Rogers Communications Inc.
Q3 2017 Earnings Call Transcript

Published: 19 Oct 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rogers Communications Q3 2017 Results Analyst Teleconference. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today on Thursday, October 19, 2017 at 8

[Amy Schwalm:]

Good morning, and thanks for joining us. I am 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 2016 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Joe to begin.

[Joe Natale:]

Thank you, Amy and good morning everyone. It is a pleasure to speak with all of you today. First of all I'm pleased to report a solid third quarter, reflecting good momentum in our business. In a moment I will go through the highlights but before I do that let me comment on the fundamentals underpinning our business and our success. Last quarter I shared my thoughts on our strategic priorities and over the last six months I reflect deeper into our operations, streamlined our team and organizational structure and set a clear focus path for our future. Overall, I continue to be bullish upon our industry and the underlying growth potential consumer and business appetite for both fixed and wireless program services are strong. This is bolstered by healthy macroeconomic conditions in the markets we serve. Our primary focus remains on growing our core business. This is where our greatest opportunities lie in driving value, sustain growth and resulting share appreciation. Our key focus is delivering on the fundaments, delivering sustainable growth in revenue, profit, margins and free cash flow. It is about delivering strong return on investment. To do this we are focusing on our strategic priorities. Our customers, our people along with investments in our network, innovation and growth. These strategic priorities will guide our actions and our decision making as a management team. We're driving deeper end-to-end accountability where it matters most our customer experience, our cost management efforts and our overall financial performance. I firmly believe what gets measured gets done so we're tracking progress with the extended metrics and we're timing directly to our performance measurement and compensation system. We are firing up our execution engine systematically blocking and tackling a multitude of core issues and opportunities that deliver on our priorities and goals. There is no silver bullet; cost efficiency will be a natural outcome as we drive our customer friction and complexity. To me, customer service improvement and margin expansion go hand-in-hand. We are investing capital in our core business with discipline. Our networks are the lifeblood of our business and world-class performance is critical to our future. So we are upgrading our wireless network to continue to deliver worry free reliable performance, while ensuring capital efficiency and strong returns on investment. Our spending is well timed, we're seeing great unit [ph] cost opportunities and increased special efficiency that is available to latest generation of equipments. Our credibility that will deep a relentless focus in our priorities and execute with discipline, we will drive sustainable growth in our core business. We remain focused on translating this top-line growth, integrate our operating profit, free cash flow, return on investment and ultimately returns to shareholders. Now turning to the quarter, overall, our third quarter results reflect continued solid momentum. Here are a few highlights. We reported strong service revenue growth of 4% and AOP growth of 6%. We've raised our guidance to reflect strong growth in AOP that we will reinvest in our networks. Tony will discuss this further in a moment, but overall you will see we're tracking - we're taking a balanced approach to our financials. Once again this quarter we delivered in all of our key wireless financial and subscriber metrics. We reported growth in cable revenue and adjusted operating profit, thanks to the strength of our internet products. We expanded our margins in both wireless and cable giving much better operating leverage and cost efficiencies. As previously stated, we intend to improve margins in 2018 from 2016 by 100 to 200 basis points in each of wireless and cable. I'm pleased to report that we're on track to achieve this. We also substantially reduced our debt leverage ratio from 3.0 to 2.8 year-over-year. Turning to wireless, we delivered excellent results again this quarter, postpaid ARPA increased 6% and blended ARPU grew 2%. This was driven by the ongoing adoption of our share everything plans, where churn is well below 1%. The penetration of these plans continues to ramp well with substantial room for more growth. Postpaid net additions of 129,000 were up 15,000. This is the highest we have seen in eight years. Postpaid churn also improved 10 basis points to 1.16%, representing the lowest Q3 churn rate in eight years. In cable, internet net additions of 27,000 were down 12,000 given a hyper competitive environment. As a result, total service unit net adds increased [ph] 20,000. We saw very aggressive offers exploding in September, and decided to only selectively match balancing pricing discipline with subscriber share performance. Our internet speed advantage continues to track well, 52% of our residential internet customers are now on speeds of 100 megabits per second or higher, compared to 42% a year ago. On the video front, we continue to make good progress on the integration of our X1 IPTV platform. Key elements of the platform including linear channels, VOD and Cloud DVR are up and running in the production environment. We're gearing up for the launch of our employee trial next month. We see great growth potential in cable with our strong broadband product and the capabilities that will come with the X1 platform, bolstered by the exciting excellent roadmap, we look forward to bringing our customers a truly connected to digital home experience. In media, sports related revenue was strong. We continue to believe in the value of true rights ownership of content, the content that audiences want most in our world that's sports, where roughly 60% of our media revenue was sports related. The other strategic plan is what I would describe is firstly local content. I believe this content is a competitive advantage and fills an important gap for audiences that other media outlets don't always offer. Before I turn it over to Tony, I'd like to thank our entire team of 26,000, who are delivering a strong quarter, thank you for your hard work and commitment to our customers and our future. Tony over to you.

[Tony Staffieri:]

Thank you, Joe. Our financial results were very strong again this quarter, we had continued momentum in growing revenue, posting overall service revenue growth of 4% this quarter. We're doing a good job of translating this top-line growth to increase the profit and margins, with AOP growth of 6% and consolidated margins expanding by over one full point to 41%. In wireless we reported strong service revenue growth of 7%, driven by excellence subscriber performance and meaningful growth in ARPA and ARPU. Once again this quarter, we saw a very healthy flow through rate of 60% of revenue to adjusted operating profit. AOP increased 9% and wireless margins expanded 80 basis points, notwithstanding our significant customer investments. Turning to cable, we grew cable revenue 1% with substantial increases in cable AOP and margins. The internet revenue was up 6% this quarter. Excluding the impact of the CRTC's decision a year ago to reduce wholesale access rates, cable and the internet revenue would have increased 2% and 9% respectively. Cable AOP was up 2% in the quarter and again excluding the impact of the CRTC's decision to reduce rates, cable AOP would have increased 5% this quarter. Margins expanded 88 basis points here as well. Higher AOP and margins were primarily driven by cost efficiencies and the ongoing product mix shift for higher margin internet services. Internet revenue comprised 46% of total cable revenue this quarter. So on the cable front, financials were strong driven by our internet business. We expect further momentum in cable fundamentals with the excellent IPTV launch next year. We believe X1 and its roadmap of innovation will offer the best experience and create great customer loyalty. In media revenue was down year-on-year due to the success of the World Cup of Hockey held in 2016, and from lower publishing revenue following our restructuring from print to digital last year. AOP was largely impact by lower print revenue and higher player salaries at the Blue Jays. I'll now go through some additional details in our financial results. The timing of CapEx spend impacted free cash flow and capital intensity in the third quarter in line with our previous messaging and CapEx would grow in the second half of the year. Overall capital intensity was 18%. As we mentioned last quarter, we expect wireless CapEx intensity to come more in line with the industry norms. We anticipate cable CapEx intensity to decline overtime. The excellent licensing models and variable OpEx structure and the average customer investment for home bode considerably, with significantly lower equipment costs, product functionality and self-installed capabilities. As we look ahead we are assessing the best approach to maximize capital efficiency related to no segmentation. We are finding it makes sense to do more segmentation in adjacent neighborhoods that we can better leverage permits, scope and scale in order to lower unit costs. As such the decline in cable CapEx intensity maybe more of a step down change to a lower resting heart rate rather than a gradual decline beginning next year. We'll lead this help further is in disclose our 2018 guidance as Joe mentioned expect us to be balanced there on cash flow allocation. Moving to overall performance below the operating line, adjusted net income was up 23% primarily due to higher AOP and lower depreciation and amortization. Net income increased 112% due to these items and certain write-downs in the prior year. With respect to our financial flexibility, strong AOP helped generate operating cash flow of about $1.4 billion, which supported dividend payments of $247 million this quarter. We ended Q3 with a debt leverage ratio of 2.8 compared to 3.0 a year ago, the improvement is due to both higher AOP and about $400 million of debt repayment this quarter. Over time we expect ongoing AOP and free cash flow growth to fund debt repayments and generate further improvement in the ratio. Our balance sheet remains healthy with our solid investment grade credit ratings with stable outlooks and attractive rates on our outstanding debt. For the year, we are raising our outlook for 2017 AOP growth to a range of 5% to 6% from our original range of 2% to 4%. We plan to spend the incremental AOP on network investment and so are raising our CapEx guidance range to $2.53 billion to $2.45 billion from the previous range of $2.25 billion to $2.35 billion. Our free cash flow and revenue guidance for the year remain unchanged. To close we're very pleased with our performance and training, it's excellent to see the team so engaged and squarely focused on the key priorities to drive further enhancement in our fundamentals and better experience for our customers. With that I'll ask the operator to open the line for questions.

[Operator:]

Thank you. One moment please. Ladies and gentlemen we will now conduct a question-and-answer session. [Operator Instructions] Your first question will come from Jeff Fan with Scotia Bank. Please go ahead.

[Jeff Fan:]

Hi, good morning. Congrats on the results. Joe or Tony I guess this question is related to some of the new pricing moves by one of your competitors that's been talked about in the market I guess that become more official today. I guess my question is really towards you guys as to what do you think your exposure to overage - data overage revenue is at this point. It looks like as the market moves to more bigger data buckets that's one area where it might be prudent to start to move people into the right plan so that there is no reliance on top ups and ARPU growth and it's more natural usage growth rather than overage? Wonder if you can discuss a little bit about that. Thanks.

[Joe Natale:]

Sure, Jeff. Wondering I spend a minute on the competitive dynamic and generally talk about data overage and our reliance on it in relative terms. So first of all we have always competed with freedom on price this appears to be an extension to that strategy with a lot marketing bravado behind it. We believe that our distribution strength, our network capability of the customer care strength are - still remain to be clear competitive points of advantage and part of the full package I mean customers choose Rogers. If you look at our customers Jeff in 10-gig space a lot of them are - in fact vast majority of them are high value chair within customers with multiple lines. They're looking for network quality where [indiscernible] does lot of work to do on the network quality side, wasn't long ago they had an 8-gig offer in the market for about $60, it was rather kind of been on in terms of its impact. So I would look at it as a business as usual kind of situation and one that we're well prepared to take advantage of our strength in distribution, customer care and network to really combat. In terms of looking at our overage revenue, we're seeing the trends you'd expect Jeff, and still in place pricing plans that encourage the customer to look to larger data buckets that gave them a better certainty in terms of bills, but also better value for money. So as you would expect as the adoption of higher data bucket plans increases particularly in the share everything category, what you see is less overage revenue being translated into better recurring subscription revenue for us. And so that trend continues in the right direction for us, and it is a conscious strategy for us in the pricing strategy of our wireless plans.

[Jeff Fan:]

May just a couple of follow-up. I'm sorry.

[Joe Natale:]

Couple of quick thoughts on that. Just bear in mind that the vast majority of our customers don't get charged data overage overall and we've really worked hard to be customer friendly in notifying our customers when they hit 90% of the data limit where kind of help them get into the right plan as Tony described. So we're not really kind of so materially relying on overage and top-ups we're really trying to get people into the right plan. And that not just is good business, but it really helped to drive a great customer experience.

[Jeff Fan:]

Maybe just a quick follow-up, it doesn't sound like you want to give us any numbers. But if we look ahead to say the next 12 to 18 months assuming Freedom Charles network is going to improve at a quality that might be more competitive. Would you expect - would you plan or is your objective to get that whatever overage is today down to the level where it's really not that material that could impact ARPU I guess down the road. Is that the goal?

[Joe Natale:]

The goal would be to continue to leverage our ability to get customers in the right data plan. We have worked hard on creating a data manager type tool sets that help customers manage their accounts not just for them, but for the entire household, entire family. And that's driving a great experience and the tool itself is actually creating how the stickiness as I mentioned at the beginning, we're seeing sub 1% churn rates for people that are on our share everything plans. So that construct is fundamentally important to us. The key is customers' data appetites are growing 40%, 50% per year. And we rather having in the place where they're in the right data plan or they can occasionally have a top-up as they see fit. Consistently data overage month-over-month is not a great customer experience. And we're trying to help manage customers into the right place.

[Jeff Fan:]

Okay, thank you very much.

[Operator:]

We'll take the next question in the queue from the line of Vince Valentini with TD Securities. Please go ahead.

[Vince Valentini:]

Yes thanks very much. Two things, the guidance range for the year obviously impressive 5% to 6%. Can you give us any thoughts on iPhone X and how you thought about that in the guidance? Is it if we get an unusually large supply of the devices and they are very popular which I don't think is the base expectation, but if that were to happen, is that buffered in the low end of the new guidance? And then secondly just the dividend I mean everything is trending right, your debt is coming down, your EBITDA is better than expected. I mean we can run the math on the payer ratio. Is there any beyond the math that we need to think about in terms of dividend growth we're assuming? Is there anything strategically or big picture that would perhaps stop the dividend from growing up in January when you report Q4?

[Joe Natale:]

Let me start with the iPhone and Tony can pick up the dividend. On the iPhone side, to your comment Vince I must have said it's more incremental in terms of product evolution rather than transformational. And what we're seeing is sort of I would say the more anemic appetite for the iPhone 8 right now there is lots of anticipations around the iPhone 10 and what it has to offer. The thing - the future that people are most excited about seems to be the augmented reality feature that's available in both the 8 and the 10. It's something that will drive network traffic so it has some potential interesting upside for us if that comes to materialize overall. Our timing is aligned with the U.S. in terms of timing we expect to take preorders on October 27th and launch on the November 3rd. A couple of things to bear in mind is that the iPhone 10 price point is about 75% higher than the iPhone 7. So it's a very expensive device. Inventory is a question mark in terms of what we will get. We do have reflected in our guidance, what we believe there is the right balancing factor around how much inventory we'll get the appetite for the device, the price point, et cetera. So we feel comfortable we reflect that in our guidance. The question will be is how much of the iPhone 10 activity happens in Q4 versus Q1 of next year. And we will try and be prepared for either overall.

[Tony Staffieri:]

Second part of your question Vince relating to any dividend assumptions. We're still in the process of going through our plans for 2018. And we expect to dividend as a capital allocation more generally doesn't change from what we said in the past. We continue to focus on revenue AOP growth with a healthy reinvestment into our network and CapEx. We're going through as you would expect our capital plans and capital allocation for next year. And so, nothing more we can say that at this point and as we continue to work through that.

[Vince Valentini:]

Thank you.

[Operator:]

We'll now take our next question from the line of Simon Flannery with Morgan Stanley. Please go ahead.

[Simon Flannery:]

Great, thank you very much. Good morning. I wonder if you could just touch Joe on your port forms of as the portfolio and in particular the potential for some asset divestiture. So what is your thinking on that right now? And I think you did touch on the X1 for 2018, can you just update us on what the latest thoughts are on when that arrives and when you start to deploy that commercially? Thank you.

[Joe Natale:]

Okay Simon for the first question again part of it came off a bit on the [indiscernible] portfolio of assets. Thank you. Well, first of all, as you've hear Tony and I say in the past, we're committed to looking at ways of surfacing value from our portfolio assets, whether it be the Js or whether it be some of our other investments across our business. Our plan is to look at each of those along the way as we kind of look for opportunities to surface that value. We don't have any plans at this moment that we are announcing or even kind of giving a nod to, our focus very much is on our core business. Our focus is on driving the key priorities that I talked about in the last call and put forward in the press release around our core business is the very much the biggest part of the value that we create for shareholders. And to be honest our 120% focus has been on that, right now. In the fullness of time we will address each of the portfolio assets and figure out what is the best way to surface value.

[Simon Flannery:]

All right. And on the X1 side.

[Joe Natale:]

Yeah. Expect to X1, we have running now in the production environment, what does that mean that a number of us are using it at home and in the office as our primary source video entertainment. And we are getting ready now with all the proprietary work to do a full scale employee trial. That is scheduled to start in November and that will see 1000 plus Rogers employees leveraging the products in their homes through the normal course of activity in terms of placing orders, chart rolls installation so that no sort of unique process for our employees, we're using the exact same process that we plan to use with our customers around commercial launch. We're going to really work hard to iron out what I believe at this point will largely be process issues, order issues et cetera, plus anything else on the platform side through the course of that trial. And then we'll have in late Q1 right now as the plan a soft commercial launch. A soft commercial launch meaning we'll kind of open up the universe of customers to a broader set of employees and also a portion of our customer base with really the goal of hardening our capabilities in further. I really believe that you've to go slow to go fast. We do know judging by the experience at Comcast, judging by the experience at Cox, Cox just revealed that they have 1 million customers up and running on the X1 platform and they've gotten to about a quarter of their base already. They're seeing a 20% improvement in churn for customers on this product. So, we believe that the price really worth making sure that we've a great execution capability and a great experience for our customers. So with that I mean is at some point later in 2018 we will do a full commercial launch. I call it the loud and proud phase, where you'll see advertising in all forms announcing the arrival of our X1 platform. Between the soft launch and that point we'll be doing it more tactically. And then at some point in 2019, we'll stop sell our legacy platform b continue a focus thoughtful migration of our entire base overtime to X1. So that's the sort of general kind of milestone around of having an X1, I tell you that that probably is a great product, we've been enjoying being the - Tony and I have been enjoying being the people and best part of trial audience. Bringing a lot more feedback from us than they probably would like but that's a good thing. But it's seem sport and the entire organization can be more focused and more excited about the advent of X1, what it means to our business.

[Simon Flannery:]

Great, thanks for the color.

[Operator:]

We will now take the next question from the line of Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

[Aravinda Galappatthige:]

Good morning, thanks for taking my question. I was wondering if you can expand a little bit of the cable CapEx side, some of the comments you made in the prepared remarks. Should we be sort of expecting a bit of an uptick in cable CapEx as we go into '18 before that it would step down that Tony talked about. Or is it more of a kind of a flatter trajectory through '18? And connected to that, should I translate to commentary that you are looking to sort of accelerate no splitting getting going forward in the fiber deployment is that how we should be looking at it? Thank you.

[Joe Natale:]

Thanks Aravinda. Let me just kind of frame it up and then ask Tony to comment on as well. There is no question that in the medium to long run, our cable CapEx intensity is coming down. We believe that we have all the right ingredients to reduce as we have been calling it the resting heart rate to materially lower point in terms of cable CapEx intensity. It's important to understand in the cable side, two things. One is that in the X1 world and in the DOCSIS 3.1 and beyond world, our cable CapEx is really success based. We truly do have 1-gigabit services enabled to entire footprint. It comes down to adding capacity as is required just take up on those features as we get more connected devices in the home. So that can truly be done on a neighborhood-by-neighborhood basis, as we have been doing it. I have been pushing the team to look more closely at how we are doing that to see if there is a more efficient way of rolling that out, you can imagine that doing one neighborhood at a time is sometimes inefficient, look at it and say, what about the neighborhood right next to that neighborhood, maybe there is no need for no segmentation right now. But while we are in the middle of getting work permits and lining up construction teams and buying equipment, et cetera, we can get economies of scope and economy of scale in doing things in a more contiguous fashion. And having some longer term contracts to our contractors and getting as a result a better unit cost. I have been pushing the team to answer the question, can we get $1.20 or $1.30 worth of work done for $1 of investment, if we leverage economies of scope and economies of scale. I believe that we can. So the focus is there, and what it means is that cable CapEx will come down in more of a step wise fashion, rather than a roll-off to this resting heart rate that we've been talking about. In the short term it's fair to say that you will see a flatter cable CapEx profile, we are not intended to take it up, or just to take it down in more stepwise fashion. I don't know if you want to add to that Tony as more broadly.

[Tony Staffieri:]

Yes just to reiterate on some of the key points with some numbers, we talked about the two ingredients that are going to bring cable CapEx down, the biggest one being the unit costs related to our customer base. The X1 platform there were significant cost opportunities in terms of CPE, in terms of cloud DVR capabilities. And also as a real potential for a self-install. And so we see our average cost per home going from what today is over $1,000 to something that's less than $400 per home. And that's going to be a big driver. And as Joe said, in terms of no segmentation, we continue to have a very efficient ROI model where can invest where it's needed and it's really about has there an opportunity to pull together certain contracts and allow us to bring that down and it's in the context of not bringing cable CapEx intensity up, but rather the pace at which it comes down. And so for the near-term what we're thinking about is whether there is opportunity to hold it flat or down slightly from what would otherwise be the case.

[Joe Natale:]

And what's underpinning all this Aravinda is, we are incredibly excited about our outlook for the cable business. We already have a great superior internet product with the arrival of X1 we will be able to as I said in the past play [ph] with both hands and we believe that that excitement, that capability, that marketplace of opportunity fully supports our investment and what we are talking about. This is an investment that we would be making anyways over the fullness of time and we're trying to get more bank for our buck by doing it in more of a contiguous and step wise fashion.

[Aravinda Galappatthige:]

Okay, that's great color. Thank you.

[Operator:]

We'll now take the next question from David McFadgen of the Cormark Securities. Please go ahead.

[David McFadgen:]

Hi, just following along on that. So you raised your AOP guidance and then you raised your CapEx guidance, as most of that CapEx increase going to the cable plan or some of that going to wireless? And then Joe, can you just comment on your assessment of the quality of the wireless and the cable network and do you really see big reason to step-up the investment there or are you quite happy with the performance of those networks?

[Joe Natale:]

Sure David, wanted to start with the last question first. And so we are very happy with the strength and capability of our networks both wireless and cable. Canadians enjoy some of the best wireless networks in the world. The recent OECD study is once again underline the fact that Canadian wireless networks are considered to be amongst the strongest across the 34 OECD member countries number four in terms of investment. And the capability of the Rogers network is certainly as shown in the example of what that investment can deliver overall. And on the cable side, we have worked very hard to create a cable internet capability that supports 1-gig profile across our entire business. The team has been on it in terms of managing the capability and the performance of that network as a whole. The DOCSIS roadmap for the future is very exciting, if you look at what's beyond DOCSIS 3.1 with N-gig capability and symmetrical capability, the roadmap is very rich and vibrant. So, we believe that we've got great situation already. If you look forward, the appetite for data continues to grow I talked about it in the beginning. Our customers are consuming 40% to 50% more data each year. The average Canadian household has 12 connected devices on the road to 50. The average consumer spends about three hours a day on their mobile device up from one hour a day. So there is a huge data apatite the owners on us is to continue investing in the capability and maintaining discipline around pricing and capability in the markets that we make sure we extract fair economic rent for the investments that we're making overall in our cable infrastructure and our wireless infrastructure for that matter. I think the key to all this is to really stay focused on some elements that are important one as you will see us really stay close to what our proven global roadmaps. The excitement you hear around Xfinity [ph] is certainly around the product feature set, but more importantly the fact that we are drafting behind an organization that has 10,000 software engineers devoted to the roadmap and creating a prove capability that is shared across many organizations. So you will continue to see us not go out alone, but drafting behind the large players globally that are doing good improving things. Next we're committed to sweating the investments that we already have in our networks. We have a lot of under the lice fiber, we have fiber stretching across vast parts of our footprint that could be better utilized for our wireless and cable networks, but also for our enterprise customers. And before we put new fiber underground we are going to make sure we sweat and utilize the fiber we have already to a greater extent. So, it's not just about the CapEx as a whole, but is making sure that we have better efficiency of what we have and the money spend going forward. In terms of us taking up guidance in CapEx this year, if you look at year-to-date we're slightly below where we were last year after three quarters in terms of CapEx expenditure. Yes, we are going to be putting forward a higher CapEx investment into Q4, it's really driven by a couple of things. Number one, like a lot of capital plans in our industry that tend to be more back end loaded that's the nature of it. On top of that something happened in April, a new CEO showed up on the scene that set the people let's just everybody take a breadth for a minute really understand our priorities really not to re-vector where we're taking the business. And then we'll come back at it with zeal those priorities and now set and walked in and we are coming after it with zeal as a result of that as a whole. And the last thing the team has done a great job at running different procurement exercises in the last few months to get us great unit cost performance on some of the critical equipment that is fundamentals to 4.5G. So, you've heard me talk about in the past for carrier aggregation, 4x4 MIMO, 256 QAM these are all technologies that we're busy installing right now as we speak. And we've led up in the last little while. And we're getting not just better structural efficiency given that we're using the latest versions of the technology, we're getting very strong unit cost outcomes as a result. So to your question more specifically David yes the big performance of that will be invested in our wireless network to take advantage of 4.5G. And by the way, the technology we're putting in place will all be 5G ready, which is important to the future overall. And I make the comment maybe just a few minute ago to Aravinda and that is that these investments are underpinned by our excitement around the growth potential in both our Cable and Wireless business, otherwise you wouldn't be considering making these investments and doing into the manner it's described.

[Operator:]

We'll now move on to the next question from the line of Phillip Huang with Barclays. Please go ahead.

[Phillip Huang:]

Yes, thank you, morning. A couple of questions, first one is, I want to ask about the Full Duplex DOCSIS 3.1, CableLabs has recently talked more about as a solution for providing symmetrical download/upload speeds. So I was wondering if maybe you guys could help provide some context around that in terms of what phase we're in that technology any thoughts on timing of its availability and of course the cost implemented? And then my second question is on the 2% decrease in device upgrades, I think you've already answered part of it when Vince asked a question earlier, but wanted to get bit more color behind what you think is driving that, you mentioned the demand for iPhone 8 appear soft, are you also getting the sense that the decrease is this quarter is just delayed because consumers are waiting for the iPhone X? Thanks.

[Joe Natale:]

Okay, one other comment on DOCSIS Full Duplex, Tony maybe you can talk about device upgrade roadmap for strategy around that. So, on DOCSIS the technology is real and capable, but realistically the specs are just out and it's early. It will be I think 2019 plus before we see it really commercially available in the full sense. I think that's fine given the upload desire of our customers, we can fully support the capabilities for our business customers that may have more significant upload needs right now we have all the products and solutions. So that fully meet the capability. The important thing to understand is that DOCSIS 3.1 is backward compatible overall. And Full Duplex DOCSIS will be timely in its arrival it will be ready for it in terms of commercial installation, commercial limitation.

[Tony Staffieri:]

With respect to the second part of your question Phillip. As you saw in the quarter spend on device upgrades was about flat just down - up slightly 2%. And that's really driven by volume of our postpaid base we had 5.1% upgrade in the quarter, and that compares to the prior year at about 5.4%. So, still relatively soft in terms of iPhone 8 demand from a hardware upgrade perspective. And as Joe talked about earlier, we expect some of that volume to fall into the fourth quarter, and possibly even the first quarter depending on supply.

[Phillip Huang:]

Thanks very much.

[Operator:]

We'll now take the next question from the line of Drew McReynolds with RBC. Please go ahead.

[Drew McReynolds:]

Yes, thanks very much. Good morning. Two questions from me, just first, I guess maybe for you Joe, on the Churn side, curious just to get your big picture thoughts not so much on specifically what Rogers is doing, but more the structural decline in churn that we're seeing across the industry. Can you kind of comment as to how low it can structurally go relative to certainly what investors have been seeing in the rearview mirror over let's say the last kind of 5 or 10 years. And then secondly, just on the regulatory environment. We obviously always have some files underway we have a new CRTC Chairman. Just wanted to get your latest thoughts just characterizing the regulatory environment as you see it going forward? Thank you.

[Joe Natale:]

Sure. So Drew, on the churn side, I think there are a few factors that are driving overall industry churn certainly Rogers is both driving and benefiting from those factors. One overall is that there is an industry wide effort around driving the customer experience. It wasn't a long ago that there was much discussion on calls like this around the customer experience. And now it's nice that us believe what are we really doing as a business where we are a service provider and therefore we must focus on the service experience as being a key differentiator truly underpinned by the fact that the days of having technology exclusivity in some way shape or form are gone. We're really a technology parity level in the days of having GSM versus CDMA or having certain device exclusivity just isn't the dynamic right now in the marketplace as we are in a more mature wireless market and a result we've harmonized lot of technologies across the globe for that matter. So there is an overall uptick in the focus on the customer experience. And therefore it's important to drive a much better experience to really drive the power of a brand behind it. Second thing I'd say is that share constructs have changed the nature of how a household behaves with respect to a churn as a whole no longer is an individual decision one-by-one in a household. Just the elements of that, but usually that's household decides together. And we work very hard to create strong share everything construct, that's why I said earlier, our share everything churn rate is already below 1%. Our ARPA our Average Revenue per Account, which is a reflection of that is up 6% this quarter. So these economics are very strong and we think that's a place to continue to focus on. And when I look at loading each and every week, I don't just look at loading Tony and I are actually scrutinizing the quality of that loading. And how much of it is into share everything construct versus add a line versus tablets versus BYOD, et cetera. And we're very much focused on adding households to help enriching that mix. Third thing I would say is that the life of devices is growing. We now have the equivalent of a used car market for devices. The iPhone 6 that I retired a little while ago I gave to my daughter. She really want an iPhone 7, but she got the iPhone 6 instead. So families are having - are handing down devices wasn't long ago that you would never consider doing that the devices were just kept getting tried with iteration after iteration. And now we're seeing sort of more incremental evolution in device as a whole. The key is to put the pressure on all of us to execute. So the focus at Rogers is very much an execution, execution on the customer experience and execution around taking cost out of the environment. The two go hand-in-hand because the path to the better world is one where we're not just driving the churn down, but we're improving margin at the same time. And therefore the better ability to invest in new ideas to serve customer and new ideas to drive better churn performance and new ideas to leverage the power of our distribution as the best distribution network in the country. And we have that opportunity to actually leverage that better if we are not as vulnerable to the overall churn impacts. So that sort of my philosophy overall on the churn a customer service world as a whole. On the regulatory front, I believe that our government is squarely focused on the importance of investment. I had a very good discussion with Minister, Bains just a few weeks ago in Ottawa and we talked quite a bit about how we enjoy some of the best networks in the world and how Canadian operators done a good job of creating high quality networks and extending reach to the vast majority of Canadians 99% plus of the Canadian population can avail themselves of high speed wireless networks. We talked about finding better ways of connecting rural Canadians with fixed-line broadband services. We talked about affordability for lower income Canadians. We talked about circumstances to create better value for a Canadian as a whole for more kind of focus in terms of better availability we talked about just really forming a stronger partnership between government and the industry and I gave my commitment to look for better ways to doing that. So it was a very good conversation as a whole. And when the new chair of CRTC is ready to speak to me, and industry leaders right now we used to getting settled, love to consider dialogue with Ian Scott as well. But the important thing here is to form strong partnership with government and go after the social and economic development issues that underpin our country and the issues that are important to the future of our industry that will always advocate for our industry. And you've seen our advocacy very clearly around 600 megahertz spectrum auction, spectrum is the life blood of our business and very important and I understand the government is thinking around set aside, but I believe that large players like Rogers who have a big customer base, we have the largest number of customers in Canada need to make sure we have an opportunity to gain a relative share of that spectrum that will help to support our customers' needs and demands especially in this fast growing world of data appetites. So that's a general kind of thought Drew around the regulatory environment, we'll continue to kind of work our way through some of the open files, we're very anxious to get the third party internet access rates kind of finalize right now we've been living with kind of preliminary rates for well over a year or so Tony I think is longer than that potentially I can't remember the exact date, but it's time to kind of get on with nailing down specific rates that will help us make the right decisions around investment in the future more clearly. But that's the general tone of the relationship with Ottawa, and I'm pleased that is going in the good direction.

[Drew McReynolds:]

That's great. Thanks again.

[Operator:]

We'll now take the next question from the line of Greg McDonald. Please go ahead from Macquarie.

[Greg McDonald:]

Thank you, good morning guys. Question on the cable subscriber churns looks to me like Joe you're talking a little bit about broadband competitive pricing in the market and I'm going to make an assumption that the double play impact had some impacts on the cable side as well. One of the big trends the U.S. MSO has talked about this quarter was on the subscriber side was the impact of online services and cord cutting seems we have a little more insulation in Canada, but I wonder if you might comment on whether that had an impact in the quarter whether you're seeing a change in that overall? And then thoughts going into 2018 as we get more U.S. carriers - more U.S. players coming up to Canada with OTT products? Thanks.

[Joe Natale:]

Okay. A couple of things I'd say is that I think it's important to understand that the U.S. market in cable is very different than the Canadian market on a few different dimensions. One, first and foremost the degree of vertical integration in the media market is fundamentally different north and south of the border. So as a result, secondly there is a different construct around OTT players between the U.S. and Canada. U.S. has many more OTT players, many more splinter capabilities in that vein. The one interesting part about that, Greg is that with our X1 platform, we have the opportunity to not just aggregate but merchandise those OTT capabilities. So as some of that splintering of fragmentation comes to Canada leave you X1 is not just a video entertainer platform, we view it as a merchandising platform to lay out the best of content from Netflix from other studios, YouTube, et cetera and therefore present that to our customers and be the curator like the better description overall. The U.S. taking the approach to bundling these services to try to differentiate wireless services as a whole, we don't see that dynamic in the marketplace in Canada. We think that we're doing very well with the current strength of distribution capabilities that we have in our wireless business, we don't see the need to bundle some of those services in overall. If you look at ARPU in the U.S. in video, it's much higher, it's more like $80 to $90. So I think that they are vulnerable to core cutting as a result. In Canada we have skinnier basic capabilities, we have a lot more optionality in terms of adding into connecting channels and the impacts are up. So by the way that's different construct as a whole. To pick to up, in terms of the subscriber performance that you saw in the third quarter had more to do with our strategy on focusing on double and triple plays. We talked about that last quarter and we started in earnest to pick up the pace on that in the second quarter. And so, what we are seeing is a good healthy trend of two and three product households in the third quarter. At the same time competitive intensity in the third quarter, really picked up around single product internet. And we decide - we make the conscious decision to pause on some of the pricing that was going on in the marketplace that didn't make economic sense for us. And so, again the focus in our cable business, overriding focus continues to be on household penetration and ARPA. And so we continue to see the trends in line with the plans we have for that business.

[Greg McDonald:]

Thanks. And one just quick follow-on, with part of the appeal on the U.S. has been the ability to price skinny and sports on top of that, because a bunch of the customers out there don't want sports. So as you get the opportunity to drop that out that's what's created some of the churn. Do you think that in Canada you have reached a spot on pricing overall that that is not a risk that you will face as more ala carte pricing comes out?

[Joe Natale:]

I think the pricing dynamic in Canada will evolve in the coming year or two. I do believe that customers want more choice overall. But to my experience, if you get customers like absolute ala cart choice is actually alarming. And all of our focus group studies have shown that we really don't want to start from a blank sheet of paper pick and choose individual channels, rather have some base options that are liner in nature and then have the opportunity to kind of add on top as they see fit. And we think sports content is a very important part of our anchoring as a whole, so it's something that we're going to make sure that we leverage that unique competitive advantage that we have Sportsnet now has the largest sports audience in Canada full stop. So for us is a very important weapon in the marketplace, a very important competitive advantage. I think the important part of all that Greg is that the platform has to be able to support the ability to really help customers find the content they love and that is the heart of it, right. And what I like most about the X1 platform that now I have been enjoying the last number of weeks is the search and discovery capability, the voice search capability is actually stunning and we see what the big deal about voice search, we all have it on Siri and on the other devices. But is a very clever voice search capability that works hard to be intuitive as to what you are looking for. Is very good at understanding accent something that had some benefit and pretend to be some of by older uncles. And they are heavy Italian in accent and manage to get them to find the right programming and content as a result regardless of whatever accent I may choose. But the most importantly, it's very natural language search, that doesn't force you down some sort of construct, where you have to say things in a certain way, you just speak. What that means is that you can easily navigate your way through all the content, and it's not like Netflix is an app, sitting on its own, its deeply integrated into the platform. So as you search you have access to the latest in sports whatever is on Netflix, whatever is on any of the overall capabilities that are out there. And as we strike the right arrangements, we will be adding more streaming services to the platform, I really want to be Switzerland, when it comes to inviting and integrating streaming platforms into our X1 capability, I think that's the future of video, where we have to be the purveyor of choice for customers and the destination of all their video consumption needs. You have heard me say in the past it's a battle for HDMI one source button on your TV. In any way relinquish that source input and someone else get then we're relegating and being number two and number three in terms of video entertainment only one has to be the destination for all that they might want, sports, Netflix, other streaming service, latest movies and discovery and searches is important part of that and that's how we're putting so much emphasis on it.

[Greg McDonald:]

Great, thanks a lot Joe.

[Operator:]

We'll now take the next question from the line of Maher Yaghi with Desjardin. Please go ahead.

[Maher Yaghi:]

Thank you for taking my question. Certainly a strong quarter in wireless, but can you talk a little bit about the pause or the change in momentum and gross addition on postpaid. Do you see this as a pause or are we - how we'll reach a new plateau let's say higher plateau but going forward. And certainly churn has helped on the net adds in the quarter, can you discuss also as we switch let's say from focusing less on gross adds versus more on reducing churn, what the implication of the cost in terms of retention versus cost of gaining a customer would impact your margins going forward.

[Tony Staffieri:]

I'll start and Joe will pick it up. So a couple of things just to ground this, so as you saw postpaid gross adds were flat year-on-year and we saw that really more reflective of the demand for device and some of the pausing that Joe talked about earlier with the latest iteration of iPhone. It's down sequentially from the second quarter by about 5%, but overall in terms of what it means for the size of the market don't know we'll see when everyone else reports that what that looks like. So from our perspective it's always a balance as we look to net share of subscribers between churn and gross adds. And so the flip side was a much better churn performance in the quarter from a year-on-year perspective down 10 basis points. In terms of go forward, we'll continue to look to lead and have healthy share on gross adds and translate that to an appropriate share on net add basis. So I wouldn't necessarily suggest that we are taking our eyes off gross adds we'll continue to focus on both in a balance way.

[Joe Natale:]

Let me just add. I think Maher the benefit that better churn performance gives us is the opportunity to be more disciplined and more same when on the gross adds front. We still will continue to focus on gross adds, but there is a level of activity that happen during near the end of every quarter that goes from sometimes competitive intensity to crazy pricing and promotion structures. If you head into that period with strong churn performance then it would be much more same way about having that approach that crazy period and that's the real benefit I think above all the very simplistic way of better churn performance is to make sure that we're spending COA and COR dollars in a manner that is driving accretion in terms of our overall economics. When you approach the end of the quarter and you haven't had good churn performance sometimes you tend to lead more with promotional plans around rate and that tends to wash back into your base and causes rerate in the base and that could be destructive at times. So it's a question of having the ability to really kind of moderate as appropriate to get the best of gross adds and net adds as a result.

[Maher Yaghi:]

Thank you for the clarification. And just to follow-up on this, when we look at your current market position you're focused on churn. When we look into the future in 2018 we've seen good margin improvement in wireless. Should we expect additional improvements in the line with what you guys discussed in terms of 100-120 basis points improvement potentially. Is that a stepwise function increase or it's an intermediate increase and that could be followed by additional improvement longer term?

[Joe Natale:]

Well we said that our plan is to improve margin by 120 basis points in 2018 when you compared it to 2016 overall. We're not done, we're going to continue to focus on finding more cost opportunities and continue to look for opportunities to take our cost in the environment. We've been focused on that already as customer experience improvement happens so does margin improvement. There are some cyclical orders for seasonality involved in the business that will obviously there. But the relentless focus on margins will not abate that's really kind of the important thing to understand. We living in a world where customers are expecting more capability, more data, more functionality and expecting to see reductions in unit prices for that capability overtime. And therefore onuses on us as a business to look what are ways of cost profile, what are ways of taking cost out of the organization in various forms. I mean you look at the amount we spend on procurement alone, we spend $5 billion plus on procurement and Tony and I are going through systemically every category with our suppliers and saying can we take things down 10%, 20% depending on the category where actually lies our supplier base I mean there is big opportunity there as a whole. You've heard me talk about in calls, in our call center we take 47 million phone calls a year in our call center at roughly $10 a call. By improving the customer experience we will decrease the capacity of our customers to caller by definition and the better cost profile. And the key is to build the culture that leverages the great culture, we have already at Rogers we build a culture that's much more tuned into customer service and margin improving going hand-in-hand and that's where we're obviously right now. The key is to simplify the processes along that group and make things clear, simple and fair for customers, that take out the complexity. If you look at the average amount of information we sent to our front line, it's a lot, if I were setting in one of our stores or in our call center or as a field technician look at the information coming their way because of the complexity in our environment. I'm not sure I could fully absorb what's happening in the business. So, I am on a mission to actually simplify a lot of that by simplification we'll improve communication and take our cost and really develop some tools for both ourselves and tools for our customers. I am not talking about large systems implementation programs just to be very, very clear, I'm talking about incremental capability that drive greater web adoption, drives better app adoption helps customers manage their capabilities and self-serve in a better way. It also helps our agents do a better jobs of serving our customers because they have the strains is their disposal and the capabilities of a disposal to make real time decisions in support of our customers. So those are the things that we're focused on and they will continue to drive benefit for our customers and for our organization as a whole.

[Maher Yaghi:]

Thank you, Joe.

[Operator:]

Ladies and gentlemen, this does conclude the Q&A session for today. Thank you for participating. And you may now disconnect your lines.