Shaw Communications Inc.
Q4 2018 Earnings Call Transcript

Published: 26 Oct 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Shaw Communications' fourth quarter fiscal 2018 conference call and webcast. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. At this time, all participants are in a listen-only mode and the conference is being recorded. Following the presentation, there will be an opportunity to ask questions. [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 conference over to you.

[Bradley Shaw:]

Thank you operator and good morning everyone. With me today are members of our senior management team, including Jay, Trevor and Paul. I am pleased with the progress we have made throughout 2018 towards our overarching goal of delivering long-term and sustainable growth. Wireless had an exceptional year with all of our key performance metrics moving in the right direction, including postpaid additions of 85,000 customers in Q4. In 2018, we grew our subscriber base by over 255,000 or 22% compared to F2017 to end the year at just over 1.4 million customers. Our big data plans combined with our latest devices available in the market continue to drive higher-quality and higher lifetime value customers to Freedom Mobile. Our wireless service is now even more accessible to Canadians through the addition of 240 locations launched with our national retail partners Loblaws and Walmart. As we grew our subscriber base in F2018, we also increased ARPU, particularly in the last half of year as our big gig plans gain momentum leading to strong ARPU growth of 9% in Q4. Through these result, it is evident that we are delivering a differentiated and sustainable value proposition and we expect to gain additional wireless market share and continue to grow ARPU throughout F2019. Supporting our wireless strategy is the significant ongoing network improvements that are quickly creating a strong high quality network and clearly benefiting our customers. The team has done a terrific job of managing and deploying spectrum in the most efficient way, including the initial launch of our extended range LTE in Calgary, Edmonton, Vancouver and Southern Ontario. The extended range LTE utilizes the 700 spectrum that we acquired last year and we will further deploy this spectrum throughout our network over the course of F2019. We also launched VoLTE over a wide range of devices and we will continue to roll this out to all eligible phones and customers over the coming months, including the iPhone, bringing the total customer base to approximately 800,000 that will be using VoLTE by the end of 2018. Wireless investments remain a priority as we head into F2019 and continue to grow our subscriber base. In addition to the spectrum deployment, we will also expand our wireless network into new markets this year with a focus on Western Canada. By the end of fiscal 2019, our network will cover an additional population of approximately 1.3 million and we will start to explore cross-selling opportunities with Freedom Mobile and Shaw wireline customers using our various touch points to discuss the wireless products and needs. While we are excited to develop this opportunity, we will focus this year on learning from small-scale trials and taking a thoughtful end-to-end approach. In our wireline business, we delivered F2018 results that are consistent with our strategy to focus on profitable growth and stabilized results and I am pleased with the significant cost savings that we have achieved during the year. However, I believe we can execute better, particularly with the Internet results for the last two quarters have not been representative of the subscriber opportunity through our differentiated broadband experience. Significant investments in best-in-class technology partners have created a strong ubiquitous wireline network. DOCSIS 3.1 has been purely deployed throughout our network and we are capable of delivering gigabyte Internet speeds. As we anchor the home with the XP6 modems, we will enable additional IP services such as xFi and the extenders that will differentiate our broadband service from the competition. In F2019, we will begin deploying a full IPTV experience to our customers starting in the second half of the year. With his service, we will simplify the installation process, reduce the amount of equipment needed in the home and enhance the ability for customers to self install. All these initiatives lead to a lower capital intensity in our wireline business that we believe is sustainable going forward and our wireline capital plan provides the necessary resources to make investments to future proof our network in the coming years. Our business division contributed solid results in F2018 via the growth of our smart products and recent success in the enterprise and wholesale markets. We expect this momentum to continue as we focus on delivering our managed services in targeted strategic verticals. As I stated earlier, I am pleased with our fiscal 2018 results and looking forward we are focused on the key areas of our business that will drive growth as well as areas that need improvement. We expect that in F2019 our wireless momentum will continue as we execute on our step-by-step operating initiatives. In wireline, we will have an internal focus that enables us to transition into a digital first company and modernize how we work and connect with our customers. Now I will turn the call over to Trevor to go through the Q4 and F2018 results and review our fiscal 2019 guidance in more detail. Trevor?

[Trevor English:]

Thank you Brad and good morning everyone. We finished fiscal 2018 on a strong note from a financial perspective with all business units contributing to Q4 consolidated revenue growth of 7.4% to $1.3 billion and EBITDA growth of almost 17% to $560 million compared to the prior year. Q4 wireless revenue grew 45% year-over-year to $250 million. On a run rate basis, this represents our wireless business generating $1 billion in revenue, a significant achievement considering a starting point two-and-a-half years ago since the acquisition of WIND closed. Strong wireless service revenue growth of 32% to $167 million in Q4 was driven by ARPU increasing by 9% to $41 compared to a year ago. For the year, wireless revenue and EBITDA increased 57% and 32% to $951 million and $176 million, respectively, as we continue to attract and retain customers with their data centric plans and continuous improving network. In wireline, Q4 consumer revenue was essentially flat at $942 million compared to the prior year while business revenue increased over 6% to $145 million. Consolidated wireline EBITDA growth of 16% to $516 million was a significant improvement compared to Q4 of fiscal 2017 and includes approximately $23 million in VDP related cost reductions as well as lower marketing and other corporate costs. These results reflect our focus and discipline regarding expenditures throughout the entire organization. For the full year, wireline revenue was essentially flat as the marginal decline in consumer revenue was offset by business growth. However, year-over-year wireline EBITDA did increase 2.6% during the year to $1.9 billion. As it relates to our total business, approximately $170 million has been paid to-date. While the employee exits will continue throughout F2019 and into F2020, the restructuring program is substantially done and in fiscal 2018, we will revise combined operating and capital savings of $47 million, which was as expected and communicated earlier this year. In summary, our fiscal 2018 results were largely in line with our expectations and reflect our focus on wireless growth and profitability and stable financial results within our wireline business. Consolidated EBITDA growth of 4.6% and capital spending of approximately $1.37 billion materially met our guidance while we delivered free cash flow of $411 million that was slightly ahead of expectations. As we carry this momentum into next year, we are introducing our fiscal 2019 guidance which includes EBITDA growth to range between 4% to 6% versus F2018, capital spending of approximately $1.2 billion and free cash flow in excess of $500 million. Our guidance and growth range includes the expected impact of IFRS 15, which we will adopt on a fully retrospective basis beginning in Q1 F2019. The fiscal 2018 and expected fiscal 2019 results under IFRS do not have any material impact on the guidance we release this morning. However, for the benefit of investors, comparing F2018 reported results and adjusting for the change in accounting policy, our reported 2018 wireless revenue will decrease under IFRS due to the fact that we will be allocating a portion of this subsidy to service revenue which is amortized over the term of the contract and we will also be allocating a portion of the subsidy against equipment revenue which has an impact at the time of sale as opposed to today where we actually amortize the entire subsidy over the term of the contract against only equipment revenue. The decrease in wireless revenue will flow through to EBITDA. However, we do gain the benefit of capitalizing and amortizing the commission expense related to wireless sales under IFRS 15 versus today where we expense commissions on the day of the sale. Despite the changes in accounting, it's important to remind everyone that there is no change to overall revenue and cash flow under the new accounting policy. We will provide additional details with respect to the impact of IFRS on 2018 reported results when we file our 2018 annual in November and with the release of our first quarter results in January. Our guidance includes assumptions related to cost reductions that we will achieve through TBT initiatives, specifically the voluntary departure program. Total savings are expected to amount to $140 million of OpEx and CapEx in fiscal 2019. As Brad discussed in his earlier remarks, we have a strong wireline network that has the capacity to meet the increasing demands of our customers. Combined with lower equipment requirements and higher self install, we can moderate our wireline capital intensity. However, we will increase investments in wireless compared F2018 as we continue to deploy the 700 spectrum and expand your network into new communities, as Brad mentioned. We expect wireless CapEx to be approximately $400 million in F2019 or up approximately 15% versus F2018. Considering our EBITDA and capital expenditure guidance, we expect to drive material free cash flow in F2019 in excess of $500 million. Note, we will continue to include the Corus dividend in our free cash flow matter which is expected to be approximately $20 million in F2019 versus the $92 million that we received in F2018. However, it's clear that we are growing our operating free cash flow in fiscal 2019 regardless of the treatment of Corus' dividend contribution. Our balance sheet remains strong and our leverage of approximately two times is at the low end of our target range providing us additional flexibility as we continue to make the appropriate investments to grow our business. Brad, I will now turn the call back over to you for closing remarks.

[Bradley Shaw:]

Thank you Trevor. We have a strong operating plan in place and expect to deliver continued wireless growth and stable consistent wireline results. This is a year that we turned a very significant corner in terms of our free cash flow profile for F2019 and beyond and our focus remains on successfully executing our strategy. Recently, there has been speculation regarding our investment in Corus and we want clarify that we remain supportive of Corus and their management team. While it remains a challenging structural environment, we think the stock is undervalued and not reflective of the EBITDA and free cash flow profile of the company. We will not look to sell our stake at these current levels and we do not need additional liquidity from Corus to fund any of our operating or strategic initiatives now or in the future. Before we turn over to questions, I wanted to acknowledge the tremendous dedication and hard work by all the Shaw employees over the last year. We have been through a lot of change, which is exciting but not always easy. It is through your passion to continuously improve and collaborate across the organization that drives great results. Thank you for everything that you do. Now look forward to an exciting and successful year ahead. Thank you, everyone. I will turn it back to you, operator, for questions.

[Operator:]

[Operator Instructions]. The first question is from Vince Valentini of TD Securities. Please go ahead.

[Vince Valentini:]

Yes. Thanks very much. Two questions or two lines of question. The first just on market conditions and competition versus Telus. It sounds like Telus was pretty effective, or maybe you want to use the word aggressive, with their back-to-school promotions and that may have impacted some of your cable subscriber numbers this quarter. Can you give us any sense of how that looks through September and October? Do you see any stabilization there in promotional activity? Or is it still a pretty heated battle? And given last quarter's communication, I am not sure you want to answer this, but do you have any thoughts about what your subs may look like in Q1? So that's question. I will let you think about that for a second. The second one may be for Trevor. I am not sure I understand the composition of the EBITDA guidance and what you are saying about IFRS 15.So if I can try to characterize it this way, you did 32% EBITDA growth in wireless in 2018. If you were to just do that again in 2019, that would contribute 3% consolidated EBITDA growth. And then you would have a very small amount of growth necessary on the cable side to get into that 4% to 6% guidance range. Is that how we should think about it? Or is this IFRS 15 stuff? Or perhaps some extra marketing and distribution costs going to make it a bit more J curve on wireless, so that you will see much less than 32% growth and perhaps a bit more contribution from the cable side in order to get into that guidance range? If you can give any color there, because I really don't understand what the mix is of wireless versus wireline in that guidance? Thanks.

[Trevor English:]

Yes. Thanks Vincent. Maybe I will start. I don't think we are going to get into too much granularity on the breakdown of EBITDA growth within wireless versus wireline, but directionally you are sort of in the ballpark, I would say.

[Vince Valentini:]

I am sorry. I am in the ballpark, thinking another 30% or so on wireless? Or this thing will slow down because of marketing costs and IFRS 15?

[Trevor English:]

There will be a little bit of slow down due to IFRS 15 when we look at the reported results in F2018 and layering on the impact of IFRS 15 in 2019. But it sort of doesn't have that big of an impact, whether it's pre-IFRS or post-IFRS.

[Vince Valentini:]

Okay.

[Bradley Shaw:]

And I think if you look at the wireline results, we have got obviously some really nice moves on the cost structure, some really nice moves on the capital cost structure. I think what the teams have missed is a bunch of our automation, both recurring and one-time investment with software, there is a service and [indiscernible], a bunch of that hits to OpEx in this fiscal year. So where you see a mitigation of CapEx to 19% wireline CapEx intensity, you are probably seeing a little more OpEx one-time and ongoing investments in automation in this year, than you are maybe suspecting. So that would be something to try and point out.

[Trevor English:]

It's a good point. I mean, just on the VDP savings too, Vince, we always articulate VDP savings as net savings. Frankly, in F2018, the VDP savings, there wasn't a lot of net investment in those numbers. It was really for gross savings, where in F2019 we are starting to make some of those net investments to deliver the business with roughly 25% less people in the future.

[Jay Mehr:]

Yes. And then to the first part of your question, Vince, I don't mind you characterizing our primary competitor's back-to-school efforts as effective. I think it's clearly a competitive marketplace when you win a cycle and when you don't win a cycle and they absolutely won a cycle. So no excuses from our end. I mean, we have the benefit that when we talked last time, we were still at the end of June in the first month of the quarter. Obviously we are a couple of months into a quarter now. We have tremendous confidence about our F2019 plan in consumer. Our F2019 team, our team is in great shape going to F2019. We are starting to hit all of our September numbers. We are doing fine in October. The business changes in F2019 for us. It becomes much more about monthly recurring revenue times our number of accounts times our average revenue per account. Obviously broadband and satellite are what drives our consumer account numbers, so primarily broadband. So we are focused on that. Lots of focus on churn and customer lifetime value and segmentation. So some of the yardsticks move a little bit but we are very excited and to Brad's comments, we couldn't be more pleased with how our team is coming out of this cycle and tackling F2019 in consumer with the commitment for us to be effective.

[Vince Valentini:]

Okay. Thanks.

[Operator:]

The next question is from Drew McReynolds with RBC. Please go ahead.

[Drew McReynolds:]

Yes. Thanks very much. Maybe a follow-up here just to Vince's questions on the wireline net losses. I appreciate your comments, Jay, on that. Can we just maybe drill down a little bit more? You obviously had some price increases in the quarter. You are staying price disciplined. Brad, you talked about kind of the execution challenges here. But was it solely competition? Or are there other things here that are well in your control that you can certainly sequentially improve going forward? And just secondly on the free cash flow guidance here, maybe for you, Trevor. Just what kind of cash tax assumption we should be assuming? Thank you.

[Jay Mehr:]

Drew, we very much feel in control of our destiny and that we can improve sequentially going forward. There was no question, we just did not get our share of gross adds. We have lots of capacity. We have the capacity to install. We have the capacity to answer our phone. We have the capacity to digitally serve our customers. We are doing 28% of our installs on a self-install basis now. So we have opened up a tremendous amount of capacity. So the engine is ready to go and I think we control the levers. In hindsight, obviously if I had to do over, we did our mass marketing spend around the 300 launch in September, which I think was effective. It's pretty clear, based on the results we have got. We probably should have had that to do over, I would spend a couple million dollars more on marketing in August, we would have gone at different outcomes. Our whole plan is around a growing monthly recurring revenue and you can't do that without growing Internet subs. If you think about our consumer business, we have a little over $300 million around in the basis September first in monthly recurring revenue. We average that number with the entire team every single day and the path to success in F2019 includes growing broadband customers every quarter. In the medium term, we are about two quarters behind Comcast roadmap and we think they are cutting a nice path for us to follow and we love the work they are doing on the their strategy and excited to bring those innovations to the Canadian marketplace.

[Trevor English:]

And Drew, it's Trevor. Just on the cash tax assumption. Yes, I know it's difficult this year. Obviously, our effective tax rate, I think, showed quite high because of some things that weren't tax-deductible like the Corus write-down, but our statutory tax rate is about 27% and for cash tax purposes, it's roughly 300 basis points around 24% that you can model for going forward.

[Drew McReynolds:]

Okay. Thank you.

[Operator:]

The next question is from Jeff Fan with Scotiabank. Please go ahead.

[Jeff Fan:]

Thanks. Good morning. I am going to ask a question about wireless and more specifically in terms of the contribution to your nets this quarter. Whether you are seeing an equal distribution from churn reduction and gross adds? Or was there any skew towards one over the other? And then the second part is the wireless is just, whether you guys are happy with the pace of loading that you guys are seeing on gross? And maybe comment a little bit about, I know you don't disclose churn yet but wondering if you comment a little bit on churn and the outlook there? And then the second question is on cable and I guess if we sit back, right now you are getting pretty decent financial performance in cable, but the RGUs are obviously not coming through. If we look back a little over a year ago, you were kind of the opposite. When do you think we can get to a point where we have got some balance between those two? Because I think really what the market is truly looking for is just some balance and to avoid sort of going back and forth between RGUs and financial performance which we have kind of done over the last couple of years. Wondering if can just kind of comment on the timing on when we can get back to that level place? Thanks.

[Paul McAleese:]

Jeff, good morning. It's Paul. I will take the first three questions on wireless. On the contributions to the nets, I think I would characterize the figures about as a split a couple of calls ago. I think in Q4, we saw probably a slightly higher bias toward contribution from gross where we were very strong. But as I will come out to admit it, we did continue to see a very, very positive churn profile for our base. So I would have the contribution slightly higher on gross than on net in terms of the lift over last year. The pace of loading, we are very pleased with and a couple of observations there. For the entire quarter for our working purposes, the flanker brands all had a double-data promo, which was really thoughtfully designed to camping through our space of data centric subscriber acquisition and we competed very strongly against that through the course of the quarter. As you can see from the metrics, we were very, very pleased with where we got to on gross. We also had an opportunity for the first time in Q4 to look in earnest at how we competed in a multicarrier retail environment with Loblaws having been in place for most of the quarter and then just as we ran it into Q1 with Walmart and while we will get into the detail more probably on the next call, we were very pleased with our share of gross in that multicarrier setting. So we think sitting side-by-side on a shelf with all of the other brands in the wireless marketplace in the markets we compete, we performed very strongly. We will disclose churn on the January call, but I am pleased to say that we continue to see record levels of retention performance across our wireless business, largely fueled by the fantastic work we are seeing from our network team. I can't say enough about the improvement I have seen in my 18 months here. This is a completely different product experience than it was even a year ago. And it just grows from strength to strength. And recently because you know Jeff, we have introduced the 700 spectrum across most of our Western markets and part of the Southern Ontario market and the consumer response to that was immediate and strong. So we are continuing to invest in that customer experience and it is flowing through to our churn results. So not specific guidance, but expect to see that metric come in on a good plane in January.

[Jay Mehr:]

And then Jeff, to your comments and thank you for your comments on the wireline side of the business. I don't disagree with your characterization of the past couple of years. We are feeling great about how we entered F2019. We are really, it might sound funny to say, we really feel like a new company as we round the bases on September 1. We have got a new super lean structure, just me and four executives in the consumer business, one who leads gross sales, one who leads base management retention, one who leads marketing, pricing and packaging and one does the important job of managing our overall programming costs. Super flat organization, almost no other leaders in Calgary. Everybody is embedded with every channel doing their job, making a lot of headway on base management and segmentation. I believe our objective in the consumer side of the business is deliver a boring and financially strong year that is also strong in terms of our long term number of customers. I think you will see that from us starting in Q1. When you talk about RGUs, we don't really think of the business that way anymore. We think about the business in terms of how many customers we have, what they pay us on a monthly basis, what's happening to our subscription revenue base of monthly recurring revenue, what's happening to churn, how do we manage our base on a daily basis, a lot more segmentation. So I think in terms of broadband customers, you will see a much more balanced approach to our result. And look, our path here isn't that hard. We don't need the shoot the lights out on revenue growth. There's things happening in the home business. There's things happening in the television business. So a small revenue growth on the consumer side steady works with improving margins and the opportunity to realize all of the cost structure that we have got, a much, much tighter and more effective capital structure. And we have got a real nice business here that's a lot simpler than it used to be and we are very proud about how the team is executing.

[Jeff Fan:]

If I could just follow-up quickly. I don't know if you have this number handy or if you track it, but some of your peers, particularly in the U.S. track the customer relationship number which, as you alluded to, takes away from the RGU. I don't know if you have that kind of directionally whether you are seeing stable in customer relationship growth or decline? Wondering if you can share? I don't know if you track that at this point?

[Jay Mehr:]

Yes. We do. Our consumer business was up slightly in terms of customer relationships F2018 over F2017. We have just over 2.8 million customer relationships and our average number of accounts over the year was 10,000 higher in 2019 than it was in 2018. And I think on the cable side, when I say cable and broadband, that's very much our plan going forward. And then if you think about customer relationships, we have a seasonality to our satellite business. You will see that in Q1. We were as seasonal as ever in Q1. So you will see that in the numbers. And satellite customer relationships might draw, say, 35,000 for the year. But our satellite business is fine and stable and profitable actually. Our ARPU is great. So I don't think that's a big issue. On the broadband and cable side of the house, we maintained our customer relationships this year and it's in our plan to do the same in F2019.

[Jeff Fan:]

Okay. Thanks Jay.

[Operator:]

The next question is from Phillip Huang with Barclays. Please go ahead.

[Phillip Huang:]

Hi. Good morning guys. Also a couple of questions on the wireless side. I was wondering if you could give us some color on perhaps performances in different regions? I suspect Ontario is still generating most of your volumes given the market size. But could you also comment on the pave of the growth in Alberta and BC relative to Ontario? And then another question I had was on the demographics of customers you guys have been able to attract. Have you noticed any sort of change or expansion of the type of customers you have been able to reach just given the network improvements? Any sort of additional business customers, et cetera that you have noticed? Thanks.

[Bradley Shaw:]

Philip, hello, good morning. So starting on the regional performance, we have a relatively static split between the East and West which is characterized. About 70% of our volume is coming from the East and 30 from the West. I will say, having spent some time over the last sort of while improving a number of things in the West. We have turned on, as you know, the 700 spectrum most pointedly in the West. That's a vast majority of the investment we have made in network on 700 is coming in the Western part of the country. We have also got a significant advantage in our Wi-Fi footprint in the West. So while the bias hasn't changed very much over the course of last year, expect to see additional strength in the West as we look to deploy and leverage some of those assets into your proposition. We been waiting for 700 to rollout but you will start to see some changes in the split over the course of the next couple of quarters. On the characteristic of our base, I think a couple of data points worth pointing out here as we look across the changing nature of our base. So probably the first thing I would point to is the average selling price of our devices. So if you go back a year, we have doubled the average selling price of a phone. So we are at a level of $800 now. A year ago, that number was $400. Just a dramatic change the characteristics of that. You can imagine that is largely driven by the iPhone influence but these are customers that a year ago, we simply weren't appealing to and now find the appeal and freedom significantly greater than they did 12 months ago. I would also point out that while it's in the release, our porting ratios, while they have long been in our favor, really changed significantly. When I look at, I will pick on the fourth quarter of F2018, in F2017, we did about 7,000 net ports. So in terms of people porting to us in excess of those pouring out. In F2018, we did 36,000 net ports. So a 500% increase on the behavior we are seeing and that's reflective of two important things. One is the confidence of competitive customers to make a change and bring their number to Freedom, a huge in the business. And the other is, again back to the work our base management team and our network team are doing, a greater confidence if you look to stay. So we watch our porting ratio very closely. It's widely available industry data and we love where that's taking us. But it broadly suggests that we are seeing a different characteristic of customer. And again, I would just point as a final thing, the onboarding value in the fourth quarter of this past year. We set yet another record for the value of the recurring MRC that customers were committing to and that figure was up about $1.5 over the prior quarter. So we are doing all the right things on directing our investments in subsidy and in commissioning and in effort to rate plans and structures that provide us with better economic results.

[Phillip Huang:]

That's very helpful. If I could, just one more follow-up. It seems like the natural question to ask at this point, given you also mentioned Wi-Fi in your response. When is the right time to launch a premium brand? It seems like all the ingredients are in place and your network is rapidly improving. Just wondering if, I know you don't want to dilute the Freedom's momentum that's been sort of gaining over the past year. Just wondering if you could comment on when would be the right time to start introducing a brand that you feel comfortable bundling with your fixed line base?

[Bradley Shaw:]

Yes. Philip, I think I characterized, there is still and I will use the same line of use for the probably the last two calls. It's dry powder for us. We love what we are seeing from the Freedom brand and how we are penetrating across all of our points of distribution today. We clearly understand that there is an opportunity for us to introduce perhaps some new branding into the marketplace at a time that suits us. But at this point, nothing to disclose on that.

[Phillip Huang:]

Thanks very much.

[Operator:]

The next question is from Sanford Lee with Macquarie Capital. Please go ahead. Q -Sanford Lee Hi there. I had a question for you guys, just on the sustainability of the ARPU growth. Obviously a lot of subs coming in at the $50 and above. Is any of the ARPU benefits coming from the customers that are migrating up from lower tier plans?

[Bradley Shaw:]

They are indeed. I think we announced previously that our migrations were coming in at around the $7 mark over the last quarter. That number has moved up favorably to about $8 and change. So it takes obviously a lot to move that base significantly. We love what we are seeing on that front. So both the number and the value of migrations are increasing. And as many of you may have noted, in July we had the opportunity to make some changes in our big gigabit plans. We introduced a $5 charge, incremental charge to the rate plan levels that were set back in October. We then gave customers the opportunity to discount that back by taking advantage of our digital discount and moving to preauthorized payment. We love the characteristics of customers that are on PAP and we will continue to incent that. But that theory is that rate plan changes has produced a number of favorable impacts for us in terms of, well, really it's both wins, whether a customer takes it or they choose not to take it is kind of a win. So where you are seeing a slight rate increase, we are seeing a longer term digital relationship with us that we think has other benefits. Q - Sanford Lee Great.

[Bradley Shaw:]

So overall migrations are a very positive part of our story. Q - Sanford Lee Great. And then kind of related to that, I know you recently launched a lower-cost $25 and $15 ARPU plans. Can you give us a sense of the uptick of that? And again, looking to potentially migrate them up the chain at some point as well?

[Bradley Shaw:]

Yes. And thank you for brining that up. One of the things that's important that isn't lost in our very strong Q4 results, the 9% ARPU lift that were able to present to the market included the launch, although it's a relatively small numerator, but it included the launch of rate plans that were significantly below our base average. So in some sense, pushing in the opposite direction. But we have a very, very clear direction from leadership here that we want to make wireless available to all Canadians and to do so in a way that is consistent with both our objectives of reaching lower income Canadians and certainly with what I believe to be the government's view of trying to make wireless and data only plans available on a more broad basis. You will have seen that we launched those plans directly into a time when the big three were less enthusiastic about that market. We are enthusiastic about bringing all Canadians to Freedom. So we took the opportunity to do that. I think we helped maybe change that, the view of that marketplace. And while the loads are relatively a small percentages, sort of single-digit effective gross for us on the quarter, they are an important part of our telling our story across a broader segment of the population. Q - Sanford Lee Great. Okay. I appreciate that. Thanks.

[Operator:]

The next question is from Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

[Aravinda Galappatthige:]

Good morning. Thanks for taking my questions. Two for me. Number one, I was wondering if you can just touch on sort of the operational impact of the VDP plan? Obviously you are sort of getting to that midpoint in terms of employee exits and sort of transition. Can you just talk about how you have been to able to sort of marriage the operational disruption? And should we think of sort of the higher risk component of it being behind those? Or is there more to go? And I am trying to sort of connect that with maybe some of the, I guess, the relative underperformance on the cable gross add side. To what extent did the size of the program, perhaps, affect the sales aspect on the cable side?

[Jay Mehr:]

Yes, great. Thank you. Brad talked about in his comments just how amazing our people are and the work that's been done in changing the company. Where we are today, not to minimize what the organization has been through over the last six months, our people are amazing and the source of everything good at Shaw. I love where our team's at. I can't remember a time, sort of in the last 10 years, where our team has been in better shape. The team has embraced this troop of 10,000 call to action. We are a smaller organization now and when we talk about a troop, we are not talking about a military troop, we are talking like a traveling performing troop where one week you are on lights and another week you are the star and well, troops lift themselves because everybody helps. It's right consistent with the Shaw culture and we were built. Our organization is doing tremendous work. In the process it has been so energizing for our team because decision making has all moved across functional squads with agile two-week sprints. And I spent a few days at Edmonton last week. The turnaround with our teams at Edmonton about our ability to just get things done effectively because our teams that are doing the work are changing the way we work. So I couldn't be more happy with how we are coming out of that, as you describe, higher risk area. The plans going forward, we still have got some work to do, but I would actually characterize this as being slightly ahead of where I thought we would be at this moment. Self install is at 28%, headed to 50%. All of our digital initiatives are going well. I think if you look at our underperformance over the last few quarters, some of that may well have been all of this adjustment. I suspect more of it was all of the changes in management and leadership and restructuring and streamlining. I am sure some of that had an impact. Most of the heavy lifting is behind us. We have certainly brought some automation investments this year. We have got a clear line of sight to our VDP exits, certainly at least for the first nine or 10 months this year. We have got a little bit of work to do as we do the final sort of departures into 2020. But we are super pleased and we will, as difficult it is to see folks exit again, it has not only enabled a fundamentally new cost structure for our wireline business but it really has enabled the new Shaw in a way in the modernization of how we do business.

[Aravinda Galappatthige:]

Thanks very much. And just a quick follow-up or second question for me. I think I may have not have heard correctly, but I think in your prepared remarks, you talked, I think, about 28% of your installs now being self installs. It sounded like, certainly to me, appears to be a good number. Can you just talk about sort of the potential to sort of increase that over the near-term? And is there a component, is there a prospect of maybe the X1 installs also becoming self install in the near term? Thanks.

[Jay Mehr:]

Yes, for sure. I mean the whole spirit of the voluntary departure program was because of this fundamental change in the business where the only thing plugged into the wall will be an XP6 and everything else is IP based experience that's connected wireless, right. And you can start to see the beginnings of that in Comcast also in what they are doing. And that's actually behind the whole direction that we are going as a company. That 28% is the right number in terms of self install. In May, it was 17%. So we are directionally headed in the right direction. That probably looks like 50% at the end of the 2020 program. The number of truck rolls that are being avoided by that will be in the hundreds of thousands. It's super material of a plan and it just gets easier as we launch our IP based experience. And as you have seen the roadmap is clear. You can see Comcast doing it. You can see Rogers doing it. You can see Cox doing it. We are on the right track here.

[Aravinda Galappatthige:]

Okay. Thank you very much.

[Operator:]

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

[Tim Casey:]

Thanks. A couple for me. Just you mentioned, Brad, in your opening comments about how you are going to start doing cross promotion. I am just wondering if you would comment on how you are going to approach that, given your other comments with respect to recurring monthly revenues because obviously, cross promotion can often include bundling discounts? And second, just a comment on your spectrum roadmap. I know you can't comment on 600, but how are you thinking about mid and higher bands given that's clearly were the focus of the incumbents are? Just how are you thinking about that going forward? Thanks.

[Paul McAleese:]

Tim, I will start here and I will take your last question on the 600. We are extremely excited about the 600 and the auction coming up and we really applaud the government for stepping up with a pro-competitive spectrum plan and policy. So we are excited about what that brings and as you know from our spectrum holdings, low, medium, high very important as we go forward. And hopefully as we step into the next couple of years that the government still has that pro-competition and we really believe that spectrum is critical as we compete with the big three and we are going to be very focused on that going forward.

[Jay Mehr:]

Great. It's Jay. In terms of the cross promotion side, I think as you heard in Brad's comments and you can see with the increasing wireless capital that we are investing. This year we have got some really interesting things happening in Alberta and BC. One is significant network improvement and so we are really getting there with the launch of our additional spectrum. We are also launching a significant number of new markets in this fiscal year, which really will cover our footprint much more dramatically. I think the West is going to matter more to Freedom in this fiscal year than it has in the last number of fiscal years. We are going to step into this. I don't know, to Paul's comments about dry powder, I don't think you will see massive bundling opportunities in F2019. I think you will see us try and have conversations with customers about what they are spending on a monthly basis and how they bring Freedom and Shaw together to help them save money. I don't think you will find anything scary in that and really excited about what happens this year for wireless in the West.

[Tim Casey:]

Just a follow-up, if I could, on another roadmap that being your all IP experience. I think in your opening comments you talked about it in the second half. Can you give a little more color on how that's going to rollout?

[Paul McAleese:]

I think I previously said, we are about two quarters behind Comcast on their technology roadmap in general terms. If you think of it that way, you are in pretty good shape. It's actually quite easy to see what's coming in terms of our product offering. And it is fair to say in terms of both the operation and market impact, that the bulk of our all IP experience will impact the second half of F2019. But we certainly are very pleased with how things are developing in our own testing. And we are certainly technologically ready. Speaking plainly, we have been helped by the aggressiveness of Rogers in their rollout in driving IP. That just makes it easier for us and it's nice on some of these things to be quick second. The first go-around, we were leading in the Canada and having to sort all that stuff out ourselves. So we benefit from this expanded syndication in Canada from Comcast and are excited about what the second half brings.

[Tim Casey:]

Thank you.

[Operator:]

The next question is from Maher Yaghi with Desjardins. Please go ahead.

[Maher Yaghi:]

Thank you for taking my question. So I wanted to just, you were talking about your marketing spend in the quarter that you could have pushed up a bit more in order to alleviate some of the losses you had on wireline. How much did you say you could have spent more in order to prevent these losses?

[Trevor English:]

Thank you for the question. Clearly, we believe that we had a go-to-market that would enable us to get our share of gross adds and not to have a decrease in broadband customers. And so what I did say is, our mass, sort of campaign is massive and it is important as it used to be. Our mass launch of the Internet 300 we did in September because it's a great opportunity to sell and set up things for F2019. My comment on that campaign was about $2 million that we spent in September. My comment was, you learn from your mistakes. Clearly we should have put more in market in August. We lost August. And so, if I had to do it over, would I have moved that $2 million into August? I think that's self-evident now. In the medium term, it's timing and we are pleased with our mix of 300 and we think about the pricing parity that we got through Internet pricing and the launch of 300 and the mix of the buy into 300 is all going well. So I think in the long term, we will come out in wash, but it's clear we had a light marketing spend in Q4 and you will see some of that timing-wise impact Q1.

[Maher Yaghi:]

And so why didn't you spend the money? Is it because you were trying to meet some financial objective for the year?

[Trevor English:]

No. We didn't spend the money because we think the best time to launch 300 and our new way of being is in September and we have good market impact from that. And we certainly had room in terms of spending the money. It wasn't that we were up against a particular number. We are delighted with the financial results that we have taken. We believe, as you have heard from our comments in June and this is the nature of a very competitive environment. We believe we had a plan to deliver our share of gross adds and it didn't turn out that way. So we are committed to achieving better results in the future, Maher.

[Maher Yaghi:]

Okay. So that's on Internet and TV because I guess, both go hand-in-hand but there is an abnormal decline in TV that happened in the quarter and it's hard to call it just on back-to-school because a lot of these subs that go in-and-out on the back-to-school period, are really Internet and not heavy on TV from what I understand, if we are talking about students and universities. So what's the strategy to turn around the TV portion?

[Jay Mehr:]

Yes. And thank you for your question. Actually, I agree with where you are heading as a hypothesis. I don't see the change in TV, in video RGUs and I think we are talking about cable here.

[Maher Yaghi:]

Yes.

[Jay Mehr:]

As opposed to satellite. I think you are right that that's not a change in back-to-school. I think you and I have different expectations with where we are headed with video RGUs. Obviously the biggest challenge that we had in F2018 financially was a degradation of our video gross margin primarily on the cable side. We think clearly we are going to manage video for profitability. We have got a cost structure that the way channels our package suggest a certain way to market video. We are going to have a much healthier margin story in video in F2019 and that will be part of our total customer story. I would hesitate, if you are trying to work a model, to suggest that we are going to have a major bounce back on how we characterize video RGUs. Because I think if you follow the math of managing video for profitability, total number of customer relationships or accounts, our monthly recurring revenue model, it doesn't necessarily take you to quickly improving RGU numbers in video.

[Maher Yaghi:]

Okay. And the general expectation was that X1 was going to help you in some way, improve your video situation and that's not happening. So I guess, you are saying that the market misunderstood where RGUs were going on the TV side. Can you maybe help us understand what's your view is for 2019 on that because I think the general understanding is that you were not going to lose more than what you lost in the past?

[Jay Mehr:]

Yes. I won't use all of the same words that you just used there, but the way we think about the business as move into F2019 is, our wireline business we are looking in that 1% to 2% revenue growth. And we have got 1% revenue growth in Q4. This is what winning looks like. We do that by managing our monthly recurring revenue. So our monthly recurring revenue as we entered the year just a hair over $300 million in our monthly recurring revenue. Every single day, we are looking to grow monthly recurring revenue by $1 and we do that by growing our broadband customers, becoming more profitable, reducing our churn on much more sophisticated management and segmentation. That strategy will work. It will deliver the long-term revenue of the company. The monthly recurring subscription revenue is what the wireline business is. It's had a shift in our management approach from the historical cable RGU approach to the business. Of course, it's a shift. It's part of how we have reengineered the whole company in the last six months and so you will see that throughout F2019. To my comments to Jeff, I think you will see a very balanced approach to the marketplace. I think you will see us grow revenue by small amounts on a steady basis with decent improvement in gross margin and significant improvement in overall consumer profitability. I think that bodes well for the future of our company.

[Maher Yaghi:]

Okay. And one last question on this topic and I will move on. What's the marginal contribution? Can you help us understand how much is TV RGU losses effecting EBITDA? The marginal impact, because one, you were looking at the mix. So with a minus 30,000 something TV, it's hard to see how that can be made up with mid-single digit Internet growth, unless the mix is really lopsided on the margin side?

[Jay Mehr:]

Yes. I think it's a helpful question. As you can see we are making lots of changes in mix to the marketplace. We, in F2018, saw a material degradation of our cable vide margin and we saw a significant increase, obviously, in our Internet revenue, all of which drives the margin. In F2018, that ended up being a degradation of overall gross margin than we offset. In F2019, we plan on improving gross margin. I think you can do the math. I am not sure it's wholly helpful for you, maybe give you the actual gross margin numbers, but they are significant. We saw a slight decline in satellite video margin, but it really wasn't the problem. The problem was overwhelmingly cable margins. There is no question we didn't help ourselves. We drove the choice packaging in a world where our cost structure really doesn't facilitate growth choice packaging with penetration based rate cards and so forth. So we got squeezed badly in F2018 in video, both on loss of customer and loss on margin.

[Bradley Shaw:]

And loss of ARPU.

[Jay Mehr:]

And loss of ARPU. And when all those are headed in the same direction, you can appreciate the magnitude and as you can see, Internet didn't fully offset that.

[Maher Yaghi:]

Okay. And so just one last question on your guidance for 2019. How should we look at the growth year-over-year, the 4% to 6%, how is it split, let's say, first half versus second half? Is it early? Is it backend loaded or frontend loaded? Just a helpful on that, that would be good. Thank you.

[Trevor English:]

It's a little bit more backend loaded, Maher, but not to the extent like it was in F2018. We do have some of the investments timing related to investment of both the VDP, net investments in technology and automation and things that Jay said. A lot of those are coming in, in the first half of 2019. So you will see a little bit of additional operating costs in the wireline business in Q1 versus the run rate in Q4, but not to the extent that this year was in terms of 2018 and that volatility in the quarterly splits.

[Maher Yaghi:]

Okay. And this guidance, the 4% to 6%, is based on the current accounting standard or on IFRS 15?

[Trevor English:]

It's the same under both.

[Maher Yaghi:]

Okay. So no change even though subsidies on handsets is quite high in your current situation? It won't the growth percentages?

[Trevor English:]

Correct.

[Maher Yaghi:]

Okay. Thank you very much.

[Operator:]

The next question is from Rob Goff with Echelon Partners. Please go ahead.

[Rob Goff:]

Thank you very much for taking my question. It would be on the recurring revenue side of things. Could you give us a bit more perspective in terms of the consumer rate increases? I think you noted that it added an incremental $4 million during the quarter. What was the timing of that perhaps and the components mix of that? Second question would be on the business revenues. Ahead 6.6% on the quarter. You attributed that to the SmartSuite. Could we look forward to greater momentum behind that product suite? Thank you.

[Trevor English:]

Rob, it's Trevor. Just on the rate adjustments that were implemented June 1, they were about $20 million, $21 million in the quarter sort of Q4 versus Q3 and just for benefit, it was about $12 million on Internet, $6.5 million on video and roughly $2.5 million on home phone. So that was the rate adjustment and you saw that really flow through the quarterly Q4 revenue versus Q3 revenue, most of that was driven by those rate adjustments. I would say, we delivered $19 million in total, but it was $21 million offset with a little bit of migration from customers.

[Bradley Shaw:]

And on business, we have got real nice momentum, Rob. We have got the SmartSuite of services and greater opportunities in enterprise. In our math, we feel it's a little bit offset by our one legacy business, Shaw Broadcast Services that relays satellite services to broadcasters. That is obviously in structural decline. So if you look at the rest of the business, we are looking much more like high-single digit increases. I can tell you, I love the energy of the Shaw business teams and we had a record sales month in August. Of course, that leads us a couple months down the road on revenue. But we have got great momentum on business. When we talk about our lowering wireline to 19% capital intensity, we are sort of still continuing to increase our success-based spend on business. So that mitigation is becoming way more effective in our capital intensity on the consumer side. Super excited about the story and business. Things are going so well in wireless, we don't talk about business very much. But we are committed in F2019 to have all three business units contribute positively to our operating plan and have all three business units be very successful.

[Rob Goff:]

Okay. Thank you.

[Operator:]

The next question is from David McFadgen with Cormark Securities. Please go ahead.

[David McFadgen:]

Great. Thank you for taking my questions. So first of all, just on wireless. When you talk about expanding into new markets in Western Canada to capture an additional 1.3 million customers, are you moving into rural areas? And what is the ultimate ambition here in terms of your footprint in Western Canada? And then secondly on wireless, can you tell us what the gross adds ARPU is? Just wondering where that's tracking because obviously it has implications for wireless ARPU growth.

[Paul McAleese:]

David, it's Paul. Thank you. I wouldn't characterize our ambitions as rural in Western Canada. The markets that you will see us move into in this coming year, places like Victoria and Red Deer and Lethbridge, some major markets that were not currently covered. So we are very excited to be able to bring Freedom service to those markets and think we will very quickly achieve a good share of gross adds in each of those places. On gross adds ARPU, yes, our inbound subscriber cohort is coming in, as I said, in the last couple of months has come up about $1.50. So it's in the low-50s and that's on MRC. So I will be careful on characterizing that between ARPU. There are some discounts that sometimes apply and then there is also things like roaming and other charges that will kind push it in the other direction. So characterize that as probably MRC equating to about ARPU. But we are were very pleased with the numbers we have seen, particularly since the July rate changes.

[David McFadgen:]

Okay. And if I can just have a follow-up, just on the cable video ARPU. If who you look at Comcast, they have characterized their video sub losses as traditionally lower ARPU. Would you say that as well for you that any cable video losses you are experiencing are more on the lower end of the ARPU range?

[Paul McAleese:]

There's lots of moving pieces in terms of our vide ARPU. I am not sure I would say in exactly that way. I think there is no question that the future of our business and our whole F2019 strategy is that we are going to lower our cable video churn and add a lower number of gross sales but much higher value customers in video. So I would certainly say it that way. Maybe that's a little bit of a spin of what you just said, David, but I wouldn't characterize it quite the way you said it out loud.

[David McFadgen:]

Okay. All right. Thank you.

[Operator:]

Mr. Shaw, there are no questions at this time. This concludes the time allocated for today's conference call.

[Bradley Shaw:]

Great. Thank you operator and thanks everyone and we will talk to you in January.

[Operator:]

Ladies and gentlemen, you may disconnect your lines. Thank you for participating and have a pleasant day.