Shaw Communications Inc.
Q3 2017 Earnings Call Transcript

Published: 28 Jun 2017

[Operator:]

Welcome to Shaw Communications' Third Quarter Fiscal 2017 Conference Call. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [Operator Instructions] Before we begin, Management would like to remind listeners that comments made during today's call will include forward-looking information and there are risks that actual results could differ materially. Please refer to the Company's publicly filed documents for more details on assumptions and risks. Mr. Shaw, I will now turn the call over to you.

[Brad Shaw:]

Thank you, Operator. Good morning, everyone, and thank you for joining us today. And with me are members of our Senior Management Team including Jay, Vito, and Trevor. We are pleased this morning to report strong financial results for our third quarter and also share some comments and thoughts regarding the recent transactions we announced on June 13. We believe that both transactions are optimizing the value and strategic positioning of our portfolio of assets and will generate long-term benefits for all of our stakeholders including our employees, customers, and shareholders. Our results this quarter highlight our unwavering commitment to the execution of our long-term strategic plan. We also emphasize that at Shaw we are putting our customers’ future connectivity needs at the center of every strategic decision we make, as we focus on growth opportunities in front of us. We are building a best-in-class converged network, driving product innovation and value through industry-leading services such as WideOpen Internet 150 and BlueSky TV and enhancing our capabilities and capacity to offer Canadians a more affordable and robust wireless experience. In the quarter within our consumer division, we gained approximately 13,000 cable video subscribers, returning to growth for the first time since 2010. We also delivered a net gain of approximately 21,000 Internet customers, a net loss of approximately 2000 phone customers, and a net gain of approximately 7000 satellite RGUs. Collectively, our consumer and wireless divisions had a net gain of 58,000 RGUs in the quarter or 64,000 subscribers including BNS growth. This substantial year-over-year improvement is attributed to several factors. We focused on our network and launched WideOpen Internet 150 across Shaw's entire cable footprint. We also provided price certainty through compelling bundle and value plan offerings which are driving notable reductions in disconnects. We modernized television viewing experience and mass launched the BlueSky TV in April across Shaw's entire footprint. BlueSky is more than just a new set-top box or voice remote. BlueSky TV is a revolutionary TV viewing experience that listens, learns, and curates preferred content through an intuitive and modern interface leveraging the power of voice. Over time, we believe this platform through our partnership with Comcast will become the digital hub for the home. We've rolled out our LTE advanced network ahead of schedule and is now nearing completion and our LTE handset lineup continues to expand and currently features LG, Samsung, and Sony. Freedom Mobile continues to release key enhancements that improve a customer experience such as Wi-Fi calling, which provides customers ability to make calls at no cost from outside the cellular calling area. As many of you are aware, two weeks ago we announced the share purchase agreement with GI Partners portfolio company Peak 10 Holding to sell 100% of our wholly-owned subsidiary ViaWest for approximately $2.3 billion. The ViaWest acquisition in 2014 marked a pivotal moment in Shaw's history and provided a growth engine which has delivered and continues to deliver strong results. The outlook for ViaWest remains robust. Though the North American colocation that manages services industry is consolidating, and scale is becoming an important factor for continued long-term success, we believe the combination of ViaWest and Peak 10 creates a platform for growth and ensures the combined entities customers and employees are well positioned for the future. I would like to thank Nancy, her management team, and all 600 of ViaWest employees for their commitment and dedication during the three years of Shaw's ownership. We also announced the definitive agreement with Quebecor to acquire the 700 MHz and 2500 MHz wireless spectrum licenses for a total of 430 million. The addition of the low band spectrum is a significant milestone towards improving network coverage and quality across Alberta, British Columbia, and Southern Ontario. Canadian's will benefit through the deployment of this additional spectrum and our continued efforts to offer a truly facilities based competition and an affordable wireless services on a more robust network. Before my closing remarks, I will now turn over the call to Vito to go through the financial results for the third quarter. Vito?

[Vito Culmone:]

Thanks Brad, and good morning to all of you for joining us on the call. The reported consolidated results for the quarter include revenue of $1.31 billion up 2.8% and EBITDA of $550 million down 0.5% on a year-over-year basis. Looking at the divisional details, consumer revenue of $930 million in the quarter was down 0.5%, while EBITDA of $401 million was down 6.1% compared to the prior-year. BNS results delivered revenue of $137 million, up 7%, and EBITDA of $70 million, up 9.4% over the prior year. Excluding legacy satellite services, our core business revenue increased 10% in the current quarter. Wireless results in the quarter include revenue of 154 million, up 16.7% and EBITDA of $42 million, up 44.8% compared to the prior year. Consolidated CapEx in the quarter was $323 million. The increased CapEx in the current quarter compared to a year ago is due primarily to broadband and wireless spending. Free cash flow of $132 million for the quarter decreased from $182 million a year ago, primarily as a result of higher planned CapEx spend and loss of free cash flow generated in the prior year by the former media division. Considering our progress to date, we have refined our fiscal 2017 guidance as follows; we expect EBITDA will be between $2.135 billion and $2.16 billion. We expect CapEx will approximate $1.35 billion, and we will deliver free cash flow of approximately $400 million. Please note that these refinements include the results of BIS through to the end of fiscal 2017. With the sale of ViaWest and the acquisition of spectrum, we expect pro forma net debt to operating income before restructuring costs and amortization to be below the low end of its target of 2.0x to 2.5x and our $1.5 billion credit to be fully undrawn. Considering all the moving parts, we believe we've significantly enhanced Shaw's strategic and financial flexibility moving forward. We are excited about our long-term wireless and wireline growth prospects. With that I hand the call back to Brad for closing comments.

[Brad Shaw:]

Thanks Vito. Q3 is another milestone for us as we focused on execution of our strategic roadmap, delivering wireline subscriber growth and made foundational investments to support and improve our network. During this transformational time, I would like to extend my sincere appreciation to all Shaw employees. Thank you for your unwavering dedication to creating exceptional customer experiences and delivering against our strategic initiative of becoming Canada's leading connectivity provider. Thank you for joining us this morning, and we now turn it back to the operator to open for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Jeff Fan with Scotiabank. You may go ahead.

[Jeff Fan:]

Congrats on the subscriber numbers. Wanted to touch on that a little bit. It sounds like some of the early success has been driven by lower churn on both video and Internet. Wondering if that's going to change in terms of shifting to more better gross ads going forward? Wondering how that mix is going to evolve as we go through the expansion of BlueSky and WideOpen. And wondering if you can just help us with thinking about how well BlueSky actually is doing within that base and how much it's contributed to the subscriber results as well?

[Jay Mehr:]

I think what you're seeing as the plan is unfolding is we started with - at a high level our plan on the consumer business was absolutely service agreement first, WideOpen Internet 150 next, and BlueSky is the third piece of the puzzle. And so as that flows through the system, you're seeing the benefits of each of those initiatives take hold in the plan. And for sure the initial benefits were on churn as you wisely described. Since the beginning of April we are now very much in all of our services available to all of our customers which is a significant competitive advantage and that has really turned this story to much more of a gross ad story. So we saw a significantly better gross ads in Q3 and more excited about the - both the prospects for gross ads in Q4 but also the quality of the gross ads being driven by the combination of the three parts of the consumer strategy service agreements, WideOpen Internet 150, and BlueSky. BlueSky has been a big part of this story. I mean it's a video product that's without peers in the marketplace, it's very much the type that’s raising all bodes. And I think if you look at the results and the reaction that the product has got certainly in the Comcast markets and in cost markets, we’re seeing lots of the same thing here Jeff.

[Jeff Fan:]

If I may just follow on. So certainly the bundles and the service agreements and the new services on BlueSky is working well. How satisfied are you guys with the financial impact of these bundles and I guess as we look out to the next number of quarters in the next year, your service contracts has a pretty good uptick in ARPU in year 2. Should we start to expect some of that ARPU to contribute to the financial results as you go into the second year of some of those bundles?

[Vito Culmone:]

First of all, the way we account for our two-year plans is in the year we affectively smooth the ARPU over the two years, so related exclusively to two-year plan and structure, you shouldn’t expect to see an ARPU left related to it. Clearly a little bit of margin pressure on the consumer business relative to a year ago. We're very, very happy with the positive RGU momentum and really allowed us to rebase our customers and something that they're happy with what they want and I think that as we head into F'18 it allows us to continue to optimize that book from a customer value proposition, but also from a profitability perspective, focus clearly on the revenue and RGUs at this time. The Q3 results versus year ago do reflect obviously increased commercial spend and the effect of increased promotional spend primarily related to those two-year value plans versus year ago. So all leaning in very much heavily into obviously the strategic growth drivers that Jay described earlier.

[Operator:]

The next question is from Drew McReynolds, RBC. You may go ahead.

[Drew McReynolds:]

First question for you, Vito when we look at your balance sheet post all the transactions, obviously one of the best now in the industry just wondering if you could just provide an update on the extent to which you’re happy where you are with leverage and maybe the free cash flow part is going forward, and probably tied to that second question, just on wireless CapEx, I think probably given all the moving parts you’re putting together on wireless there is the expectation that will see an increase in wireless CapEx going forward as you grow the business. Just wondering if you can give us an update for modeling purposes what we should be penciling in for maintenance CapEx whether it's an intensity data point or something else. So essentially excluding the LTE upgrade and excluding the 350 million in spectrum deployment. Thank you.

[Vito Culmone:]

You're absolutely right, obviously with respect to the balance sheet we absolutely love our flexibility as we sit here. We're assuming the completion of these two transactions obviously and after payment for the spectrum our leverage will be - as I said in the low twos - actually under two and at least as we calculated an fully undrawn revolver. So counter flexibility the first priority Drew clearly building on our wireless network and capital investment in our strategic and basically establishing the converged network we talked about is really the priority. We’ll come back in our call meeting with maybe a little bit more color on what that looks like as it relates to F'18. As it relates to wireless I think what we said in the past is 15% to 20% is a good barometer on your maintenance cap and as you saw us in our release we indicated a $350 million incremental CapEx related to affectively enabling the newly acquired spectrum the majority of which we expect our plans are still in development but the majority of which we expect to fall in F'18.

[Operator:]

Our next question is from Greg MacDonald, Macquarie.

[Greg MacDonald:]

Question is on post ViaWest sale - so what I'm really wondering is what if any impact is the sale of ViaWest going to have on the Canadian data center business the prospects for overall growth in that business segment?

[Jay Mehr:]

We continue to maintain ownership of the data center in Calgary, Calgary 1, under the management agreement with the super strong wireless team. And I think if you look at our focus on Shaw business it’s been adding credible clarity at the small and medium-size business model. And we're going to continue to have that focus. Is there an opportunity to come up market into some of the product and with the partnership with ViaWest for sure there is. And it's an exciting opportunity, it's not job one for us on Shaw business, but it’s absolutely still part of the story.

[Greg MacDonald:]

And overall Jay what do you consider the growth prospects there. The data points on the Western economy have kind of come and gone most recently it feels like a gone in terms of the - I don’t want use that word literally, but the energy price being more depressed than it was six months ago. What's the mood like within the business customer base and your outlook there?

[Jay Mehr:]

We’re quite positive on our outlook in the small and medium space in Western Canada. Our performance results in this calendar year have been good in Alberta and some of that's where we are in the cycle and some of that is maybe the folks are moving on and people are carrying on with business and it’s been hard few years for sure. Remember we save businesses money, some of their factory helps us in the small and medium size business space, the small and medium-size businesses that are still around in Western Canada are here because they're price-sensitive and they understand the value of money. And so we’re place for them to look to in this marketplace.

[Greg MacDonald:]

I appreciate that. Can I ask one final one on wireless, ARPU looks like it ticked up in the quarter. Can we attribute that to anything is that just assumed more customers coming in on the LTE network, is there something else going on there. And any updates on devices beyond the Samsung family would be helpful as well?

[Jay Mehr:]

ARPU did tick up I think it's just the continued execution of our plan. To be clear we've had a - the growth was postpaid not prepaid in the quarter and as you understand our postpaid LTE base has a higher ARPU than some of our historical base. So all of those things are positive for the future. We think the handset ecosystem is coming along nicely. We're excited to have the Samsung device and other devices available today. We think everything else is coming with the course and speed that's largely expected and handsets been made available on Band 66. We don’t have any announcement to make today but we’re optimistic about handset ecosystem continuing. And we're excited about adding, I mean the wireless business for us is about long-term value creation and as you've heard us say before, adding prepaid customers to 3G base isn't really a big part of that story. And so you'll see us continue to focus on LTE on postpaid and growing the high value part of the business.

[Greg MacDonald:]

And does that optimism extend into potential iPhone contracts, what's your messaging on iPhone?

[Jay Mehr:]

Nobody underestimates the importance of the iPhone to the marketplace and we anticipate like others announcements about iPhone's that work on Band 66.

[Operator:]

Our next question is from Aravinda Galappatthige with Canaccord Genuity. You may go ahead.

[Aravinda Galappatthige:]

With respect to the consumer margins, I was wondering if you can help us out if you kind of look at the near-term, you obviously have the extra cost around the BlueSky rollout and obviously payments to Comcast advertising et cetera, as well as obviously the promotional discounts. Is the more reasonable view to take that you can see the margins will probably see a little bit of pressure in the next couple of quarters before we start to see sort of the benefits of these stronger subscriber results that that you're posting. Thanks.

[Vito Culmone:]

I think that's an accurate description of what you can expect to see and it's pretty consistent with what we've been saying over the last couple of quarters that really the focus of course is taking advantage of our position with our products that you described at the outset here and moving forward through that. Your Q3 margin compression really compared to obviously prior quarter and prior-year marks the prior year reflects a lot of those spends that you're describing that we believe from a value creation perspective are enhancing to overall portfolio and our product set.

[Aravinda Galappatthige:]

And just a follow-up to that. In terms of the competitive landscape, obviously you're starting to gain momentum on both on Internet front and on the video front. What are you seeing competitively in response to your sort of promotional office and is there anything - has there been any new developments over the last month or so that's sort of noteworthy that's maybe a little more aggressive than anticipated or something of that sort. Thanks.

[Vito Culmone:]

We operate in an extremely competitive environment in the kind of market chips that we're seeing are hard. It's clear that everybody is fighting for a share of the change in consumer experience and we're excited about the go-to-market that we're bringing to market and the value that it provides to consumers. I think it's been well reported some of the innovation that others are bringing to market and we're both - all of the competitors are playing to the primary strength and I think you'll see us probably both do that. In the last month or two it hasn't got any easier but we've got strategy and we'll focus on our strategy and we're going to continue to execute.

[Brad Shaw:]

I just wanted to take the opportunity to thank all of the Shaw employees as well when you talk about margin compression, the team is doing a tremendous job around efficiencies and effectiveness across our entire organization and that doesn't go unrecognized and we’re hiding our targets there and it helps obviously as we’re working through this transformation.

[Operator:]

The next question is from Tim Casey with BMO. You may go ahead.

[Tim Casey:]

Just wanted to revisit a couple of items on wireline. Vito is there any one-timers in the quarter or in the previous year that would affect the comp or is that revenue and margin run rate? Is that's just reflective of the items you talked about in terms of investing in the consumer experience and some promotional activity. And also on the last call Jay you were very forthright about returning the positive growth on subs and obviously you've delivered on that. Are you equally confident that you can sustain that over the next several quarters? Do you think you've turned the trend here or do you think there may be a bit of volatility on those - in those subscriber numbers going forward?

[Vito Culmone:]

There are some one-timers quite frankly going through and as there always are on G&A related items but I think the primary story on the consumer results are what we've described which is the increased investment in our portfolio and in our products. So I wouldn't overstate the one-timers I think based on the discussion we've had, that's what I would go forward with.

[Jay Mehr:]

And in terms of the trajectory on subscribers Tim, I think what I hope you're seeing in the quarter is the plan coming to life and its step-by-step we talked about service agreements, we talked about the broadband advantage available to every customer in the market through WideOpen Internet 150 and we've talked about BlueSky not only in terms of what BlueSky is today but the roadmap that it makes possible for consumers as we continue to evolve that experience. There is that question that we see that going forward winning looks like executing that plan and that plan includes a positive video subs. We had a great quarter because we had a launch and we’d love to continue to perform at levels like this. It's hard out there. There is competitive responses, and things are happening back and forth but there's no question we've got an entire team that's focused on growing the wireline and wireless business and on the wireline business that includes video growth.

[Operator:]

Our next question is from Maher Yaghi with Desjardins Capital Market. You may go ahead.

[Maher Yaghi:]

I wanted to ask about the $350 million CapEx in fiscal year 2018 that you mentioned is to deploy the new spectrum that you bought from Quebecor. Can you maybe just explain at what extent of this investment will mean in terms of improvement in your network. Is it going to be used to expand the network or just upgrade the network in utilizing the new spectrum in the same geography that you currently cover.

[Jay Mehr:]

I'll start in terms of benefit our focus today is we're excited to be able to add low band spectrum to the mix, it's an important part of our plan and just as we've talked about our step-by-step approach on wireline, I hope you're seeing us taking a step-by-step approach on wireless with the LTE built, the additional low band spectrum, the things we've talked about in terms of the handset ecosystem coming online over the next year. To be clear the $350 million in our CapEx is adding low band spectrum to the markets that we serve. So it's about in building coverage, it's about metro coverage and we're focusing on our existing markets in Ontario and Edmonton Calgary and Metro Vancouver as the priority. Over time we've got other market to built into the plan that we're going to be focused on but the intensity here is to build a much more compelling product in markets that we currently serve. And we think we've got room to grow in the markets we currently serve.

[Maher Yaghi:]

Thanks for that clarification but I do want to have a - just a more discussion on that. When you look at your coverage network coverage area, and when you look at your potential fiscal year 2018 CapEx without getting into the specifics, are the 350 million - should we see them as in addition to what you have been investing in 2017 or a different type of investment. Basically, I'm looking at the LTE upgrade basically, is that going to be on top of the LTE upgrade is that - what is maintenance CapEx that we should be assuming in fiscal year 2018.

[Vito Culmone:]

I mean this is not in addition to the LTE spend, so I think as - we'll come back in October as I said and give a little bit more color but I think it’s fair for you to take our F'17, $1350 and remove $150 million roughly of LTE spend there and use that as a sort of the base and then move forward from there. But the 350 is exclusively related to what Jay described. And that will be other components as we go forth and continue to build our plans but - and work through the capital plan. And as regard to maintenance, I think 15% to 20% is a good number in relation to your maintenance assumption outside of the 350.

[Operator:]

The next question is from David McFadgen with Cormark. You may go ahead.

[David McFadgen:]

Just on wireless I was little surprising a positively surprised at the wireless EBITDA growth in the quarter. Was there any one-time items in there or is this is a good start of level to model for the cost structure going forward?

[Vito Culmone:]

I think margins maybe got a little bit ahead of themselves there in Q3. Overall we're obviously really pleased with our Q3 wireless results. When you look at the EBITDA 42 million from the wireless business, 13 million higher than prior year, the majority of that was driven by increased subscribers and coupled with obviously smaller gains in ARPU. We did have some timing differences and related to some commercial market and advertising related expense and other G&A related items. So I would guide you more to our year-to-date margin in the neighborhood of 23 to 24 perhaps as a barometer going forward at least in the short-term.

[David McFadgen:]

And if I can just squeeze in, just a question on the CapEx. Can we assume that the core table side of the business CapEx is just going to continue as it is right now it’s not going to change much for 2018 is it?

[Vito Culmone:]

Well I think again it gets really difficult to start separating the core network versus wireless because as we're going through all of this, it's really how do we leverage all of our assets into conversion network, quite exactly. So I don't think there is any nasty surprises as we lean into next year relative to our F'17 base on network, but as I said maybe will come back in the fall and give you a little bit more color on that.

[Operator:]

[Operator Instructions] Our next question is from Adam Ilkowitz with Citi. You may go ahead.

[Adam Ilkowitz:]

Jay you had a conference recently talking about your prior wireless plan and potentially getting to 2 million subscribers. I was wondering if you can kind of help us out thinking about what the updated wireless plan might look like over a near to medium term so we can kind of see what you guys are thinking about in terms of subscriber growth over that time period. And then just in the quarter specifically, can you help us understand the churn versus gross additions on the postpaid side. Are you seeing any impact on either side to drive that net add number? Thank you.

[Jay Mehr:]

Let me start and then I'll let Vito talk about the wireless churn number. We wanted to be clear, we bought our business with an existing business plan that was a value player and was originally built on our fourth player model and it was all about executing that plan and bring it into the marketplace. I think it’s clear with our recent investment in spectrum and the way that we’re thinking about the wireless business that we’re thinking about it with ambition and aspiration. We think Canadians deserve a choice and a choice is not provided by the big three. I think you’ll see us behave that way as we move forward. That having been said just as you’ve seen us do on wireline where we built a strategy, we build partnerships with the plan in place and we've created winning conditions to execute in the marketplace I think you’ll see us do the same thing on wireless. And you’ve heard us talk about our plan as we’re moving forward where it will be another year or so until we get all of the pieces in place that will be able to be a meaningful player in some of the spaces that we're not a meaningful player in today, but we’re a company that's prepared to make those investments. And there is no doubt for us that there is a space in Canada and in the markets that we serve. Our position for the company worried about the consumer, worried about the opportunity to do things a little bit differently. And if you hear that in our ambitions then I think that's the right message.

[Vito Culmone:]

I’ll just add to that Jay, I mean churn was a - we are very, very pleased with the churn in Q3. We don't release churn specific numbers, but as I look at the last several quarters it was our best churn number - our lowest churn number to quite sometime which I think of you know obviously connects to our LTE network and the quality of our network the handset environment as we see that coming in obviously early days, but I think those are all contributing to improve churn and we expect that to continue.

[Operator:]

Mr. Shaw there are no more questions at this time.

[Brad Shaw:]

Operator, thank you very much. And thanks everyone and we look forward to have a great summer and we’ll talk to you in October.

[Operator:]

Thank you. This concludes the time allocated for today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.