Rogers Communications Inc.
Q3 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Good day, and welcome to the Rogers Communications, Third Quarter 2018 Results Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Glenn Brandt. Please go ahead sir.

[Glenn Brandt:]

Thank you, Simon. Good morning everyone and thank you for joining us. I'm here with our President and Chief Executive Officer, Joe Natale; and our Chief Financial Officer, Tony Staffieri. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2017 Annual Report regarding the various factors, assumptions, and risks that could cause our actual results to differ. And with that, let me turn it over to Joe to begin.

[Joe Natale:]

Thank you, Glenn and good morning everyone. I am pleased to share our third quarter results with you. Let’s start with our financials. Overall we delivered a strong third quarter with total revenue growth of 3% and adjusted EBITDA growth of 8%. Given our robust year-to-date results, we are raising our full year adjusted EBITDA and free cash flow guidance. Let me offer some highlights across our business. In Wireless, we delivered another strong quarter. We continued to reduce postpaid churn delivering the best Q3 postpaid churn since 2009. We continued our strong ARPU growth and attractive high quality net additions. The team executed strong price discipline, adding the right customers with the right long term economics. We continue to see a strong, positive trajectory on lifetime value. In Cable we reported solid results during one of the most intensely competitive Back to School periods. We increased total service unit net additions by 5,000 over the last year. We added 35,000 internet net additions, that’s 6000 more than last year, and our best result since 2016. Despite the aggressive approach of our main competitor, we're pleased with our market share gains and footprint. In Media we grew adjusted EBITDA. Revenue was down year-over-year and our margins were up over 300 basis points. Overall, we have made terrific progress. It reflects our relentless focus on delivering consistent and sustained performance in our core business. More broadly, the macroeconomic environment continues to be stable and we see strong growth prospects in Cable, Wireless and Media. We have a strong team, the right strategic priorities and solid momentum on our side. I am proud of what the team has accomplished and the growth prospects ahead. One of our key strategic priorities is to drive meaningful improvement in our customer’s end to end experience. It starts with serving and supporting our customers in their channel of choice. We are driving continuous improvement by fixing customer processes and addressing moments of truth, while ensuring we have the right tools and resources to serve our customers and our efforts are paying off. We are seeing a healthy increase in digital adoption, driven by focused investments in our digital platform. We are building customer awareness of our digital options and giving customers a reason to move to digital with features like fiber extra. In the last year we have doubled our digital sales and service activities, making it easier for customers to upgrade their device, change their plan or activate a new line. In the Call Center, reducing call volumes. We are giving customers more self-serve options and addressing top call drivers, including hardware upgrades, data usage and promotion expiry. More than ever, we are proactively reaching out with targeted communications and offers, delivering a better, more personalized experience. We're also giving customer more control over their data through our SmartPhone app, helping to avoid unexpected charges and to improve service. In Cable, our Proactive Network Maintenance program lets us monitor, identify and fix the issues in our network before our customers call. This has prevented 15,000 truck rolls within the third quarter alone. We also continue to offer self-install, eliminating over a 0.25 million in relation to truck rolls this year. Cost efficiency is a natural outcome as we drive complexity out of the customer experience. As I've said before, customer service improvement and cost savings go hand-in-hand. As a result, day-to-day Wireless margins have improved by 150 basis points and Cable by 100 basis points. Our efforts to build a customer first culture are taking hold and you are seeing this reflected in customer churn. We will continue to drive improvement to Wireless churn in a sustained and consistent way over time. We're also making well-timed strategic investments to bring our customers the best networks, technologies and services of the future. Last month we announced a multimillion dollar partnership with UBC to build a Made in Canada 5G ecosystem. Current estimates suggest 5G will deliver 500 times more connected devices than 4G. We are firmly focused on developing the best applications and relevant use cases, so Canada truly benefits from 5G. With the UBC partnership we will co-develop 5G applications to drive R&D in Canada. We'll have 5G ready, equipment and infrastructure up and running on the UBC campus in the first half of 2019. The UBC campus offers a real urban community and will become a proving ground for how we deployed 5G across Canada. We also just announced plans to launch LTE-M in Ontario as part of our 5G roadmap. LTE-M is a network upgrade that powers the next generation of IoT capabilities. LTE-M will support customers with lower bandwidth, lower cost devices, extended coverage and improve battery life. It will support fleet track, smart meters, home automation and smart city sensors. LTE-M will also enable customer applications such as wearable’s in monitoring and tracking solutions. All these are efforts build on our comprehensive partnership Erickson, North America's 5G partner of choice. On the Residential front we continue to make steady progress on Ignite TV. We have launched the service and preliminary feedback from customers has been very positive. While it is early days, Ignite TV is driving positive ARPA and improved early life cycle churn. Later this month we will start our employee trial in Atlantic, Canada. Ignite TV truly delivers unmatched entertainment experience for our customers. Their offers are great voice remote, Cloud PVR and integration with all forms of entertainment from Netflix and YouTube to interactive sports scores and statistics. We will soon integrate Amazon Prime as well. There is a constantly evolving roadmap backed by a strong team of 10,000 engineers that is virtually impossible to replicate. But this is just the start. We are well on our way to bringing Canadians the world's best connected home road map. I look forward to sharing more details in the coming quarters. In closing, I’d like to thank our entire team for their incredible commitment to our customers and to our organization. I am proud to share that we are recently named one of Canada's 50 most engaged workplaces. This recognition reflects the culture we are building to deliver for our customers and to make Rogers a destination for top talent. Let me now turn it over to Tony. Tony, over to you.

[Tony Staffieri:]

Thank you Joe and good morning everyone. I’m pleased to share some additional highlights from our strong performance this quarter. We continue to show steady growth in our service revenues, while driving efficiency deeper and deeper into the company which is resulting in meaningful margin expansion. On a consolidated basis, we reported total revenue growth of 3% and adjusted EBITDA growth of 8%. This reflects margin improvement of 180 basis points compared to the prior year, while delivering solid operational metrics across the business. For 2018 we have set a full year goal of 100 to 200 basis point margin expansion improvement compared to 2016. We are tracking well ahead of that goal and to-date achieved cumulative margin expansion of 270 basis points. Looking at our wireless business, we reported strong service revenue growth of 5%, which reflected a combination of meaningful subscriber growth and ARUP growth. Our continuing ARPU growth has been driven by our disciplined approach, to translating the increase in consumer demand for data, along with our focused base management. This quarter we saw a growth of 3% in blended ARPU and 4% in blinded ABPU or Average Billing Per User. We are tracking towards our goal of delivering full year growth of 2% to 4% on blended ARPU and 3% to 5% on blended ABPU with year-to-date growth of 3% and 4% respectively. Along with strong ARPU and ABPU growth, we also reported a 124,000 postpaid net subscriber additions. Our commitment to improving the customer experience has resulted in churn of 1.09%, which is a 7 basis point improvement year-over-year. On adjusted EBITDA for Wireless, we reported growth of 8%. Wireless margins continue to expand this quarter by 90 basis points. We remain disciplined and focused on the longer term growth of our business by balancing subscriber growth with the right economic value. Turning to our Cable business, we grew revenue and adjusted EBITDA by 1% and 4% respectively. Internet results continue to be the largest contributor to our growth and the positive trend in our internet business remains very strong. Internet revenue now represents 55% of our Cable business and we expect the strength of our product to increase going forward as internet becomes the key anchor in the household. Our ability to offer Ignite gigabit internet across our entire Cable footprint continues to attract customers. This quarter we reported 35,000 net subscriber additions in internet, along with 8% revenue growth. Similar to our Wireless business, we continue to expand our margins in Cable. This quarter even with increased marketing spend on awareness of our Ignite TV platform, we expanded margins impressively by 160 basis points over the prior year. In the fullness of time we fully expect to realize further meaningful margin expansion, but expect some fluctuations of short term due to the timing of initiatives and increased costs related to the transition over to our Ignite TV platform. In Media revenue declined year-on-year largely due to the Blue Jays, but our continued discipline around costs across our other media assets has resulted in adjusted EBITDA growth of 20% in the quarter. Turning back now to our consolidated figures, I'll now go through some additional details on our financials. The strength of our adjusted EBITDA growth enabled us to continue to make investments in our net and generated free cash flow of $550 million. This is an increase of 5% compared to the prior year, while delivering substantial dividends of $247 million to the shareholders this quarter. Given our ongoing uplift to the network across both our Cable and Wireless businesses, overall capital intensity came in at 18.6%. Over the long term we expect Cable capital intensity to decline significantly as the penetration of Ignite TV reaches our entire base and we move off of Legacy Set Top Boxes. In the near term we’ll put forward [inaudible] to realize more efficient per home economics and continue to driver our nodes closer and closer to our customers. With our hybrid fiber coaxial work we are able to plan and be strategic around our fiber investments. These investments will be made gradually as consumer demand reaches the long runway ahead of Coax Cable, which is not for the foreseeable future. All of our nodes are fed with fiber and we are able to deliver what our customers need not only today, but well into the future, including for 5G. We remain committed to capital efficiency and ensuring appropriate returns on our existing assets. We ended the quarter with a debt leverage ratio of 2.5 times materially lower than 2.8 times when we reported a year ago. The improvement is due to both higher adjusted EBITDA and lower net debt. Our balance sheet remains healthy with our solid investment grade credit ratings, stable outlooks and attractive rates on our standing debt. The management in our balance sheet comes down to the quality of our assets and ensuring we are prepared for the future. While we're pleased with the improvement as we head into our optimal leverage ratio range, we reiterate that we are focused on the fundamentals of the business and we’ll revisit long term sustainable dividend growth at the right time. For the year, with the solid progress we've made on the fundamentals and strong execution, we are raising our outlook for 2018 adjusted EBITDA growth to a range of 7% to 9% from our original range of 5% to 7%. We are also increasing our free cash flow guidance to 5% to 7% from the original 3% to 5% guidance range. In conclusion, we are extremely pleased with our performance of the steady growth that we have demonstrated this year. Even stronger guidance reflects our confidence in our execution on the sustainable growth, along with our ability to deliver on the fundamentals. With that, I’ll ask the operator to open the lines for questions.

[Operator:]

Thank you, sir. [Operator Instructions]. We’ll now take our first question from David Barden from Bank of America. Please go ahead your line is open.

[David Barden:]

Hey guys. Thanks so much for taking the question. I guess I had a few if I could. The first one was, Joe with respect to the Ignite TV rollout, you highlighted the higher ARPU and lower churn kind of early characteristic. Could you talk about the profitability characteristics, net of the kind of variable cost that comes along with that product margin and does that kind of inform Tony some of your comments about margin might be kind of moving around a little bit in the Cable business? And then the second kind of related question is, you guys kind of set that 100 to 200 basis points margin expansion goal over a two year period which you guys have kind of pulled through pretty nicely. Can you kind of maybe set a bar at the margin now as we look out maybe a year or two years forward? What do you think the incremental cost savings opportunities might look like? Thanks so much.

[Joe Natale:]

Thanks Dave. Why don’t I take the first one and then Tony will give you the second question. On the Ignite TV, first of all we are very pleased with the results so far in Ignite. It is early days. We launched the product externally in July. The goal really being to really harden broader service experience, the platform is working very well, making sure that the proceeds around ordering, billing, installation and customer support are really kind of in great shape and they are shaping up very, very well as a result of that effort. We do believe that the long term profitability, in fact the long term cash prospects of the business are very strong. If you kind of take a look at it just broadly for a second, number one in terms of overall installation effort on the front end, it's a very much more simplified product to implement as a whole. If you look at the CPE requirements and the installation costs, we talked about before, with Legacy TV we are running over about $1000, $100 or so for a full implementation. With Ignite TV that’s closer to the $400 range and there is still opportunity to kind of compress that over the fullness of the time. Add to it the effect that it's much easier to discover a concept for our customers and we believe that's why we are seeing, even in the very early stage strong ARPA uplift as customers have an easier time finding accounts and navigating through content and therefore we think a much easier time consuming content. We’ll continue to find you know other ways of packaging and merchandising content in the fullness of time which I think will help give the economics of the business. You know we are pleased with it overall. It early days and more to come on that point Dave.

[Tony Staffieri:]

Picking up on Joe's comments Dave, from a total cash flow perspective, we see opportunities both in terms of margin, but particularly in terms of reduced capital intensity for Cable going forward. Joe’s talked about – just talked about some of the opportunities of materially reducing our capital intensity from where it is now as the launch of Ignite TV continues. From a margin perspective, we see good opportunity to not only continue to grow ARPUs, but accelerate ARPUs and ARPA in particular and then on a margin basis we see the opportunity to expand margins. I don't want to get too far ahead of ourselves in terms of what that means, but with the product we've taken the opportunity to simplify a lot of our processes and improve the customer experience and as a result, that is dropping out costs and you see some of that coming through already, but more to come. My comments in terms of lumpiness of margins was meant more in terms of the very near term. As we continue to expand, you can expect someone lumpiness in cost, like awareness advertising for example. And so think about it in that context of the longer term. We continue to be very optimistic about the cash flow opportunities.

[David Barden:]

Alright, super helpful, thanks guys. Congrats on a great quarter.

[Joe Natale:]

Thanks.

[Operator:]

[Operator Instructions] We will now take our next question from Vince Valentini from TD Securities. Please go ahead, you line is open.

[Vince Valentini:]

Thanks very much. Your Wireless ARPU or ABPU, which I want to focus on, clearly trending better than your peers in the industry so far this year. This 3% range, you know just call it 3x higher than what the other two incumbents are doing. Is this a temporary thing in your mind? I mean is the industry growth really 1% or lower and you won't be able to sustain this 3% or so range for much longer? So we are looking at 2019, should we have level set expectations that your ARPU growth should be in the 0.5% or 1% range, same as Bell and TELUS or do you think that you’re still doing things with base assessment that will carry out beyond this year?

[Joe Natale:]

I think that’s – first, of all its – I don’t think it’s appropriate for us to give ARPU guidance in the longer term. But I will say to you that we still see the fundamental growth and base management opportunities there in our business. The appetite for data continues with our customers, you know any given cycle where our customers that are arriving at our doorstep and customers that are leaving and we’re looking very careful to make sure that we do a great job of managing that base and finding opportunities to focus on lift time value. I think fundamentally the industry continues to grow and really the onus is on us. The onus is on us to continue making sure that we drive affordability for our customers at the same time drive economic value for our business. We don’t believe that the industry growth opportunity, the behavior around people consuming data, more and more over time doubling every 24 months or so, and then the opportunity for us in base management is substantial and we believe there is still opportunity for us therefor in ARPU growth.

[Vince Valentini:]

Thanks.

[Operator:]

Thank you. We will now take our next question from Jeff Fan from Scotiabank. Please go ahead your line is open.

[Jeff Fan:]

Thanks, good morning. I just want to focus on subscriber loading on Wireless for a second, particularly on gross adds. So this quarter it looks like it was again a little bit from last year. You had great churn numbers, so the net continues to be fairly stable. I wonder if you can comment just what's going on in the market, what your observations are, because gross adds have been growing and the market has been growing and you guys have been growing in a last few quarters. I was wondering if there was anything that’s happening there on gross loading. And then just a quick follow-up on CapEx. On Wireless I was wondering if you are – you feel like you are spending at the right pace and then just very quickly on Cable, I think Tony you mentioned or Joe you mentioned about maybe sun setting the Legacy Cable service, I was wondering if there's any timing that you can put around that? Thanks.

[Joe Natale:]

Okay, first of all on Wireless Jeff, we are very pleased with our Wireless results in Q3. We really believe it a tri-factor for us. We had very strong high quality net adds, with strong lift time value, with strong ARPU that’s you know 3% ARPU and 4% churn. Churn improved by 7 basis points on top of the 10 basis points that churn improved Q3 last year, so its 17 basis points in subsequent Q3s. In terms of the growth in the market places, we still continue to see the market growing. You know we exited last year, 2017, at 5% market growth. We saw about 6% market growth in the first half of this year. We really pushed the team to be disciplined in terms of price in the market place, focusing on high quality net adds and we are very pleased with the result that came out of that. We don't see any change to market growth penetration prospects at the end of day. We still feel that you know there is an opportunity to work our way towards U.S. levels of penetration. As you know Canada sits at about 87% wireless penetration. The U.S. sits at about 120%. I think we'll continue to see that march toward 120 over the fullness of time. How will it be reflected each and every quarter? It's kind of hard to say until everyone reports and we see all the results and really look back and say, "Okay. What was the growth like this quarter?" But the macro conditions for continued growth in the sector we believe is still there. On the wireless CapEx front, we do believe that we're making the right investments. We do believe that we've got the right plans in place. As we've said in the past, we made the move to 4.5G later in the cycle. I think it's done well for us. It's done well for us because not only have we been able to implement the latest technology that is truly 5G ready in terms of 4.5G capability, but the unit cost price points have been much stronger than they were at the beginning of the cycle, and therefore we're enjoying much better economics in terms of the unit cost of delivering a gig. Do I look at that? Which way do we look at it? What is the cost to deliver a gig? And therefore we're doing I think a very good job of managing those unit costs. I do believe that you'll see consistent wireless CapEx intensity from us and we think we have the right levels to sustain the investment we're going to make in 5G in the years ahead. So we won't see any erratic surprises or big changes on that front in the short to medium term. On the cable side, our goal has been to grow Ignite TV at a thoughtful pace, at a pace that drives the quality and capability in the marketplace around the service experience that reinforces the fact that Ignite TV is a premium brand. You will see us at some point in the future – I won't say exactly when. At some point in the future you will see us stop sell legacy TV and then really kind of drive further efforts in getting the both OpEx and CapEx efficiencies of that move. As you can imagine, having various vintages of TV set-top boxes and home gateways drives complexity in the field for our people. And going to an all IP network and going to a passive hybrid fiber coax network as a whole, we'll also continue to see strong OpEx and CapEx savings to us. The good thing for us is that we can make those changes, including adding capacity on a success basis. And to go back to what Tony said a few minutes ago, we have had a one-gigabit capability across our footprint for a very long time, and it serves us well in terms of the market and that's why you continue to see internet penetration growth, 13 straight quarters of internet penetration growth. In a lot of ways, our main competitors are playing catch-up with our fiber investment because of the capability you have for a long time in the marketplace. But we do look forward to those opportunities because our focus on margin expansion and CapEx efficiency improvement are not stopping this year. We've got a whole playbook on both those fronts, some of them shorter-term in duration and some of them longer term that will come with the full migration to Ignite TV and the platform as a whole. So income on that front as we feel comfortable competitively and specifically telling you more about that, we will. But rest assured that those plans are very specific and very definite in nature.

[Jeff Fan:]

Thanks Joe.

[Operator:]

Thank you. We'll now take our next question from Drew McReynolds from RBC. Please go ahead. Your line is open.

[Drew McReynolds:]

Yeah, thanks. Thanks very much. Maybe for you Joe first. Just on a competitive environment in Ontario, we know it's always been competitive. It sounds like it was extremely competitive and you still certainly managed through that well. Can you just talk a little bit more on both cable and wireless competition and kind of expectation you know as we get into a seasonally competitive Q4? And then second question, just on the iPhone upgrade cycle versus prior years, is there anything that you are seeing that's unusual in terms of the upgrade dynamics as we've seen it to date at least? Thank you.

[Joe Natale:]

Great! Thanks Drew. In terms of the competitive nature of our business, I think it's fair to say it's as competitively intense as it's ever been and frankly, across all areas of our business. Gone are the days where the cable business was less competitive than the wireless business. Frankly, both are intensely competitive, and in the residential business over Back to School, there are a lot of people that are looking to hook up their service. It's more of a dividend only kind of marketplace during the Back to School period. You think about students. Having kids myself in university, I know exactly how the type of dynamic that's out there with respect to wanting some simple internet service and wanting a low price. So I think it creates a lot of intensity over that particular period of time. We feel we're well prepared for both the cable business competitive intensity. We got a great product; we've got a great team, and we've got a roadmap that is quite exciting beyond just cable TV if you look at the connected home and where it's going and we've got a team that's very much focused on execution. On the wireless front look, it's a very competitive market and Canada has been for many, many years. Wireless is a shopper category and every time there is a brand new device that comes out, customers look up and say, "Hey, maybe I want that device" and so the intensity begins. We're very proud of the fact that we've got the best distribution in the country. We're proud of the fact that we've got good momentum on the wireless front, and we have a focus around sales and marketing that is respectful of the competitive dynamics, but also looking very carefully and specifically at base management and a lifetime value as a whole. So, I'll leave it at that in terms of competitive intensity. In terms of iPhone upgrades, you know we're very excited about the iPhone XR. We're taking preorders for that phone, in fact starting today. The only dynamic that's different I guess you could say is that, yes, this year we have a double-pronged iPhone launch with the more affordable device going second. The last launch was the other way around with the more affordable device going first. So of course, with every iPhone launch there's a bit of a different nuanced dynamic in the marketplace. We're pleased with what we've seen so far from the iPhone XS and the XS Max and we're prepared for Q4 in our channels and across our business for what will be another busy season and a very exciting season for the Rogers organization.

[Drew McReynolds:]

Thanks very much, Joe.

[Joe Natale:]

Thanks Drew.

[Operator:]

We'll now take our next question from Simon Flannery from Morgan Stanley. Please go ahead. Your line is open.

[Simon Flannery:]

Okay, thanks very much. Good morning. Coming back to the 5G comments about UBC, can you just talk a little bit about what you think you need in terms of spectrum and in terms of infrastructure? There's obviously millimeter wave auctions kicking off here next month and then a lot of action in the 3.5 or so gigahertz band. Do you think you have what you need for 5G or what would you like to have to be able to compete, and what bands are you trialing with UBC? Thanks.

[Joe Natale:]

Simon, if you stand back and look at 5G overall, there are a few things that are fundamentally important to 5G. One, you've hit on, which is spectrum. Spectrum is very important. We have a strong base of 3,500 megahertz spectrum today. There is a 3,500 auction coming up in 2020 and that will become I believe the first tranche of important spectrum for the future of 5G. And hopefully the millimeter wave, the opportunities for us soon thereafter, so but spectrum's an important part of 5G. The second thing that's very important around 5G are the economic use cases. We all are busy postulating where there might be strong use cases for 5G. At this point they really are a series of trials and PowerPoint presentations. We're working hard to make sure we can find good environments where we can test the reality of some of these use cases, hence the UBC/RD collaboration. UBC's got a great engineering group, very much focused on co-developing some of these ideas and applications with us and proving out both the technological and the economic use cases. It also helps with the third factor. The third factor is in 5G we need access and attachment rights, access to polls, access to ducts, access to – call it real estate rights if you want to call it that and on that front that's going to be a challenge for the industry as a whole. It requires cooperation across all levels of government, of provincial and municipal. It requires changes to the telecom act in making sure that everyone has access to various polls and capabilities and ducts and brace ways to kind of integrate this infrastructure. One good thing about the UBC campus, it's a city within a city and the university actually runs that city as a responsibility for all the services that support 65,000 students in that community. So we view it as a very attractive place to try not just the technological ideas, but also the ability to have unfettered access to the infrastructure so that we could actually bring to life those ideas in a meaningful way, and so you know standing back, those are the three things. Spectrum's really important. We're going to be pushing hard on that front and making sure that we’re doing everything in our power to expand the availability and create a wider portion of 3,500 spectrum for the industry as a whole. Number two is working hard with municipalities and landlords and partners across the country and all levels of government to try to get the right attachment rights and make sure that we can economically deliver on the 5G promise, because if we're paying users rents for various capabilities in different parts of the country, then those are costs that we have to bear and they will be borne by the customer in the end. So, it's important that we get economic rights that make sense. The third thing is proving the use cases. Alright, making sure that we really sift through the absolute plethora of ideas and opportunities around 5G and pick the focused few that we really believe are right for Canada and are right for the industries and the businesses that are most important to the Canadian industry and really go after those. It will largely be a B2B play, a vertically focused play, and therefore it's important we make the right bets. The worst thing that we can all do in 5G would be to just come sprint across the landscape with a spattering of ideas in every area and really kind of achieve little excellence in any of them. So, we're going to be very focused in that area.

[Simon Flannery:]

Hopefully that’s [Crosstalk] Thank you.

[Joe Natale:]

Yeah, thanks.

[Operator:]

Thank you. We'll now take our next question from Maher Yaghi from Desjardins. Please go ahead. Your line is open.

[Maher Yaghi:]

Hi. Thank you for taking my question. I wanted to just – maybe first question on internet loading. Strong results compared to last year. Is it – I wanted to just know if there's a bit more wholesaling activity going on in the third quarter of this year versus last year, because the only reason I'm asking is the revenue generation from the subscribers was sequentially slightly down quarter-over-quarter versus last year. So, I just wanted to know if wholesaling was more successful this year than last year or it's mostly the competitive profile on pricing that's affecting the revenue line. And on the follow-up – just on 5G Joe you talked quite a lot on that and thanks for that. But I wanted to just ask you a question that is on many people's mind. Is the timing difference between the cost that will be put to use to create this 5G environment and the timing of when the revenue generation will come from these new cases might be longer in time basically between the revenue and the cost than the technological advancement we had previously in 3G and 4G and would that create a bit more pressure on the balance sheets?

[Joe Natale:]

Okay. Why don't I start with some comments, may be broadly about internet loading Tony, then ask you to comment on the wholesale question around that and internet ARPU as well? So first of all, Maher, thank you for your questions. We are pleased with what we're seeing overall in our Cable business. Revenue is up 1%, EBITDA was up 4%, and on a footprint of 4.4 million homes, we grew internet additions by 6,000 to 35,000 overall. We did see internet revenue go up 8% as a whole which we think is a very strong number and penetration is still very strong and continues to grow, like I said for 13 straight quarters in a row. Maybe Tony, you can comment on the wholesale question and anything else you wanted to add to that piece.

[Tony Staffieri:]

Maher, a couple of comments. In terms of the sequential pieces that you see, it's really the year-on-year that's more relevant. Q3 is highlighted by the Back to School season and so you get a different dynamic than you would have seen in Q2. And as Joe said, good performance on a year-on-year basis and bigger than when you look at that performance relative to homes passed. And as we said before, we continue to improve our penetration rates consistently every quarter on a year-on-year basis, and so in the third quarter it was even above one point of penetration improvement, so we're pleased with that. In terms of where they're coming from and the impact of wholesale, I describe wholesale as one very small in the overall metrics, but importantly, relatively flat. So it really wasn't a factor on a year-on-year or even on a sequential basis. So I'd describe it as non-impacting. Hopefully, that answers your question.

[Maher Yaghi:]

Yes. Thank you.

[Joe Natale:]

On 5G Maher, you know there's one important part of 5G that doesn't get a lot of airtime or attention because we're all focused on the kind of exciting use cases. But frankly, the most exciting economic use case is the ability to deliver network capacity, especially in densely populated areas at a lower per gig unit cost and that's where there is a level of energy going on right now in 5G. You're seeing it in building out small cells. You're seeing it in densely populated areas, in arenas, and in places where there are a lot of people coming together using their smartphones in a very intense way. So I think that is the best and most important and proven economic use case that will be the first thing out of the gate. I think it'll help to create good economics and therefore create some air cover if you will for some of the other use cases that we’ll have a bit of a J-curve, bit of a J-curve of investment. The thing is that the use cases that will have a J-curve of investment will not require, I believe you know massive CapEx investment. There'll be places where we can create overlay capabilities, if you want to call them that, build applications, etc. and then as the market penetration grows from those ideas, then we'll see the revenue come and the ability to actually continue to make further investments. Bear in mind that 5G is an overlay to a strong 4.5G network. It's a very important point. We're not ripping and replacing 4G like some other previous generation changes in technology. It is truly an overlay. And also bear in mind that 3.5 gig frequencies can be added to existing high-band networks. So, we've got the opportunity to kind of integrate this in a seamless, evolutionary way. The next generation radios will support existing frequencies and support 4.5 and 5G. So we're getting economies of scale and scope with the latest radio technology. Because of our movement again in the later part of 4.5G cycle, we can take advantage of these economies in a much more meaningful way, and therefore we think we're well positioned. We won't see that kind of gap between investment and financial return that has been around with some of the previous technologies. And we've all made the jump to 4G. It took a while for smartphone adoption to catch up and the rest of it. It's a bit of a different game with 5G. Hope that helps.

[Maher Yaghi:]

Great. Thank you, Joe. Thank you.

[Operator:]

Thank you. We'll now take our next question from Aravinda Galappatthige from Canaccord Genuity. Go ahead, please. Your line is open.

[Aravinda Galappatthige:]

Good morning. Thanks for taking my questions. Two for me, please; the first one on Cable. I wanted to get a sense Joe of the traction you're getting on the SME side and enterprise side in general. I know that remains an opportunity for you as incremental as dry quotes and profitability on the cable side. And secondly, on the wireless front, I guess connected to the earlier ARPU question, we're starting to see that very large data buckets being offered. I'm talking about the 10K size buckets that are being offered fairly often nowadays on a promotional basis, in the mid-70s. I'm curious as to how that plays into sort of the medium-term ARPU growth picture. I mean if you look at it headline-wise, obviously 35's a lot higher than your average ARPU, but much of the times on what offers your subs that are taking up those promotions. So, I just wanted to get your thoughts on that and what that says about the health of the pricing growth on a long-term basis for the industry? I'll leave it there. Thanks.

[Joe Natale:]

Okay. Thank you, Aravinda. Thanks for your questions. On the small and medium side, we see overall we're doing very well in a very small business. I think of that as sort of ten employees and below. We're seeing good growth in that area across capabilities that we have with wire line services, both cable and related kind of value-added services, everything from point of sale capability, etc. We think it's a big opportunity because we still have a very small percentage of the market in that area. In the medium business space we think there is also opportunity. There it requires you know kind of leveraging some of the technologies and platforms from enterprise, but making them more shrink-wrapped and easy to configure and deploy in the market. So as we work on that piece of it as well, then we 'll have opportunities to kind of grow penetration in the medium-sized market as well as the small business. It'll take time for this to show up in our results, but we feel very bullish around the opportunity. We look no further to the market share of our peers in Canada and the U.S. with our cable peers or telecom peers. We are under-indexed in this area and it is job one for our enterprise team to go after this opportunity. So, more to come on that front. It's still upside for us. On wireless ARPU, it's a great question. There's no question that there's a huge appetite for data among our customer base and there will be promotions that come and go through every period. It's this normal course of our business because of the strong appetite that customers do have for bigger data buckets. The key for us is to make sure that we can deliver better unit costs and monetize that data growth in a better way. So that means we're looking across our business, both OpEx and CapEx to make sure that the margin on a gig reflects the appetite of the base to want bigger data buckets. In terms of the ARPU impact of that, we continue to kind of focus on driving a strategy where we increase ARPU across different sections of the base, based on my – go back to my comments earlier on base management, I think there's an opportunity to both increase data consumption, monetize it better and then have a second value-based approach to making sure that we manage the best of our abilities to grow ARPU in the process. So this is something that's been going on for a long time. This is not something that's new and what you're seeing is just the fact that there's promotional intensity in wireless from time to time with bigger data buckets.

[Aravinda Galappatthige:]

Great, thank you.

[Joe Natale:]

Thank you, Aravinda.

[Operator:]

We'll now take our next question from Richard Choe from JPMorgan. Please go ahead. Your line is open.

[Richard Choe:]

Great! I just wanted to follow-up. Given the nice margin improvement and guidance raise, how should we think about the dividend potential increase and maybe CapEx going forward? What should we be considering in terms of the margin increase versus the dividend?

[Joe Natale:]

Sure. In terms of the dividend, I'll kind of reaffirm what we said in the past. We're playing the long game. As Tony referred to it, we’re playing the long game. This is all the sustainable long-term dividend growth and there's nothing new to report on that front overall. Tony, do you want to talk about CapEx?

[Tony Staffieri:]

Sure. On capital entity Richard or CapEx overall, again, don't want to overreach into our long-term guidance, but I think in terms of some of the pieces of it, we've been fairly consistent on wireless capital intensity. If you ever see the range we're at now, its somewhere in the 12% to 14% range. Its kind of the ongoing capital intensity for wireless, which we think makes sense, and then on the cable side, we intend and you will see in the fullness of time the capital intensity come down over the long-term to peer levels and so there's nothing new to report there either.

[Richard Choe:]

Thank you.

[Tony Staffieri:]

Thanks Richard.

[Operator:]

Thank you. We'll now take your next question from Sanford Lee from Macquarie. Please go ahead. Your line is open.

[Sanford Lee:]

Hi, and thanks. First off guys, congratulations on the solid quarter and guidance range. My question here relates to the Telco fixed wireless internet solutions that have been rolling out. Now, the same technology has opened up another 800,000 that are moving and targeting broadband homes. So do you see this as a critical threat today or is it something that's still maybe a couple of years away as far as having a material impact on Rogers cable?

[Tony Staffieri:]

Well, we're seeing the comments as you are Sanford, coming from both Verizon, AT&T around their trialing and experimentation with fixed wireless. I'll tell you, we firmly believe that a hybrid fiber and coax network has a lot of longevity. It has really strong compelling economics. What I'll say to you is that if the economic case on fixed wireless and the technological reliability is proven on a global basis or on a very specific scale basis, then we will still look at it and find opportunities integrated into our network. We really look at it as our mandate is to deliver strong, reliable bandwidth and capability to our customers, and we are in a business where in some cases that's fiber, in some cases that's fiber and coax, in some cases that might be fixed wireless for the last mile. It's still right now a very expensive solution, and it's also something that we’ll take time to really approve of the reliability. I don't believe that the technology is really ready right now to challenge coax and fiber. Therefore, we're going to maintain our current course.

[Sanford Lee:]

Okay. And if I can ask one quick one on the wireless ARPU. So obviously your growth hasn't seen the slowdown in growth as your peers. And part of it I think is attributed to the positive impact by removing the shares through these contracts from the base. However, you know like you said, there have been the point available to all these free data incoming offers. Do you think that's going to impact it going forward or are you still able to offset it with the higher tiered plans?

[Tony Staffieri:]

Sanford, on the ARPU, as I said in my opening comments, I think for the full year, based on an IFRS 15 adjusted basis, we saw a full-year ARPU growth of 2% to 4% and that captures the impact of the government of Canada contract, which we said would be one point and it declines over time as those customers move off of our network. And so we don't see anything that is materially going to change the trajectory of ARPU. As Joe talked about, the fundamentals in the industry continue to be there in our execution and capturing that growth continues to perform well. So nothing that we see will suggest us coming off the trajectory.

[Sanford Lee:]

Great, thanks. And congrats on another solid quarter.

[Tony Staffieri:]

Thank you.

[Operator:]

Thank you. We'll now take our next question from Dave McFadgen from Cormark. Please go ahead. Your line is open.

[David McFadgen:]

Thank you for taking my question. Just a question on the wireless EBITDA growth. Joe, you talked about reducing call volumes in the wireless business. I was just wondering where you stand with respect to that, because I know you have a target there and you'd like to bring that down. I'm just wondering if that is having much of an impact on reducing the cost in the business or is there still a lot of room there to take up cost on the call center?

[Joe Natale:]

I still believe there's good opportunity on that front, Dave. As I mentioned in my opening comments, digital adoption continues to grow. We saw that double from this time a year ago, and we still have a lot of opportunity on that front. A combination of increasing digital business penetration and adoption and then also we're working hard to take complexity out of our call center. In Q3 alone we remediated some 100 different customer service processes and took complexity out of what our frontline teams have to deal with and what that'll do is continue to drive call volumes down. We think there’s opportunity to chip away at that for the next number of years, frankly. At the same time, what it does is, it leaves our agents to really spend the time they need to spend with our customers on the most important conversations, not dealing with a particular error or lack of clarity and etc. Our goal, as you've heard me say before is to be clear, simple, and fair with our customers and that is showing up in everything that we're doing. It's showing up in how we're improving processes, how we're driving digital adoption. And we continue to make investments in the smartphone apps that allow our customers across all brands to interact with us, and that'll continue to have opportunity for us in the very long term.

[David McFadgen:]

Well, if I can just follow-up or maybe push a little bit more, I think you were targeting maybe a $50 million reduction in expense on the call center. I was just wondering where you stood with that and exactly what percentage of call volumes are down.

[Joe Natale:]

We continue to drive improvement in call volume. I'm not going to get into the specifics of the numbers or the dollars for a whole bunch of reasons Dave, but suffice to say that the improvements continue year-over-year and you see it reflected in our margin expansion as being a key driver of that margin expansion.

[David McFadgen:]

Okay. Alright, thank you.

[Joe Natale:]

Thank you.

[Operator:]

[Operator Instructions] And our last question will come from Drew McReynolds from RBC. Please go ahead, your line is open.

[Drew McReynolds:]

Thanks very much. I appreciate you fitting me on the follow-up here. Joe, just back to kind of 5G related IoT, two questions on this. You put an announcement about your LTE-M network in Ontario that you are building out now. Does that mean at some point presumably you shut down your 2G network, which is my understanding that's handling a lot of your M-to-M business and does that add an extra layer of cost savings into the equation at some point? And then secondly, I know you don't want to quantify your M-to-M revenue contribution, but just can you directionally comment on how it's been building over the last two or three years? Is this something that you wait for 5G and then this thing takes off? Is it a little bit more exciting right now than what I just characterized? Thank you.

[Joe Natale:]

Great. Drew, let me start from the end and work my way back. We are the market leader as it relates to machine-to-machine in terms of having the best share of the overall opportunities in the market. It goes back to the fact that originally we were a sole GSM provider in the early days of modems for machine-to-machine and we've maintained that lead through the move to LTE, etc. We continue to see steady growth in that business as a whole. Bear in mind, it is still a very small percentage of the total wireless revenue. We believe it'll accelerate as we grow capabilities. You heard me say earlier that we believe that 5G will bring 500x, the number of devices. I think that's reflective of the fact that machine-to-machine will take on even greater proportion of the business opportunity for us as a whole. Yes, whenever you have multiple technology layers and multiple networks, there's always cost reduction as you decommission a network and repurpose a spectrum, etc. In the scheme of things, given the bandwidth consumption of machine-to-machine on 2G, it will produce some benefits in savings for us, but it's not of a material nature and size in terms of the overall cost reduction opportunities. It'll be helpful to us, but it's not like we're turning down a big, broad network. It is a layer on the 2G network.

[Drew McReynolds:]

Thank you very much.

[Joe Natale:]

Okay, thank you for the questions.

[Operator:]

Ladies and gentlemen, this concludes the Q&A session for today's conference. I would now like to turn the conference back to our hosts for any additional or closing remarks.

[Joe Natale:]

Thank you, Simon. I think with that we'll close the call. Thank you everyone for joining us this morning and for your interest in Rogers. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.