BCE Inc. (BCE) Earnings Call Transcript & Summary

Hi, good morning. I'm Sebastiano Petti, and I cover the Canadian communications space here at JPMorgan. I'm joined by Curtis Millen, CFO of Bell Canada. Curtis, thanks for joining us.

Good morning. Thanks for having me.

You've been in the CFO seat since September 2023, but with BCE for over 15 years. Perhaps start by updating us on the near-term priorities for BCE as you navigate this more competitive industry backdrop.

Yes. It's interesting because the old strategy is a bit of a new strategy. It's -- we've been on a fiber build-out strategy here for 12, 13 years. Kind of a similar time to when the American telcos started building out fiber. We just happen to continue that journey all the way through. So I do think fiber is our best strategic asset, and it will continue to be our best growth asset. Ultimately, plan to at the end of 2025, hit 8.3 million fiber homes pass, and that's in that 80% range of our total footprint, total fiber plan, which is quite a big development. Obviously, there have been a couple of developments in the Canadian telco cable landscape. But one of the big ones is that we now have enough fiber that we're competitive. I mean, let's say you said, I know I drink the blue cool aid, but where we have fiber broadband, we win. That's what happens in the marketplace. That's why we have net adds and a little bit different than the U.S. market. We're a much more bundled world up in Canada. So having access for us, for our consumers and customers to get access to our fiber network, which still has an advantage in a moment in time. Hopefully, it's a long moment in time. So that's driving growth for us, and it's driving bundled opportunities for us, which just reduces churn. So the big story for us, again, is monetizing the fiber footprint that we've built out over the last 13 years.

And so what do you see as the biggest opportunity? Is it just continued sell-in of the fiber as you look out over the next maybe 12, 24 months?

Yes, I'd say a few things. I do think that's the opportunity. I mean ultimately, we have 1.5 million new fiber locations in the last 2 years. We certainly don't have 1.5 million subs in those fiber footprint. So it is a bit of a ramp-up. It takes 2, 3 years to ramp up and get to I mean I wouldn't say equilibrium because I think we're still pulling incremental share where we have that even after a couple of years, but I mean, there is a ramp-up. So even if we stopped our program today, which we're not, we still have more growth on fiber. And then ultimately, it's pull-through, right, in a world of customers, right? I mean, the way I think about it as a customer is you just want your stuff to work, right, whether it's wireline, whether it's Wi-Fi, whether it's wireless, you just want your stuff to work, right? My 9-year-old, he just wants this stuff to work. And if it doesn't work, he's unhappy about it. So I do find the high broadband -- broadband usage in the home, seems to be the most important driver of customer behavior and customer buying decisions which is a little bit different than 10 years ago where we all thought you'd sell Internet separately from wireless. It does seem to be heading down the bundle path more and more, especially in Canada. And that's where, given our fiber footprint and our wireline coverage, it drives an advantage for us. So I think then just the rest of the growth question. I think there are two other venues there, well, three other venues. One, we're just going to keep ripping out costs. It won't be as dramatic as announcing nearly 5,000 head count reduction, 10% of our workforce, but the ability to leverage technology and it's not just us. I mean, everyone else is going through the same kind of workflow automation, digital automation, which is a BBM sales opportunity for us, but just internally, ripping out these costs and being more efficient, it's better for the customers, especially as you push more online digital transactions, but it's just more efficient for us. So leverage digital, leverage technology, leverage the fiber footprint, which is just more cost efficient for us, and it winds up driving cost savings and better customer service. So that, I think, is just a trend that's going to continue for us as well.

Yes. So maybe real quick because convergence has been a quick -- has been a topic for sure this week at the conference. But -- so we have some U.S. guys that are maybe converged 15%, 20% if you look at Verizon, I think that's kind of the number they've thrown out, little bit of debate on where convergence goes in the U.S. and so AT&T is something that they're a little bit more focused on perhaps than peers. Maybe we have Verizon at 15%, European level, 60% to 70%, maybe -- where do you think the Canadian market falls in that spectrum in terms of the number of, I guess, bundled -- converged bundled subscribers across the Canadian landscape?

Yes. I'd say we're going to be in between. Again, we've diverged strategies U.S. versus Canada, right? I mean the U.S. started building fiber in U-verse back in the day. And we started that journey out in the Atlantic. We just continue that journey. right? I mean, it does take time to build out over 8 million fiber locations. It's going to take time, but there's a reason why our cable competitors are building a fiber in new builds, right? It's not because -- they don't think DOCSIS 3 is good. They just think fiber is better. So they're building it out. And again, it's a different market. Our telco brother in out West, they've built out fiber. We've built out fiber and honestly, it's a game changer. It's such a cliche, but for us, it completely changes the way we can go to market. It completely changes the way that we can sell, and it changes the way that we think about the household as opposed to products. right? And I think it's a subtle shift, but it's an important shift in mentality, and you've kind of seen it over the last few years internally, but all of our sales structure is now organized to sell multiple products into the same household as opposed to, okay, let's count how many wireless subs, let's count how many Internet subs. I mean we still do that because it's -- they're useful metrics. But ultimately, it's -- how many customers do you have, how much revenue can you generate out of that household.

And we'll definitely come back to some of the fiber strategy later on as well. So shifting to wireless. Obviously, competition remains a big topic in the Canadian market. While we did see some pullback in promotional intensity in April, competition remains somewhat elevated versus perhaps typical second quarter seasonality or promotions. Hence, that backdrop, BCE has remained focused on premium loadings. Can you update us on the competitive environment in wireless thus far in 2Q and maybe any other demonstrable changes since you guys reported results?

I think more of the same. I think rationality in the industry ebbs and flows a little bit, probably like every other industry and geography. It would be great if everyone was rational all the time. But we report subs. So end of quarter, folks are buying subs. I do think what's different in my mind anyway is -- and again, it ties back to the question you asked about kind of bundled and convergence. Internet churn is lower than wireless churn. Bundled Internet and wireless like the more products you have, lower churn becomes for the customer. But we're also in the world where I feel there's a bit of a bifurcation between wireless subs. They're -- the last 10, 20 give it a number gross adds that you'll pick up in any quarter and for us in any of the other customers. I mean, they're not really going to be long-term bundled subs. And there's no long-term business at a $35 postpaid ARPU. So those subs, 6, 9, 12, 24 months, like they're going to be churning out anyway for whatever the best deal is at the time because they're not focused on quality network, they're focused on solely on price. So I don't think the industry is better off chasing down toward the last 10, 20 incremental loads just to say they got a bunch of loads, but didn't make any money off of it. So we're really trying to stay away from that part, focus on the bundled aspect. But I've given away a lot of discount, just bundled out to capture the churn and to drive our, we would say, main brand, superior product, folks that are going to actually use their products and not just the red tag shopping all the time.

And you talked about on the call, I think, or in the press release, talked about expectations for mobile phone ARPU moderating growth or to decline versus moderating growth prior because of some of this competition. So maybe help us think about how should -- we should think about promotional intensity or how the team is thinking about promotional intensity for the balance of the year. And then again, not necessarily chasing these low-end subscribers, but how does the Canadian market, I guess, evolved from this point is maybe some of your competitors out there probably don't necessarily have the same view in terms of pricing.

That's fine. Look, others are -- whether they're being rational or not. We all defined rationality a little bit differently, right? But when you're not competing with the same quality of assets, you've got to pull different levers. So we understand that. And it's not like competition is new. So we'll continue to compete. We'll continue to get our share. I think what's different and I think it's different than in the U.S. also, we're a little less mature in terms of overall handset penetration, 5G handset penetration and new-to-category, new-to-Canada has been a real growth driver for the total industry. And frankly, we've underperformed in that over the last decade. I think you go all the way back to the GSM network. I mean we just didn't have a wireless network 15-odd years ago, I guess just a bit longer than 15 years ago that was compatible with international roaming. So we've been at a disadvantage, but I think we're seeing a bit of momentum now and for us, that's really just a tailwind. We don't have to dominate that market. We just have to be okay. And for us, that's a win. So I do think in the industry, it's a little bit different in that there's actual just headline growth and let's capture our share of the new category and continue bundling, continue growing the rest of our sub base. I think there's growth for everybody.

Yes. So you brought up the new-to-Canada market and so the population growth remains robust in Canada. And you are taking more share in the new-to-Canada segment. It hasn't been a strategic focus for yours over the last several years. But on the -- Mirko talked about putting the right building blocks in place to accelerate that share growth. Can you help us think about what those are, maybe timing or realization or milestones from here in if -- when should we maybe expect to see that move the needle a little bit more on the loading side?

Well, I hope moving the needle as soon as possible. I think it does take time, though, right? I mean, these are kind of community initiatives, and I think distribution plays a big part of that. And it's local partnerships, local, whether it's dealers or under our banners. It's still -- it's in the community and serving the community. And I do think some of the partnerships with the Dollaramas and Staples, the No-frills, that helps us, right? I mean that really should accelerate. The Air Canada partnership we have, given our eSIMs on planes, that gets a lot of press because it's Air Canada, and it's a bit slasher, but I actually think it's the blocking and tackling of distribution in community in market and frankly, out of country in the home markets before folks move or travel or become students in Canada. So I think distribution is quite a big one, and then ultimately, turning our sales engine to focus on it, right? I mean, not all new to category are the same. They have different credit ratings. Some have fantastic credit. Some are just building up their credit just like the rest of the community. And I think industry-wide, I think we've looked at new to category a bit more monolithic manner, and we're being much more flexible here in terms of how we go after that new segment of customers.

Yes. And so the new name -- the no-name mobile partnership is an example. And any update on that? And how meaningful perhaps could that be?

Well, A little too early to say. I mean, all signs point to that being quite successful. Strategically, it's certainly on brand. It makes a lot of sense. Now we just need to execute.

So one dynamic of the wireless market that has been a little bit more of a challenge, perhaps recently and just given your share there has been the business wireless side. And so you're facing macro headwinds as perhaps Canadian enterprises rationalized a bit, but also more competition. So can you help us think what portion of the base business wireless comprise? And qualitatively, can you help us think about maybe the trend in business wireless subscribers over the last maybe a couple of quarters here in year?

Yes. You're not wrong. Business wireless has been more challenged than consumer wireless. I think, again, our strength is the relationship we have with enterprises in Canada, and it's a bundle of service that we're selling them. So it's -- again, it's priced differently, it sounds different, but ultimately, we have customer relationships, and we want to sell them as much as we can, right, quite simply. And I think what's happening is some of the products put them in legacy bucket or give it another name, right, where there's a bit more negotiating pressure on some of those items while we ramp up kind of the growth services in BBM, right? So the BBM is just our enterprise segment. So if you're talking to customers, is base connectivity the most important thing we're thinking about? Or is it transition to cloud, workflow management, digital transition. And I think the latter is becoming much more important for CIOs and up, frankly. And I do think that's a growth vector for us. I mean you saw that we made an acquisition of a company called FXI, all right? And that's ultimately install ServiceNow and it's -- we've been talking about cloud in the U.S. forever, right? I mean everybody is talking about cloud, but this is the team that will actually transfer your compute entry to cloud and update your processes so that you're not just lifting and shifting to the cloud. I do think there's a bunch of growth there, and then that wraps around the cybersecurity side of it and it wraps around our network. So I do think that bundle is quite compelling. And since the acquisition, we've seen pretty good growth there and a very different type of discussion with our end customers. So ultimately, long way of saying the bundle of services will keep changing over time. I think we do have the capabilities to deliver what our customers are looking for. But again, the overall revenue and EBITDA is what we care about and the product mix is just going to keep changing over time.

Yes. So just jumping to business wireline for a second since you touched on it. The decline in legacy revenue, again, continues to be a bit of a headwind. But at the same time, you touched on perhaps the business solutions, services revenue, right? Had a nice organic growth, it's 12% in the quarter. And I think now at a $500 million annualized run rate, I think, was what you guys discussed. So how -- you touched on some of that with cloud security managed automation. Help us think about the growth drivers there? And maybe how some -- maybe double-click on the conversations that you're having about next-gen solutions with some of your enterprise partners and customers?

Yes. I think that's right. What's interesting, we'll see how it plays out, but it seems like any one of those products can actually pull through the rest, where traditionally, you think, okay, well, it's connectivity and then you can sell through other products in this world where there if the customer is focused on transition to the cloud or workflow automation or whether cybersecurity product, it winds up being a -- again, a bit of a buzzword, but it winds up being a holistic discussion because they all tie together, right? And we have our own IP, but we can also -- we have partnerships with kind of the leads in all of those different avenues, and we can implement it. So whether it's kind of the MSI, the PSI, the product side, enterprises aren't that much different from consumers. You just want it to work. And then if something does go bump in the night, you need a number to call and that group will go out and fix it. So the strength of relationships, the reputational strength will continue to help us keep driving the newer products and newer services and frankly, helping our customers solve problems. I mean, fundamentally, that's what we do. We help our customers solve problems so that they can run their business and not have to worry about the solutions that we bring to bear. So I think it's more of the same, but the conversations are taking place at different levels in the organization now as you start talking about longer-term transition plans and beyond just connectivity, which is a bit more CIO level or even below sometimes.

Yes. Okay. So shifting back to the consumer and convergence. So we talked about BCE's long-term fiber to the home or fiber to the premise strategy. And particularly driving increased penetration, which seems to be a focus or Mirko has talked about. So you reported record Internet net adds in 1Q '24 noted, I think, a 39% increase in bundled sales where BCE fiber was available. And so despite the more competitive wireline market, it was the best result since 2007. So help us think about, I guess how sustainable are these trends in the Internet business? And think about perhaps the converged strategy is meant to drive lower mobile churn over time. You kind of talked a little bit about that. When do we perhaps begin to see that converged opportunity and that better CLV kind of start to come through on the wireline side?

Yes, I think you continue to see it and continue to accelerate. Like all of the metrics, the more products you have with the customer, the lower the churn. And it actually holds -- I mean if you sell 4 products to 5 products, there's actually a churn benefit going from 4 to 5% from 5 to 6. So the churn benefit of products as kind of we're all consumers, if the consumer can just hit the easy button, they do, right? And I do and is kind of human behavior. So that, I think, continues. And again, what's different in the Canadian industry is while others were pulling back their capital spend, our fiber deployment actually accelerated during COVID, right? Again, it wasn't an experiment anybody would want in Canada or the U.S. or globally. But it kind of proved out that as folks are working from home, your teenagers or your spouse or partners working from home also like broadband, like fast broadband in the house is quite important now. I'm not working for a home a day or 2 days a week without fast Internet, right, and fast, reliable Internet. It's just become a much more important product. I think it was always kind of ramping up to be the most important product, but it certainly got accelerated. So what's changed is we win where we have fiber, where we have copper network or fiber to the node, it will be less competitive. Copper honestly, is not competitive. It's a service that provides, but it's not as good as fiber by a long shot. So what happens is we go from 30%, 40% fiber coverage of the cable footprint. Now we're north of 60% heading north 70%. It's a very different world of how we can market, what we can sell and the growth that, that drives. So ultimately, wireless has always been competitive for the last 15 years, but our wireline footprint is now pulling through. So we call it bundle, but ultimately, we went from having an inferior broadband product to a superior broadband product, and now it's time to monetize that network.

Yes. And I think maybe a couple of years ago, when Mirko was here at the conference, kind of said you had reached that 60% critical mass. And I think that was kind of a turning point for the business because now, again, you have the superior product bundle offering across the vast majority of your footprint, now you can really begin to lean in. So that's kind of where we are.