to higher speed tiers and therefore, generating higher ARPU from the existing customer base, that's going to drive further top line growth, and I think of things like copper decommissioning, better self-install capabilities because the more penetrated we are, each one of those homes becomes a self-install potential down the road.

Royalties on the side.

Yes, virtual repair capabilities that we're beginning to offer, all that's going to drive down our cost structure on fiber.

Great. So really strong consumer Internet growth, but there's still some legacy headwinds in the enterprise SMB space, legacy product sets and whatever. How far along and they had some COVID impact, are we in terms of working through some of those?

Yes, we're going to have to continue. I mean we're going to -- those legacy declines, as you put them, we're going to have to continue to manage those quarter after quarter. Omicron, you mentioned it, certainly didn't help. So to me, I mean, the optimism is the team has done a very good job of managing that. And what I like about where we sit and probably we're quite -- well, we weren't there 3 years ago, is a very clear growth plan in the enterprise segment. Part of the fact is we've been building the networks and the capabilities to position ourselves to go capture some growth on the things I mentioned, IoT, security, cloud, private networks, et cetera. So we weren't there 3 years ago, now we are. So when those -- as we talked about MEC 2, 3 years down the road, when it starts to scale, we're ready. So I'm quite optimistic about the enterprise space. But this is kind of looking in the medium term, it's going to be compelling as these enterprise -- as the enterprise growth portfolio starts to really hunt.

Okay. And is there any kind of threat from Rogers having more of a national footprint to attack enterprise?

Cable networks haven't been set up or well equipped to really serve the enterprise, certainly not the large enterprise segment. So combining 2 cable networks that don't overlap or even if they did overlap, but they don't overlap, it's not going to make the cable network better equipped to really serve large enterprise needs. And then you need kind of the product development expertise for that particular segment and the distribution strength. So to me, it's not evident.

We've talked a lot about connectivity be it wireless or wireline. We've got AT&T tomorrow and WarnerMedia's Discovery, that deal is going to get voted on. So we're seeing some telcos get out of the media business. You own stakes in sports teams and so forth. So how do you think about -- as video -- traditional linear video declines, how relevant is media for BCE versus selling connectivity, given that streaming is becoming more and more direct?

Well, I think only media helps us on so many levels, and it continues to fit strategically. So in the past, who would have said the media assets generating $750 million to $800 million -- $850 million of free cash flow that's helping us fund fiber. That continues to be the case. I think from a strategic point -- that's perhaps a financial argument, but from a strategic point of view, still continues to be significant symbiosis between TV and Internet pull-through in both directions, by the way. In terms of the cable TV declines or IPTV declines or big bundle package declines, nowhere near the pace of decline in Canada as there has been in the U.S., partly as a result of pricing, pricing has always been low in Canada on TV, partly a function of industry structure. So -- and because of the quality of our networks and our TV products, we're actually seeing growth. Some -- a little bit of that is coming from people kind of reconnecting if they've kind of cut the cord coming back. It's easy to cut the cord, but it gets complicated to try to reassemble the content you want.

You may not save money.

You may not save money, and it's not as convenient. So some people are coming back, and of course, we're taking share from cable. But I think those are arguments we've typically made that we believe and, obviously, because they fit strategically. But really, what's new is there's -- I believe there's tremendous growth potential in the media business for Bell. Bell Media has typically been a traditional television broadcaster. And the pivot we're making to digital, where we're taking our high-quality content, making it available on more digital platforms than we ever had before. All our digital platforms are addressable, which is what advertisers want, converting traditional TV systems like Bell TV systems to become addressable because with new modems that are not -- sorry, new set-top boxes that are becoming available, they'll be addressable. So now you're able to offer addressable systems on the traditional platforms. Obviously, digital platforms are addressable. That becomes really compelling for advertisers. You marry that with ad tech and attribution, and that positions us really nicely to start taking our fair share of digital ad spend in Canada and just taking a few points of market share in digital ad spend market, big growth potential...

Yes. And you're already growing 12% on...

And we -- actually, our digital revenues last year grew 35% and digital is now 20% of the overall revenue mix. That's basically 2 years from a traditional broadcaster. I think it's been -- the teams done a remarkable job.

Great. Well, we're -- almost we are out of time, but just one last thing on -- you raised your dividend again despite -- the payout ratio despite the leverage shows a lot of confidence that the cash flow is going to accelerate. So maybe just talk to that as you get through the accelerated CapEx program.

Yes, I'm glad you asked me that as the final one because a few things I want to share on that question. So one is we know who we are, we are a dividend growth company, and we know what our shareholder expects of us. We've had a long, long track record of raising the dividend. And I've been the CEO now for 2 years and have raised the dividend 5% 3 times. So that speaks for itself. I think we've been -- certainly, this year, we've been funding the dividend increase through organic growth, which is also quite a positive. And if our payout ratio is elevated it's because of the accelerated CapEx, yes. And here's what I'm really optimistic about in terms of looking out a fairly short period of time, just look out even 3 years, 2.5 years actually now, which is not far. In 2.5 years by the end of 2025, we will have 9 million locations in our footprint with fiber. After we do 900,000 locations this year and just imagine an average of 600,000 in '23, '24, '25, we'll have 9 million locations with fiber. We've already got 1 million locations with wireless home Internet. So we have reached our target footprint. And now we're talking about being down to 15% to 16% capital intensity. That's $1 billion in free cash flow flexibility compared to today. So that's amazing free cash flow growth.

Well, Mirko, thank you so much for coming to the conference and joined the discussion.

Thank you, Simon. Really appreciate it.

Thank you.