BCE Earnings: Mixed Results, With Cost Pressures That Don’t Affect Our Long-Term View

BCE’s BCE first quarter was not impressive on the top line, and bottom-line results were poor. However, we hold a more positive view on the areas that we believe are most important to the firm, notably the progress with fiber broadband subscribers and steady—albeit lackluster—performance in wireless. We are maintaining our CAD 67/$50 fair value estimate and find BCE’s peers more attractive at current levels. However, if the disappointing first-quarter results spur a selloff, we’d see it as an opportunity, as we remain confident in BCE’s long-term prospects.

A 1.8% year-over-year decline in adjusted EBITDA, with margin compression of 230 basis points, was disappointing. Many factors contributed to the margin weakness, but the outright EBITDA decline was due entirely to the media segment, which benefited from a one-time revenue adjustment a year ago. We attribute margin compression in BCE’s telecom segment mostly to the sales mix, as the growth in equipment revenue, which carries low margins, far outpaced that of higher-quality service revenue. Generally, BCE simply suffered from inflation across its cost structure, from labor costs to content costs. With inflationary pressures beginning to lap last year’s spikes and no reason to think other idiosyncrasies that affected this quarter will carry on throughout the year, we are not changing our projection that full-year margin will be flat with 2022.

Total service revenue was up only 0.9% year over year, but the breakdown was more encouraging, with media and wireline voice revenue causing the drag. In more critical areas, wireless service revenue grew 5.4% year over year, and wireline data revenue grew 2.5% year over year. Even better, consumer internet sales were up 10% year over year, with the muted wireline data revenue growth due to the firm’s sizable legacy revenue in things like enterprise services and satellite TV.