BCE Inc.

All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the BCE Q4 2018 Results in 2019 Guidance Conference Call. I would now like to turn the meeting over to Mr. Thayne Fathopoulos. Please go ahead, Mr. Fathopoulos.

Thank you, Valerie. Good morning to everyone. With me here this morning are George Covici's President and CEO, as well as Glenn LeBlanc, our CFO. As a reminder, our Q4 Results Package 2019 Financial Guidance Targets and other disclosure documents, including today's slide presentation, are available on VC's Investor Relations webpage. However, before we get started, I want to draw your attention to the Safe Harbor Statement on slide two. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore subject to risks and uncertainties. For information, Additional information on such risks and assumptions, please consult BC's Safe Harbor Notice concerning forward-looking statements dated February 7, 2019. That is filed with both the Canadian Securities Commission and with the SEC, which is also available on our website. These forward-looking statements represent our expectations as of today and therefore are subject to change. We disclaim any obligation to update forward-looking statements except as required by law. So with that done, over to George.

Great. Good morning, everyone. Thank you for joining us. I'll just start on the presentation, give you a quick overview, and then turn it over to Glenn. Certainly, we ended the year on a positive note with all three of our operating segments reporting revenue growth and important EBITDA growth across the three groups. From the wireline perspective, the 2.4% revenue growth being our strongest organic revenue growth in over 10 years there, driving the 1.3% wireline EBITDA growth. and a growth in market share of internet and IPTV combined with net ads up 11% year over year. On the wireless side, I thought it was a balanced quarter with 143,000 total postpaid and prepaid net ads generating the revenue and EBITDA growth we reported this morning. I think one of the highlights of the quarter on top of the wireline revenue growth was the media's financial performance up 1.9% revenue and adjusted EBITDA growth to 2.9 and generating free cash flow growth. in the quarter. Turn to the next page, just stepping back and looking at the year. I think it was a very positive year from a broadband perspective for the company. Approximately 700,000 subscribers added during the year, up 32% year-over-year. Excellent wireless growth with 480,000 net adds, up 44%. Year-over-year, of course, a large part of that driven through the change in or trajectory of our prepaid business from negative to positive with the launch of the Lucky brand. And the Fiverr rollout continues to benefit us with 219,000 Internet and IPTV net ads in the year up approximately 12%, and about 233,000 additional customers now on our Fiverr footprint up 40%. So some obviously strong growth numbers for the year, and our investment thesis that we put in place a number of years ago starting to pay off with some broadband growth across all segments. We turn to the wireless business. Good quarter, 122,000 postpaid net ads. Just for investors, it is worth noting that we did lap the federal government in the fourth quarter, so there were some net ads last year in the fourth quarter, as there were this year, where the other quarters would have had no federal government net ads from a year-over-year comparison. So pleased with that relative to our largest peer. Post-pay churn coming down nine points, obviously a valuable metric for us. Prepaid having its second positive quarter in a row, and clearly we took market share in that segment. And importantly for us, as I mentioned, just taking what's been a negative revenue growth story for us for a number of years and turning that into something that's positive and adding a little bit of subscriber growth and giving us the ability to migrate over time some of those customers to post-pay. We continue to maintain the highest APU in the industry. Worth noting, if we take out the federal government, we were up slightly 0.3% in the fourth quarter on our average revenue. I guess APU now the term that we use for the quarter. Overall for the year, the EBITDA growth and the margin of 42.3 combined with a capital intensity ratio of under 8% is obviously driving significant free cash flow margin and quite healthy free cash flow margin for the company. enabling it to invest as it is in the fiber network and our LTE advanced network. Take a look at our network for next year 2019 on the wireless side. We'd expect to end 2019 at around 94% of the country covered with LTE advanced, providing Canadians in 60% of the population speeds of up to 750, but enjoying typical speeds of 222. megabits, which is really, as everyone knows on the call, incredible from a wireless perspective by any global standard. On the 5G side, we continue to do trials and continue to prepare ultimately for the launch of 5G mobility. To make a couple comments from a supplier perspective, there's a lot being talked about these days. Huawei has been a supplier in our radio access layer for 3G and 4G mobile networks for a number of years, with, of course, Canadian government support. We do not use Huawei's network in our core. As everyone knows, the government is conducting a cybersecurity review on whether to permit the continued use of Huawei equipment for 5G. We clearly recognize the issues at play and will manage those appropriately going forward and of course follow the law. For investors, it's important to know we've made no selection yet of our 5G vendor. And if there was a ban or we chose a different supplier than Huawei for 5G, we're quite comfortable all those developments would be addressed within our traditional capital intensity envelope and therefore no impact from a capital expenditure program outlook, nor do we think whatever the outcome is would in any way impact our timing in the market for 5G. The other point I want to draw out is our wireline fiber investment continues to truly benefit our wireless business. That's why you're seeing capital intensity levels at historical low levels for us now in our expectation for 2019 at approximately 7%. At the end of 19, 85% of our combined urban and now rural cell sites will also have fiber backhaul in place. Literally 90% of our capacity will have fiber backhaul. And we think that position is just well against any competitor in the Canadian market perspective. in terms of network quality and speed. Turn to Wireline. We added about 65,000 new fiber customers in the fourth quarter, 1.2 million at the end of the year in total. Pleased with the internet ads at 33,000, retail up 15% year over year. I mentioned the last quarter, and I'll mention again this quarter, we're not focused on the hotel segment. The revenue stream and the profitability of that stream is really not worth pursuing strategically. It's a regulatory obligation we will meet, but it's not a strategy of the company. On the TV side, 36,000 net ads up 12%, clearly all TV. Our streaming TV service that does not require a set-top box is available at a maximum of two streams. It's clearly helping us drive some additional TV and Internet pull-through growth with 14,000 overall TV net ads up in our wireline footprint, so up 27% year over year. And there's a number of highlights from a product perspective we'll pursue this year that you can see on the page, which makes us quite excited going into the next year that our leadership in broadband in the marketplace and our investments will continue to help grow the company. If you take a look at our wireline footprint on the next slide, really pleased with 2018. Many investors will recall that we had a target to add 800,000 to our footprint from a fiber perspective. In fact, we got closer to 900,000. still within the same capital envelope we'd had, so really pleased with that outcome. For this year going forward, we're targeting $700,000. That includes our fiber and our wireless to the home program. Again, we'll hope we do better than that, but that's what our current plan would show, and over to our engineering team to try to exceed that and do it within the same cost envelopes. We will surpass a fiber milestone this year, and we'll go over 50% of our fiber footprint completed, which of course is part of our long-term strategy in terms of continuing to grow our broadband share. And I want to announce also this morning that we've decided to take our wireless to the home program up from 800,000 homes was the plan to 1.2 million and that is really a 50% increase and that is particularly driven by the recently announced Canadian government program which allows for an acceleration of our capital cost allowance helping us out from a tax perspective which Glenn will talk about and us then reinvesting that capital in rural markets where we, one, they're underserved, and secondly, we think represent a significant market share opportunity for Bell, where in those markets we'd be anywhere maybe as high as 15% share and sometimes as low as five. So that rollout will continue. It'll be much more significant, as I mentioned. For next year, for the analysts, it will continue to be the 200,000 households with 28 communities getting access to that new service. On the media side, I mentioned best quarter for us in a number of quarters. Fourth quarter of 16 was the last time we saw these numbers. Driven by great growth in the last year and a bit on our sports network side, we've returned to being the number one sports network in the country. Some really nice growth metrics. Our investment in the Raptors is certainly paying off, not just in winning, but in ratings, where the ratings are up 71% year over year. We're also really excited about the relaunch of Crave with 2.3 million now linear and direct customers on that service. For our American friends or our investors on the phone, it's really quite a unique product at $20 Canadian. You have access to HBO Showtime. You can stream Game of Thrones or any other product, or you can get it through a traditional TV provider. And at $20 Canadian, we think it's, frankly, one of the best, if not the best, S-Pod service in the world in terms of what's available from a content perspective. And we're seeing some nice early growth on that as well. Just want to call out, not talk about much, our out-of-home business that we also own has just had a strong quarter, mid-single-digit growth from a revenue perspective. We are now the second-largest outdoor advertising company in the country with over 31,000 advertising faces. And we are growing our digital footprint and digital advertising outdoor, of course, is excellent for us from an integration perspective because all that backhaul required for that, of course, runs on our own infrastructure. Turning to the dividend announcement this morning, obviously really pleased, management is very pleased again to announce a 5% dividend increase to $3.17 per share. It's our 11th consecutive year of a 5% or higher dividend increase. And again, that will be done within our payout ratio, targeted payout ratio, 65 to 75%. Glenn will comment on this, but I just want to call it out that, you know, it's got all these changes in accounting rules. If you were to ignore those changes in accounting rules, we're probably close to the high end of that payout ratio. And if you take the new, if we're at 16, we're kind of in the midpoint of that payout ratio. Either way, we're within the bounds of the payout ratio. That's the 53rd consecutive quarter of EBITDA growth, and of course, that's given us the ability to announce this dividend increase this morning and the financial results that we've just reported on. Let me turn it over to Glenn.

Thank you, George, and good morning, everyone. I'm going to begin on slide 13 with the review of the consolidated results. The fourth quarter capped off another successful year financially with growth in revenue, EBITDA, adjusted EPS, and free cash flow in line with our guidance targets for calendar 18. Revenue was up 3% in Q4, reflecting strong year-over-year organic growth across all segments. This drove a 2.8% increase in adjusted EBITDA with a relatively stable year-over-year revenue margin as we balance subscriber growth with pricing discipline in an intensely competitive marketplace. Adjusted EPS increased 7 cents over last year to 89 cents per share, mainly the result of higher EBITDA and a pickup of some equity income. However, Q4 statutory EPS was down year over year due to $190 million in non-cash impairment charges at Bell Media, related mainly to its French language specialty and its pay TV properties This was to reflect revenue pressures from ongoing audiences and subscriber declines. Lastly, we generated over $1 billion of free cash flow this quarter, bringing total cash generation for 2018 to approximately $3.6 billion or 4.4% higher year over year. This exceptionally strong growth we saw in Q4 was the result of a planned decrease in capital spending, lower cash taxes paid due to the timing of some income tax installments, as well as a favorable reversal of working capital from Q3 driven primarily by the timing of customer receivable collections. Let's turn to slide 14 and Bell Wireless. Overall, a good set of financial results once again this quarter reflecting our consistent discipline focus on subscriber profitability and cash flow generation. Total revenue was up 4.6%, driven by a continued healthy subscriber base growth and a higher proportion of post-based customers choosing plans with larger data allotments, as well as an increased sales of more expensive smartphones compared to last year. In terms of operating profitability, wireless adjusted EBITDA increased a very solid 5.1%, while margin was up 10 basis points to 39.5%. This was driven by a combined impact of the high revenue flow through to EBITDA and spending discipline on both new postpaid subscriber acquisitions and customer upgrades during the seasonally busy holiday period. Turning to slide 15, revenue growth accelerated to 2.4% in our wireline unit, driven by a positive top line growth across all of our wireline units. This result represents our best organic quarterly performance in more than a decade. Residential revenue was up approximately 2% year-over-year on combined top-line Internet and TV growth of around 4%. In business wireline, Bell Business Markets reported a second consecutive quarter of positive revenue growth on the back of higher IP trends. broadband connectivity and professional service solutions revenue, as well as a higher year-over-year data product sales to large enterprise customers, all of which was indicative of a better economic growth trend in the quarter. With steadily increasing broadband scale, improved business financial performance, and the flow-through of cost savings realized from workforce reductions and other productivity improvements, wireline-adjusted EBITDA increased a healthy 1.3% in Q4. However, due partly to stronger year-over-year growth and lower margin product revenue this quarter, our wireline margin decreased by 50 basis points to 40.3%. In terms of cash generation, Bell Wireline provided a strong contribution to consolidated free cash flow in 2018, delivering growth in adjusted EBITDA less capex of 2.9%, with 2.1 billion of simple free cash flow generated, our higher year-over-year fiber capital spending was fully supported. Turning now to slide 16, as George mentioned, Bell Media had its best financial results in two years, delivering positive revenue, adjusted EBITDA, and simple free cash flow growth in Q4. Total revenue up 1.9%, driven by 2.8% growth in advertising, Advertising revenue increased year-over-year on stronger specialty TV entertainment and sports performance that reflected audience growth and higher advertising rates. Improved conventional TV ad sales from a strong fall programming lineup as well as higher year-over-year out-of-home advertising and digital growth. Subscriber revenue was essentially flat year-over-year as pay TV subscriber declines were offset by growth in our direct consumer crave and sports streaming services. Adjusted EBITDA grew an impressive 2.9%. This was achieved despite operating cost growth of 1.7%, driven mainly by sports broadcast rights and ongoing CRAVE programming expansion. With that, I'll leave my comments on 2018 and move on to 2019. Our 2019 financial guidance targets are summarized on slide 17. These targets have been prepared in accordance with IFRS 16 accounting standards and take into consideration our current outlook as well as our 2018 consolidated financial results, which will not be restated to reflect the application of IFRS 16. For those of you who are not familiar with IFRS 16, it is the new accounting standard for operating leases that became effective January 1st of this year. Going forward, many operating leases will now be recognized on the balance sheet as right of use assets and debt, similar to capital leases, with related expenses recorded as depreciation and interest expense rather than operating costs on the P&L. As a result, adjusted EBITDA is positively impacted. Revenue is not affected. Over the term of the lease, the total expense recognized under IFRS 16 will be equal to the previous accounting standard, of course. However, the timing of the expense recognition will change. Under IFRS 16, interest expense will be higher at the beginning of the lease term and decrease over time as the liability decreases. Accordingly, the per lease expense is now more front-end loaded. resulting in a negative year-over-year impact on net earnings and adjusted EPS in calendar 19. Regarding the impact on reported free cash flow, the portion of the operating lease payments relating to the principal will now be recorded as a finance activity below free cash flow. However, the imputed interest component remains in free cash flow. As a result, the absolute dollar impact of IFRS 16 on free cash flow is lower than the non-cash benefit to adjusted EBITDA. Our consolidated 2019 financial guidance targets are underpinned by a favorable financial profile for all three operating segments, building on the operational progress we've made in 2018 and reflecting our consistent and disciplined financial execution in a competitive marketplace. With healthy projected adjusted EBITDA growth contributing to higher year-over-year free cash flow generation, our financial foundation remains stable and strong, amply supporting a consolidated capital intensity ratio of approximately 16.5% for 2019, as well as the 5% increase in BCE's common share that was announced this morning. Slide 18 provides some perspectives on our revenue and adjusted EBITDA outlook for 2019. We are targeting consolidated revenue growth of 1 to 3%, which is consistent to our 2018 financial guidance when normalizing for MTF's one quarter of incremental financial contribution last year. This is predicated on our expectation for continued healthy wireless subscriber-based growth, further internet and TV market share gains driven by our ongoing expansion of our FTTP and rural fixed wireless broadband footprints, and higher residential household ARPU. We also anticipate a narrowing of the wireline business revenue declines on the back of higher telecom spending by large enterprise customers as GDP growth strengthens. On the media front, we expect revenue trends to stabilize despite the non-recurrence of the revenue from the 2018 FIFA World Cup and no SIM sub for this year's Super Bowl broadcast. We also expect to benefit from the continued growth in Crave and our out-of-home advertising, as well as a recalibration of media spending allocations by advertising towards linear TV given its broader and more targeted customer reach. With respect to adjusted EBITDA, because of the continued strong wireless and wireline operating profitability, together with savings from a number of cost containment initiatives, we have outlined our Q3 results call, as we outlined in our Q3 results call in November, we are projecting adjusted EBITDA growth of 5% to 7% for calendar 2019. As I referenced earlier, this growth range reflects the favourable non-cash impact from the application of IFRS 16. Excluding IFRS 16, consolidated adjusted EBITDA growth for 2019 is projected to be in line with BCE's historical average growth rate of 2% to 4%. Turning to pension funding on slide 19, we made a $240 million voluntary contribution in December, mainly to align the funded status of several of BCE's subsidiary-defined benefit pension plans with the strong solvency position of Bell Canada Plan, and to substantially reduce the use of letters of credit for funding purposes. With this contribution, together with the higher solvency discount rate at the end of 18, reflecting an increase in government bond yields, the average solvency ratio across the aggregate of all BC plans is now essentially in a fully funded position right around the 100% mark. Given the strong valuation position and the market's expectation for higher interest rates going forward, no additional voluntary pension cash funding is currently anticipated for 2019. As for BC's total normal course cash pension funding for 2019, that is expected to remain stable year over year at around $375 million. As for the Bell Canada plan, it continues moving closer to a surplus position of over 105%, at which point a contribution holiday can be taken on the annual current service costs. That opportunity to reduce BC's annual cash pension funding of up to $200 million is becoming more and more tangible. Moving to our tax outlook on slide 20, the statutory tax rate for 19 remains unchanged at 27%, while our projected P&L effective tax rate of approximately 25% reflects lower year-over-year tax adjustments, totaling around $0.02 per share. We also expect cash taxes in 2019 to be maintained at roughly the same level as 2018 at around $650 to $700 million. This stable year-over-year outlook reflects the benefit of $100 million in additional MTS-related tax losses this year, as well as the tax savings of approximately $75 million enabled by the new federal government investment incentive program that allows for accelerated expensing of capital expenditures. As a result of that program, we anticipate to generate savings in the range of 100 to 200 million annually for the four years following 19, which should help to significantly moderate the expected increase in cash taxes during that period. Slide 21 summarizes our adjusted EPS outlook for 2019, which we project to be 348 to 358 per share. This includes a negative non-cash impact on earnings totaling approximately $0.05 per share due to the difference between previously recorded operating lease expense and the timing of depreciation interest expense under the new IFRS accounting standard for operating leases, as I mentioned before. Excluding the financial impact of IFRS, adjusted EPS is expected to grow approximately 1% to 3% in 2019. BC's free cash flow for 2019 is projected to be in the range of $3.8 billion to $4 billion. That represents year-over-year growth of 7% to 12%, reflecting the flow-through of higher EBITDA as overall capital expenditures, pension funding, and cash taxes remain relatively unchanged year-over-year. As I stated earlier, this growth range reflects a favourable non-cash impact from the application of IFRS 16, net of the incremental income. interest component related to the newly designed capital leases, as the portion of the lease payments relating to the principal are being recorded below free cash flow and finance activities. Excluding IFRS 16, free cash flow growth is expected to be consistent with our 2018 guidance range of 3% to 7%, which fully supports the 5% common dividend increase for 2019 at the high end of our target payout ratio of 65 to 75. Lastly on slide 23 a quick update on our balance sheet and cash resources heading into 19. As we begin the year we have access to 1.8 billion of liquidity together with the capital structure that provides good overall financial flexibility to execute on our 2019 business plan and our capital market objectives. Our strong investment grade credit ratings all have stable outlooks And our net debt leverage ratio is projected to improve gradually over the next several years with steady growth in EBITDA and applying excess free cash flow to net debt reduction. Our leverage ratio in 2019 will reflect a one-time negative impact of approximately 15 basis points due to the adoption of IFRS 16. As we added approximately $2.3 billion of capital leases to net debt on the balance sheet on January 1st. As a result of this IFRS 16 impact, we are increasing our target net leverage ratio policy from the previous 1.75 to 2.25 adjusted EBITDA to now 2.0 to 2.5 times adjusted EBITDA. This range better aligns with our BBB plus credit rating and is consistent with the target ratios of our direct peers. Our interest coverage ratio is unaffected by the adoption of IFRS 16 and therefore remains unchanged. Also highlighted on the slide is BC's favorable long-term debt maturity schedule that now has an average term of 11 years and a historically low average tax cost of public debt of just 3.1% and no debt refinancing requirements in 2019. Finally, I would like to add that BCE's approximately $1 billion in annual US dollar expenditures has been fully hedged into 2020, effectively insulating our free cash flow exposure until that time. To conclude, BCE's fundamentals and competitive position are strong, as evidenced by our 2018 operating results. In 2019, we intend to build on that progress, consistent with our financial guidance targets we announced today. And with that, I'll turn the call back over to Zane and the operator to begin the question period.

Thanks, Glenn. So before we start the Q&A, to keep the call as efficient as possible, given the time we have left, I ask that you ask one question and one very brief follow-up to ensure we get to as many people as possible. So with that, Valerie, we're ready to take our first question.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. Our first question is from David Barden with Bank of America. Please go ahead.

Hey, guys. Thanks so much for taking the questions. Maybe just on the fiber build-out, George, I guess now you've gotten to 50% coverage. What is the cadence of the incremental expansion that you see and the capital that you're willing to put to work on the fiber side of that build? And then just as a follow-up, if you've seen any kind of effect from the Ignite TV project, rollout in the marketplace and how it's affected your kind of go-to-market approach. Thanks.

Okay, sure. So on the fiber side, our overall program for 19 is pretty much consistent with 18. I think we call it out on, I think it's slide 9, I forgot the right slide there thing, at about $2 billion a year. That does include part of the wireless to the prem build-out as well, although on a cost-per-home not as significant as fiber in terms of the bill. The cadence, you know, we obviously don't give guidance out for the year after year after year but the fact you look we're doing 500,000 hopefully a little better on fibers next year and a couple hundred thousand on wires I mean you know it would be probably a safe thing to moderate that into some type of model we're just now that we're over the 50% number everybody can do the math on what a half million means we get further and further into you know that footprint being starting to touch some of the rural markets ultimately and that's where we'll have the wireless to the home you know if you take our total chart there that shows our FT-TN or FT-TH and our wireless footprint at 9.8 as of the end of 2019. And if you were to roll out on top of that another 800,000, sorry, another million wireless to the home premises, you start to get our footprint being fully competitive as we overlay the FT-TN with FT-TH. So hopefully that gives people a sense of where we are. And, you know, we don't think you're going to see acceleration in that program. We think it will be consistent over the next while and that's why I want to mention on the call last quarter The mix issue of wireless being more of our business and the stable wire lines allowed Glenn to give some guidance a little more precise on a capital intensity at roughly 16.5 this year, which the street will know is slightly different than where we've been historically.

And George, just on the Ignite TV.

Oh yeah, sorry, on Ignite TV. In the marketplace, competing with us, we would say it's a competitive market there. Clearly that product had success in the U.S., so it's going to keep us on our toes, but We're pleased with our TV results and we're just going to have to compete with that in the market. We're really confident. We think the one place we're maybe slightly different on that approach is our all TV product being also a product without a set top box, saving us the cost there so we can sell it at a different price. Focus particularly in the condominium markets where we now have fiber and two streams and that's probably a little more of our competitive focus. as well as our IPTV traditional business competing against Ignite. So in the marketplace, but clearly our results show maybe not as a dramatic impact yet, but I'm sure they're out there competing with us every quarter.

Thanks, guys.

Thank you. Our next question is from Philip Wong with Barclays. Please go ahead.

Hi, thanks. Good morning. I wanted to ask about your wireline growth outlook, just given the best organic growth in 10 years in Q4. You know, obviously your ongoing expansion in fiber and fixed wireless footprint is going to be very supportive of that growth. There's also contribution from strength in the business market and product revenues, which I assume could be, you know, potentially lumpy. So just trying to assess if the strong growth in Q4 is an indication that business is entering a period of faster growth or, you know, should we still assume that the growth would be more consistent with the prior couple of years for now?

Yeah, it's a great question. And, you know, giving a very precise answer, you know, we'd love to give you exactly. Obviously, we are really pleased with seeing a couple quarters on the wireline side of this type of revenue growth and flowing through to a little better EBITDA growth than we would have told you a few quarters ago on the wireline side. And so, you know, the guidance is the overall guidance. So I don't want to go down that grand other than to say BBM is clearly doing better in the marketplace. Whether it can be economics and market share, we're not sure which of the two completely, but certainly it's a more positive view. And if that were to continue, then the wireline business does end up obviously in a stronger position. But two quarters doesn't make for a long-term model, so we just got to keep executing. And I hate to do this to you, but frankly, it's just all within our overall guidance. But to be complete, you know, finally to be transparent, you know, we are very pleased to have that type of top-line and wireline growth and it was above our expectations for a couple quarters.

Right. I appreciate that. And then just to follow up on the fixed wireless broadband expansion, I was wondering if you could talk a little bit about, you know, some of the areas that you've deployed the technology already and if there are any early indicators of customer adoption or feedback to the product itself. Thanks.

Yeah, it's very early. We've done a few markets. And in those markets, one was to make sure we really understood the cost of that technology, the line of sight, that it was going to do what we wanted it to do, that we could use our mobility sites and also get the backhaul in place for the fiber because you've got to have the fiber backhaul. But in those markets we launched, it was enough to convince us to have this type of a dramatic change in our approach to take it from nothing to $800,000 and now with the accelerated capital cost allowance to $1.2 million. And in those markets, as I mentioned, some of those markets we had 5% internet share and some markets will be 15%. And we saw not huge absolute numbers, but we saw households move to Bell that we haven't had in a while. You combine that with our satellite, And if someone has local phones still, then it gives us a package we've not had because suddenly people are getting speeds that, frankly, it's just not available in those markets. And so it's got us making this investment. We think it's a great way to grow our competitive footprint. And if we're in markets where we're under 15% share, if we can take that number up, obviously that's going to be good for everyone here on the line who's an investor.

Thanks very much.

Thank you. Our next question is from Jeff Brown with Scotiabank. Please go ahead.

Hi, thank you. Good morning. First question is on wireline. The revenue number was definitely stronger than expected. I was wondering if you can comment a little bit on the margins with respect to wireline as we look a little bit forward and how or whether cost cutting, if any, is going to start to, should we start to think about that as a key contributor to 2019. And then the second question is on the wireless side. Great churn numbers, but I think what we're seeing is some moving parts compared to last year given the competitive activities that happened in Q4-17 with the promos. I'm wondering if you can talk a little bit about some outlook with respect to how churn and APU and NetAds may look for 2019, because I think we are at least it seems like based on the results that we've seen so far, and I know TELUS is going to report next week, but it just feels like there's a little bit of moving activity in wireless more so than what we've seen maybe in the last couple of years. Thanks.

Okay, great. On the margin side, I think Glenn called that out.

Yeah, I mean, our wireless margins, excuse me, wireline margins, if you look at them for the calendar year, Jeff, are very stable. They move around in this quarter. It was down a little bit. We had a higher volume of product sales, and as was mentioned earlier in the call, they can be lumpy. If we look forward, we see stability in margins, and we think 2018 is quite indicative of what we see go forward. Cost initiatives and cost efficiency initiatives, that's just part of what we do and execute on every year.

Yeah, so not really a subtle change there. And then on the... On the wireless side, you know, I think it's an overall question, I mean, for the company. Certainly this year's fourth quarter, we're happy with the net ads, happy in terms of the swing on the prepaid and overall. Clearly last year's fourth quarter had a bit of a unique happening in the marketplace, and some of that share, you know, moved our way against one of our largest competitors in a pretty dramatic way. But to us, like as I said, a little more normal quarter, I guess, is what I would say in terms of that. And that's in our results. From a term perspective, we saw a decline year over year. And we'll see how that unfolds as we go forward. And the issue on the ARPU, as we mentioned, I think people have seen the flattening of our ARPU here versus ARPU growth. And that is, frankly, reflective of the competitive intensity that we've seen in the marketplace. And then on the wireless free cash flow, obviously the fact that our capital intensity is significantly below certainly One of our peers gives us, I guess we think, the investment horizons that we need to keep generating the free cash flow growth for shareholders on the wireless side. But clearly, the fourth players are building out. They're more competitive. And that's why we're going into other segments as well to try to pick up revenue and obviously making significant investments in IoT opportunities. That will be, as I mentioned before on calls, large volume of units and very small increments of dollars, but all adding up to something to help us on the cumulative front over time. I don't know if that helps answer or not, Jeff.

OK, thanks, George.

Thank you. Our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Good morning. This is Landon Park on for Simon. Just wanted to quickly touch on the ARPU outlook on both the wireless and broadband sides. And if maybe you can also just talk about how we can think about crave profitability and penetration as well.

Okay. So on wireline ARPU, as people migrate to higher speeds on the broadband side, we would continue to anticipate to see ARPU growth in that space because just the mix of clients moving to one gig, one and a half gig generates for us some incremental ARPU growth on that product portfolio. On the wireless side, as I've said, we've seen We saw flat really on a year-over-year basis. And so now for us, Thayne will get into this later on with the analyst community, but of course it's prepaid grows as a mix of ours. You know, there's a denominator-numerator math there. But we're not going to forecast ARPU. We've basically given you our guidance on the consolidated basis. And we're just going to have to see because it was pretty hard to predict last year up and down in terms of what was happening competitively. And we do, as Dan just handed me a notice, it wasn't my idea, it's his, but we are lapping the government of Canada contract this year as we get later into the year.

When should that start rolling off in the year?

Probably as we get into the second quarter, second half. Second half, I was just told. Second half of the year. And sorry, the other question was?

Crave TV profitability.

The Consolidated Crave is profitable because we've obviously combined it with our linear business, an OTT business, repackaged for our traditional linear TV subscribers and this OTT product. And the OTT product at $20, whether you're on a TV subscription or over the top, provides us a profitable business model going forward And obviously our goal here is putting some of this content that traditionally was only available through linear and not over the top, we think will also help us improve our mix of over the top subscribers, which for us, of course, add more profitability to BC overall because the margin stays within the house at 100% on that side. So now it's just about subscriber growth. But it's being well received in Canada. At $20 Canadian, it's quite a product and an amazing content having obviously the HBO and Showtime content in it. So now it's about growing subs there.

Great.

Thank you.

Thank you. Our next question is from Aravinda Ganapatig with Canaccord Genuity. Please go ahead.

Good morning. Thanks very much. George, I wanted to ask you about sort of your sort of early experience following the GTA fiber to the premise rollout. Obviously, you started sort of the more active marketing around it around April, May last year. Can you just talk a little bit about the market share shifts that you were seeing there and the competitive counteractivity? I suspect it's fair to say that much of the gains from the enhanced product is still ahead of us. But I was wondering how you saw the initial months in terms of market share shifts following that rollout.

Well, overall, as we mentioned, retail-wise, the back half of the year, we had growth in overall net ads. We think that is – we know it's 100% driven by our total fiber footprint. In fairness, it's not just Toronto. It's our total fiber footprint that's getting us that growth. There's no doubt about that. Toronto itself is highly competitive also from the wholesale market perspective. It's one of the reasons we have the Virgin brand as well in the marketplace selling there. When we step back and look at revenue growth, share of revenue growth, in the last six months of the year, we saw ourselves in some cases exceeding more than 50% of the net revenue growth in the industry in segments where we had fiber. And that starts to bode well for where we really want this investment thesis to go. We'd like it to be both subscriber and revenue growth, but clearly there's been some price activity in the wholesale side that works against that. But we've got to have the fiber footprint. We see it in the last half of the year, and now it's just over time executing in that with the 1.5 speed that we have in the market.

Thanks. And just quickly to follow up on some of the comments you made earlier about media and improvements in the advertising front, I just wanted to get your thoughts high level as to sort of your view on how material advanced solutions on the advertising front, what you call ad tech, would be down the road to sort of help maintain that stabilization and any initiatives you can kind of talk about right now.

Thanks. Yeah, we have initiatives we are actually executing now in the marketplace with our clients at Bell Media. There's some other technology work to take that to another level because we know that's where we need to take that product portfolio to. and it's early days there. If I had Randy on the line with us here, he'd be telling you some early Wednesday that we're seeing, but we've got some technology evolutions there to do as well to help. But I would, in fairness, not say that really had the impact on the fourth quarter results. It was just overall strength in the overall business as, one, I guess businesses are feeling better about their own organizations, so advertising. And secondly, I think Glenn's correct. We certainly saw movement back. into this space, even by companies who sell a lot of their products only in the OTT world, advertising a lot on the linear world, and Canadians up here watching would have picked that up as well. And the other thing I thought was positive was one of our peers reported as well, who's just in the media business, a good quarter as well, so clearly it was something across the market, which usually for investors is better than just market share moves for the obvious reason. So, you know, let's hope it... It holds going forward, but it's early days into the new year, so we'll have to see.

Thank you.

Thank you. Our next question is from Richard Cho with JP Morgan. Please go ahead.

Thank you. On the wireless metrics, the subscriber and top line were a little light, but it seems like profitability is It was significantly better. Is there a focus on not worrying about customer counts and more profitable customers? And as a follow-up, it might be too early days, but are you seeing the prepaid to postpaid migrations from the new prepaid product?

Yeah, so let me start at the end and then go back to the beginning of it. Prepaid is very, very small for us so far. I mean, literally all of our net ads are coming off of the back of our traditional gross postpaid sales, which as we know is different than one of our peers. We've done a great job of that. And one of the reasons we're in that prepaid market as we are to ultimately get some of that conversion opportunity. In terms of the market, it's kind of interesting. If you look at our results versus so far only one of our larger peers has reported, we're happy with our relative share, our relative results, a pretty normal quarter. If you take away last year's fourth quarter, it had all that unique promo. One of our competitors has been quite public about having some execution issues. So we thought it was a relatively good quarter. We're really pleased to see the prepaid market share swing our way. and that's where the revenue growth comes. On the cost side, you're right in that we did execute that cost restructuring in the company, and that was across the entire organization in the fourth quarter, but I don't want anyone on the call to think that somehow we backed off in the fourth quarter. That's just the market that took place, sets us up well, and I think maybe a couple of the analysts won't take people through it a little bit offline, but there were some government net ads last year in the fourth quarter, Most of it came in the first quarter. There were some. So if you do a year-over-year, I think the street will say it's awfully. It all kind of washes out with what some people had in mind. Hopefully that's helpful. Thank you.

Thank you. Our next question is from Drew McReynolds with RBC. Please go ahead.

Yeah, thanks very much. George, just back on Crave TV. As far as a Canadian OTT service goes, you guys have done a great job locking down the premium programming. Just wondering, given the success to date now that you've added and enhanced the platform, any thoughts on do you have enough scale to really grow that sub-base as you're targeting? Would you consider bringing in partners, strategic or financial, to take it to the next level? And a follow-up just on home security, if you could provide an update just on how that business is performing and how it's contributing. Thank you.

Sure. So on the Crave, first of all, you've got to be careful because corporate development is always something you don't want to comment on, but I would say we're happy with the structure we have on that. We're really happy with our strategic supplier relationships with HBO, with Showtime, with those relationships and the long-term nature of those agreements like HBO. So that's probably where we are there. It doesn't mean we're not going to to do other content. I think we announced something this morning with stars on the content side. That's not ownership, but it's another relationship. And we do think at $20 Canadian, that amount of SVOD product, and I know for sure, pretty sure on the line, the U.S. investors will know the U.S. marketplace, 20 Canadian for Showtime, HBO, OTT product is a very competitive product in the market. and is profitable for us combined with our linear TV. So now it is truly about pursuing those relationships that aren't with those other global SVOD players and leveraging that through our strong distribution and our BDU partners. I mean, one of the things we didn't mention, but you may be aware if you're in Toronto, is our number one competitor here in Toronto has now launched Crave and they're now distributing it. Our understanding is they like the product. and that's going to help drive Crave subscribers for us, and they make a great margin on that product, so it's good for them as well. So we're feeling that we're in the right space there to offer a competitive, compelling product to Canadians. And then on home security, yeah, actually, you know, it's working as we wanted it to. It is helping us with some stickiness on the Internet side. That product gets – there's some little better integration that goes on next year on that product side, so we'll continue to see – some steady growth there. It's not in our RGU metrics anywhere. So we don't have it in our internet subs like some of our peers do. It's just a standalone business unit. So I think we're happy with the first year. Product rollout has become a little more competitive in terms of integrating into Bell next year, and I think we're pretty optimistic that it's given us the right platform. That's what I would say. But it's really just you guys don't see submetrics on it because otherwise you'd have to roll it into another number, and frankly I don't think it's going to help you get a clarity on these other products we've got.

Okay, thanks, George.

Yeah, thanks for the question.

Thank you. Our next question is from Vince Valentini with TD Securities. Please go ahead.

Yeah, thanks very much. Can I just get a clarification and then a question? From the midpoints of your guidance and the adjustment, Glenn, is it fair to say the EBITDA impact from IFRS 16 is around $196 million and the free cash flow impact is around $160 million?

Good morning, Vince. No, the actual impact from the changes of IFRS 16 are about $275 million on revenue, about $175 million approximately on free cash flow, and then, of course, the differential of $100 million is interest expense, and that would be an interest.

$275, you said revenue, but there's no revenue.

Excuse me, EBITDA, $275 EBITDA with $175 flowing to free cash flow, and $100 of that is interest.

My apologies.

Hey, no problem.

The other very personal question, I mean, that announcement yesterday, I think it was, on the city of Markham and the smart city, it seems very interesting. I mean, we're all chomping at the bit to try to figure out what the revenue upside could be from 5G in the future and how these deals work between the connectivity provider like you and it seems like IBM is the IT provider. George, can you give us any sense as to what kind of revenue you see here and what pathway this gives to maybe more low latency 5G and IoT services in the future with these kind of city partners?

Yeah, I would say this. We're like you. We're chomping at the bit to try to figure out what the revenue opportunity is going to be, so it's a great way to describe it. I would say this. We have four now. I think that's our fourth smart city project we have going. Each one of them is a result of having our fiber and our wireless networks as integrated as they are. and some of this partnership with IBM. And so people will start to see some application rollouts in those communities and, you know, start with the managed service contract and ultimately, hopefully, for us, recurring revenue streams. It is so early for us to start putting quantified dollars against it, but most importantly, you know, we get the low subscriber revenue or low unit revenue off the IoT at some point. We get managed service agreements. And, of course, it's important for us because these are large wireline clients of ours as well. So we think we're really well positioned to be in that space, particularly those markets that have the fiber. But it's really early to us to put any number against it other than we're pleased we've got four communities we're working with. Thank you.

So in the interest of time, Valerie, this will be our last question.

Certainly. Thank you. Our last question is from Maryagi with Dejardin. Please go ahead.

Thanks for squeezing me in. I wanted to ask you, so I have a question on wireless APU and just a follow-up on IFRS 16. So on wireless APU, is it fair to say that the peak or we should start to see less pressure on year-on-year numbers in Q1 as we start to lap the government contract and you talk about the impact on APU coming from pressure on overage and the fact that the data buckets are getting larger. How much overage is there still in the APU number or if you don't want to give a number How much more pressure are we to expect if, let's say, if we suppose that the data buckets stay around these levels? Are there still more downside pressure on APU just from the change in overage year on year? And on IFRS 16, what is the discount rate you're using internally to calculate your interest cost portion of the operating lease cost?

Okay, I'm definitely not going to answer your question too, so I'll answer question one. In terms of the second quarter, Thangis had handed me the note in terms of launching, crossing the government contract, and then we'll start to see what, quote, normalized ARPU is without the impact of the government. So it'll be Q2 before we know that answer. On your second point, Frankie, you're on the track of what is driving, I think, some of the stabilization, if that's the right term, in ARPU versus the traditional ARPU growth we've all seen. in that the buckets are absolutely getting larger. And so our out-of-bucket revenue is less than it was the previous year, and that's where some of that mixed change is for sure. And we've mentioned every quarter trying to normalize out for the government contract. And then for us, the other issue, and analysts, of course, will all know this, if we do more prepaid, even if we'll say we're exactly the same net as and more prepaid, the math of numerator and denominator trades that off a little bit, but that doesn't impact. That's a positive because that's an accretion to cash flow. So I think at the end of Q2, we can maybe re-ask the question and see where we are. Q1 is going to be a little, because the government stuff won't flow through until we get to Q2. Morning, Mayor.

It's Glenn. On your second question on IFRS 16, I think we did a real good job today laying out all the components and how they impact our results. I mentioned $2.3 billion in leases would be added to our balance sheet, approximately $100 million. That results in $100 million of imputed interest expense, so 4.5% approximately is what your rate is. So I think through our remarks today, you get a real good handle on how IFRS 16 changes have impacted results.

And have you changed how you account for year-on-year change in capital deployment on handset subsidies in your free cash flow calculation?

No changes to our free cash flow definition at all.

Okay. Thank you.

Great. So on that note, thanks again for your participation this morning on the call. I will be available throughout the day for any follow-up questions and clarification. So have a good rest of the day, and thanks for participating.

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