Shaw Communications Inc.
Q3 2016 Earnings Call Transcript

Published: 15 Jul 2016

[Operator:]

Thank you for standing by. Welcome to the Shaw Communications’ Third Quarter Fiscal 2016 Conference Call. Today’s call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. At this time, all participants are in listen-only mode and the conference is being recorded. Following the presentation, there will be a question-and-answer session. [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’d now like to turn the call over to you. Please go ahead.

[Brad Shaw:]

Thank you, operator, good morning, everyone, and thank you for joining us today. With me today are members of our senior management team including Jay, Vito, Alek, and Nancy. As everyone knows we closed the acquisition of WIND on March 1st and Q3 now includes wireless in our financial and operating results. We are excited to have wireless as part of our portfolio and capitalizing on the numerous opportunities that lie ahead. During the quarter, we exceeded 1 million wireless subscribers and we made significant enhancements to our wireless network. In June, we completed the 3G upgrade in all of our markets and this has significantly improved the current customer experience. Our planning and design work related to our LTE network is well underway and we expect the upgrade to be complete by the end of fiscal 2017. By bringing together our fibre, Wi-Fi and wireless assets, we are creating an enhanced connectivity experience through a converged network that is efficient and has sustainable cost and capital advantage. Everyone is well aware of the devastation that occurred around Fort McMurray and the surrounding areas due to the wildfire this spring. Fortunately for Shaw, we do not suffer any significant service interruptions or any material damage to our network. Clearly, our customers were not as fortunate as they were displaced for a month and some of them for much longer as they look to rebuild their homes. During this time, we put our best foot forward and provided all residents regardless of them being a Shaw customer not access to our Shaw Go Wi-Fi networks, so they could stay connected to their loved ones. We also provided a credit to all customers for the month of May, so they do not have to worry about the expenses during this difficult and emotional time. As we supported the community through donations raised by employees and matched by the company, while Shaw had approximately 35 employees in the Fort McMurray area, I want to take the opportunity to express my sincere thank you to all Shaw employees that went above and beyond for their fellow colleagues and for the company. The passion and dedication of our staff is truly amazing and this is the reason why we are the strong and resilient company that we are today. We are a company that cares deeply about our employees and our communities. During the remainder of 2016 and throughout fiscal 2017, we will continue to deliver on our strategic initiatives. As part of our network and infrastructure roadmap, we have completed our digital network upgrade, doubled our network capacity, and we continue to roll out DOCSIS 3.1. Our network has never been in better shape and congestion is at an all time low. Today, we are excited to launch an unrivaled ultra broadband product that we have branded WideOpen Internet 150. The 150 megabyte services available to our entire footprint and showcases the strength of our hybrid fibre coax network and the previous investments we have made. Fast and affordable internet services in demand and we think customers will find tremendous value with this new offer we continue to build on our path towards 1 gigabyte speeds and beyond. We will also be launching the X1 set-top box later this year and plan to have it available across our footprint by the end of F17. We will also complete our LTE update by the end of F17, which will provide our customers with a much improved wireless experience. I’ll now turn it over to Vito to go through the financial results in greater detail and will provide some additional context with respect to F16 and preliminary F17 capital guidance. Vito?

[Vito Culmone:]

Thanks, Brad, and good morning to all of you for joining us on the call this morning. At a consolidated level, Q3 reported revenue and EBITDA was up 13% and 5.3% respectively as the current quarter includes a full three month contribution from WIND. Excluding the results for the wireless division, revenue increased 1.4% while EBITDA was roughly flat over the comparable period. Capital spending in the quarter of $286 million increased over the prior period as it includes $51 million related to wireless spending. Consolidated free cash flow for the third quarter was $182 million and is a combination of free cash flow from continuing operations in the amount of $152 million, which includes approximately $14 million in dividends received from Corus plus discontinued operations of $30 million. On a year-to-date basis, free cash flow totaled $473 million. Consolidated net income for the quarter of $704 million, or $1.44 per share, has a number of one-time items that I will walk through. The increase to net income in the current period as a result of higher EBITDA including wireless and a $615 million net of tax gain on the sale of our media assets, partially offset by some additional nonrecurring items such as transaction cost related to WIND of approximately $12 million, restructuring cost of $24 million related to the initiation of a multiyear efficiency program, a $10 million equity loss from our investment in Corus and impairment losses related to investments and the tracking business, which in aggregate totaled $88 million. Turning to the individual business units, let’s start with our newest division, wireless. We reported revenue of $132 million. And for informational purposes, this represents an increase of 24% versus the prior year. Wireless EBITDA of $29 million or 22% margin was strong. Alek and team are doing a tremendous job moving forward on the network upgrade, which is translated into immediate improvements for our customers including reduced, reduced churn. In the quarter, we spent $51 million on wireless CapEx with a significant component of this related to the $250 million LTE upgrade. We remain on track to complete the full LTE overlay of existing markets, which covers a population of approximately $15 million by the end of fiscal 2017. In the quarter, we added approximately 22,000 net new wireless customers and the mix of postpaid continues to improve, representing over 64% of our total 1 million wireless customers. Blended ARPU increased to $36.30 and we expect continued ARPU expansion as network quality improves. I would encourage our listeners to review the Q3 MD&A financial statements and related notes to the financial statements for further details regarding the accounting policies associated with the reporting of our new wireless division. Turning to consumer, third quarter revenue was down 1.4% to $935 million and EBITDA declined 2.7% to $427 million compared to the prior year. The contributing factors to this year-over-year decline are largely due to lower RGUs, fewer on-demand buys as Q3 last year included a very successful pay-per-view boxing event and the one month credit that we provided to all customers in Fort McMurray, an area that were impacted by the fire. This credit resulted in a revenue impact of approximately $3 million for the month of May. Consumer RGU losses of 47,000 are inline with the comparable quarter, but it is worth nothing that this includes approximately 5,400 related to Fort McMurray and a tougher economic climate particularly in Alberta compared to a year ago. Broadband results in particular were impacted in the quarter by a large number of single play internet disconnects led primarily by students, however, we are confident and excited that a WideOpen Internet 150 product along with the introduction of X1 set-top box later this year, which Brad discussed earlier, will gain momentum in the market as we move into fiscal 2017. Business network services, or BNS, revenue and EBITDA were up almost 4% and 5% in the current quarter due to continued customer growth. Excluding business satellite services from the results, revenue was up 5.1% and EBITDA increased 8.6% in the quarter respectively. In June, we launched a third managed cloud-based solution for the SME market called SmartSecurity. Our strategy and focus on the SME market by providing our business customers with enterprise grade solutions is working. The sales funnel continues to grow and we remain excited about the long-term growth profile of this very important segment. Business infrastructure service continues to deliver steady growth with reported revenue and EBITDA up 36.5% to $86 million and 32% to $33 million respectively. On a U.S. dollar organic basis, ViaWest continues to deliver double-digit revenue and EBITDA growth. The team continues to work on the new Plano, Texas data center and expects to open this facility in October. Customer demand for our hybrid suite of services continues to be strong and we remain confident in the growth opportunities that exist in this space as business infrastructure services is a core element of our overall growth strategy. During the quarter, we launched a multi-stage efficiency program resulting in the one-time charge of $24 million in Q3. We expect that the actions we have taken in this quarter along with the additional initiatives planned in early fiscal 2017 will result in approximately $75 million in annualized savings. Cost discipline has always been a focus at Shaw and we have an opportunity to become an even more efficient organization as we transform into an enhanced connectivity company. In terms of guidance, we forecast that our fiscal 2016 operating income before restructuring and amortization on a consolidated basis to range between flat to low single-digit growth as compared to fiscal 2015. In regards to consolidated capital, investment in fiscal 2016 is expected to be $1.2 billion including WIND. In addition, we are introducing preliminary fiscal 2017 consolidated capital to be approximately $1.3 billion, which includes a $250 million LTE spend and we will provide additional detail regarding fiscal 2017 guidance in conjunction with the release of our fourth quarter results. I will just make a few final comments on our balance sheet, which remains strong and within our target range of two, to two and half times net debt to EBITDA providing us with ample flexibility. In May, we repaid the 6.15%, $300 million senior notes with balance sheet cash. And at the end of Q3, we had approximately $320 million in cash on-hand and $1 billion of liquidity available to us under our credit facility. With that I will turn it back to Brad for his closing remarks.

[Brad Shaw:]

Thanks, Vito. We continue to execute on the strategic plan that we outlined in connection with the transactions we closed earlier this year. And we’re making steady continuous progress. Our infrastructure advantage is clear and we will rely heavily on this going into fiscal 2017 as we complete a number of initiatives including the X1 set-top box rollout, ultra broadband Internet speeds, completion of the LTE upgrade and additional initiatives related to customer service improvements. We have an incredibly focused management team and we look forward to updating you on our progress throughout this journey. Thank you for joining us this morning and we will now turn it to the operator to open it up for Q&A session.

[Operator:]

[Operator Instructions] The first question is from Jeff Fan of Scotiabank. Please go ahead.

[Jeff Fan:]

Thanks. Good morning. I have got a few. Let’s start off with the consumer Internet subscribers being down about 8000, wondering if you can just help us break that down into some of the impact related to the fire, consumer and maybe the competitive impact. Maybe we will start there?

[Jay Mehr:]

Hi, Jeff, it’s Jay, thanks for the question. The Internet subscriber results in consumer which to be clear nobody is happy with, I think are largely a continuation of the trend that we’ve had for the last four quarters when you net from Fort McMurray University students. So if you think back over the last number of quarters, Q4 was 265, a small net gain. Q1, we added the University students, so it was 9,400 and then Q2 with a small gain of 4,300. So when you look at the number there’s 2,000 temporary disconnects and Fort McMurray in it, along with University students. What you can’t see in the number is increasingly as Vito mentioned, we have a growing single play Internet base with some churn in single play that is driven partially by University students and partially by other factors in the market. And you have seen that we’re changing some of our approaches with the communal value of high net and WideOpen in our go-forward basis to add value to those customers. So let – I mean that’s a little bit of extra data for Jeff, let’s be clear though – taken together these Internet subscriber results are not acceptable for what we see in the future of our business. Our big growth opportunities as you know are absolutely wireless and absolutely ultra broadband and we are going to choose to behave differently in the marketplace going forward.

[Jeff Fan:]

Okay, thanks Jay. Maybe quickly turning over to wireless, just on the accounting, related to handset subsidies, can you help us quantify the – how much that was, I guess capitalized? I know the number is not a big amount, but it just helps us for comparison with the other wireless guys and also versus our numbers.

[Jay Mehr:]

Vito.

[Vito Culmone:]

Yes. Hi, Jeff. Our VP Controller is very excited that we’re getting an accounting question here on our call. Thank you for asking the question obviously, it is the first time we’re reporting wireless. You are absolutely right revenue from equipment is recognized when the equipment is delivered and accepted by our subscribers or our dealers. And so that is a bit different than where the I believe the legacy or the incumbents are at. And when you look at the receivable, so what happens obviously is at the time that we sell it, we recognize the revenue and then we capitalize the subsidy and amortize that subsidy over the 24 months or whatever the term of the respective contract is. The amount of the receivable at the end of May is in the amount of approximately $62 million for the quarter. So that gives you an idea of what the tab subsidy is. If you sort of try, determined what was our EBITDA results versus our cash EBITDA perhaps for the quarter, I’d give you a number that would be closer to what $3 million adjustments, our cash EBITDA would’ve been $3 million lower than perhaps reported. Hope that helps and provides some context.

[Jeff Fan:]

That’s helpful. And just maybe a lastly question for Nancy. In the data center business and just the Infrastructure as a Service market it seems like there is a tremendous demand that is going on driven by various players including the enterprise but as well as other cloud providers. Nancy, we’re just wondering if you can talk a little bit about what is going on in the market, whether the demand is sustainable, whether that’s kind of pulling forward some of the demand from the future. Just can you give us a sense of what is going on in the market and how sustainable the growth is for you guys?

[Nancy Phillips:]

Yes. Good morning, Jeff. We just continue to see very strong demand across the entire portfolio of products that we are offering. I think it wasn’t that long ago that many felt colocation maybe a product set that might see a slowing. We don’t see that. We don’t see it amongst our peers, we don’t see it clearly in our pipeline and demand cycles. But on top of that, clearly I think ViaWest has worked hard to distinguish itself in the market, in terms of a multi-platform strategy. And so we see increasingly not only a demand for our colocation products which remain very strong but also in terms of our private cloud capabilities where we do see new demand attributes definitely around the security services and deeply managed capabilities. Which I think, we did a good job last year of acquiring the Applied Trust asset to add that into our portfolio and we see good demand profile there. So I don’t see and certainly what I would say in terms of sort of the public peers down in the market here, we all are seeing continued strong demand for our capabilities certainly some of them with more of a colocation band. But overall just continue to see good growth and don’t anticipate or don’t see anything that’s slowing that as we enter fiscal 2017.

[Jeff Fan:]

Okay, great. Thanks.

[Operator:]

The next question is from Vince Valentini of TD Securities. Please go ahead.

[Vince Valentini:]

Thanks. Jay, I think will you may be alluding to with changing your behavior in the Internet we may have seen some first example of that this morning with your new Internet 150 product for $49.90 for the first 12 months. Can you comment a bit about that, it seems awfully aggressive versus what you were charging for slower speed services before and what TELUS charges per se 50 megabit service is this a sign of things to come at Shaw fields you need to really push on the price pedal to reaccelerate your subscriber growth in Internet?

[Jay Mehr:]

Thanks and appreciate the question. I wouldn’t look at this within the context of Internet subscriber results in the last quarter or two as much as the realization of our strategy that we’ve talked about for a number of quarters around the growth engines of shopping, wireless and ultra broadband. As you know there is a DOCSIS advantage that the cable companies have and we focused our investments in getting ready. The advantage that we have is we do not have that neighborhoods, we have everybody lives in a good neighborhood and we have the opportunity to bring value to consumers with speeds that they haven’t been able to enjoy in the past at prices they can afford. And we have been working on this for many years and I know the team here at Shaw is quite excited to be able to grow the DOCSIS cable advantage to our consumers. Let me you give a look and you can have a look at the website as we launched it today. If you look at the pricing and packaging I think the team is done a terrific job of managing the balance of providing value for consumers and if you look at where our price points are coming from we’re still talking about an $80 Internet product and I know you talk about the first 12 months on a value agreement, but we are pretty excited about how this is going forward and we have a window of time where our cable has a broadband advantage and we think Western Canadians should enjoy it.

[Vince Valentini:]

But Jay, we talked many times in the past about battle between yourselves and TELUS. Right now TELUS has been in and around three months promotional pricing and it always seems like an undisciplined move to move to 12 months and any other guy will inevitably follow. It seems like you are making that first move here, why wasn’t the $49.90 just a three month promotion as opposed to have full 12 months?

[Jay Mehr:]

Yes, I guess there’s two ways to look at that Vince, the other way to look at it is really introducing a two-year value plan and a contract for Internet customers which is, I think a major step forward in terms of discipline and I think if you look at the blended rate over the two years, these are still highly, highly profitable customers compared to the previous three month, the three month offers that we’ve had in the past. Remember when you talk about this $80 product, it’s only a few years ago that we had a $35 ARPU in Internet. We’ve got very few customers paying us $80 today, the $73 price point is the last sort of big price point that we have consumers in. So I mean while in a world of, if you do the math despite how it looks initially, if you do the math I think you are going to really like it.

[Vince Valentini:]

Okay, great. I just clarify a couple of CapEx things, Vito. You said the 2017 guidance includes the $250 million LTE, just to clarify you don’t mean an entire $250 million you’re just saying that plan whatever portion of it spending on that plan is included within the $1.3 billion for next year?

[Vito Culmone:]

Yes, that’s correct, thanks for the clarification, Vince. It includes the completion of our LTE program.

[Vince Valentini:]

And in this quarter the $51 million you spent, the wording in the MD&A says their spending on LTE readiness, does that imply that there is no actual hard construction yet in the Q3 figure and that probably starts in Q4 and is basically just network planning at this point?

[Vito Culmone:]

Yes, that’s correct and maybe I’m not sure if Alek want to provide any additional cover from a network perspective in Q3, but that’s correct from an LTE perspective.

[Jay Mehr:]

Alek, do you want to go?

[Alek Krstajic:]

Sure. Look the bulk of that was regular CapEx some finishing of the Q3 swap out, there’s some early work being done beyond just planning but it’s really early stage on the LTE stuff.

[Vince Valentini:]

Excellent. Thanks guys.

[Alek Krstajic:]

Thank you.

[Operator:]

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

[Phillip Huang:]

Hi. Thanks, good morning. Certainly we agree with you that the big growth opportunity is in wireless in the long-term. My question is what you’ve completed the LTE upgrade, can you maybe give us a sense of what level of growth do you expect WIND to be able to achieve and also beyond the LTE upgrade, maybe if you could give us a sense of what else we need to do to accelerate growth whether it would be spectrum, towers, and directionally the time on that you see that happening. Thanks.

[Jay Mehr:]

Great. Alek, we’ll let you start it off.

[Alek Krstajic:]

Thanks Jay. Look folks, I think that what you’re seeing here is moderate growth in wireless, when you take that into – take into account the fact that we’re still operating just with a 3G product with a network its still need some upgrading. I think the growth that we are seeing actually is part of our walk before we run strategy. The flanker brands that we compete against continue to have an advantage both in terms of some of the handsets they have and also in terms of the fact that they have advantage over our 3G network. My big indicator is are we getting our fair share of gross adds and I believe that given some of the constraints the businesses had up until now we’re definitely getting our fair share of gross adds I think what happens is once LTE launches next year we have an opportunity to grab a better percentage of those gross adds, by then a lot of things have been fixed, you will continue to see our churn rate drop and then you actually start to see growth but I think is more commensurate with what this opportunity really presents.

[Phillip Huang:]

And as part of that strategy, after the LTE upgrade, at what point you envision the need to add some low band spectrum and how do you feel about the number of cells that you currently have given the spectrum portfolio that you currently hold?

[Alek Krstajic:]

I think the way we’ve designed the network given the spectrum we had in the past and currently have I think is working as well as it possibly can. The recent 3G upgrades where we swapped out the old 3G equipment in Vancouver, Calgary and Edmonton. And then turned on the extra spectrum that we got in that Rogers-Mobilicity, Shaw deal last summer has had a profound impact on the performance customers are experiencing and it’s essentially a 50% increase in data throughput and we’re seeing that anecdotally in some of the bloggers are saying but we’re seeing it with some real solid numbers in terms of lower churn rates. So I’m not uncomfortable at all with the number of cell sites we have for the area we’re trying to cover. I think the priority to get low brand spectrum is not lost on us and it’s sure as heck isn’t on the folks in Ottawa. Part of having a sustainable fourth player option is making sure that the offering from that fourth player comes as close to being the same as what these three incumbents have and its pretty hard to do that in terms of in-building penetration without low brand spectrum. So we are cautiously optimistic that low band spectrum will be part of our sort of tool bag in the future.

[Phillip Huang:]

Right, right. So I guess, just to clarify beyond the LTE upgrade or say you have X amount of dollars to spend on wireless budgeted what would you prioritize first spectrum or cell site building or distribution like what would it be that you think is going to give you the most bang for buck in terms of accelerating growth in the business?

[Vito Culmone:]

Look I think first and foremost is monetizing and realizing the benefit of the spectrum we currently own so we own 30 megahertz of AWS-3 and it shouldn’t be lost on anybody that how big a chunk of spectrum that is to be all turned on for one technology specifically LTE so very clearly that’s our priority. I think that next would be to get low band spectrum and then the list is long beyond that.

[Phillip Huang:]

Right, got it. And then finally I have a quick follow-up on the $51 million impairment to Shomi. I was wondering what’s the reason behind that like what’s causing the impairments to have to be made? Thanks.

[Vito Culmone:]

Yes the – thank you it’s Vito here. I mean, at the end of the day…

[Phillip Huang:]

Hi, Vito.

[Vito Culmone:]

The $51 million write-down represents the cash contribution to the Shomi joint venture in excess of what we have today expensed in our P&L by our equity accounting methodology. I would that our investment in Shomi was more directly anchored to our media business and coincident with the sale of our Shaw Media to Corus which as you are aware was closed and recorded in our Q3 financials. We evaluated our investment in Shomi on a more, I’ll call it, standalone basis and accordingly we believe it was more appropriate for us to write down the carrying value of the investment to nil. It doesn’t say anything more about our future prospects at this point in time in regards to the Shomi joint venture in any way, shape or form. It’s an accounting write-down.

[Phillip Huang:]

And the timing of that in that is relation to the – obviously the Shaw media sale to Corus is that the reason why we’re seeing that now, or…

[Vito Culmone:]

Yes, absolutely. I think it’s – as I said, it links back to our strategy more of media strategy for us a bit and it was an appropriate time for us too. On a quarterly basis we look at the carrying value of our investments and we thought this was the time for us.

[Phillip Huang:]

Got it. Thank you so much.

[Operator:]

The next question is from Drew McReynolds of RBC Capital Markets. Please go ahead.

[Drew McReynolds:]

Thanks and good morning. Vito just a clarification back to the wireless accounting, just from your MD&A, it looks as if when you start to amortize that handset subsidy in the P&L, are you netting that against revenue or do we still see revenue and then that amortization hits an OpEx number can you just clarify that?

[Vito Culmone:]

Yes the former, we are netting that amortization against revenue.

[Drew McReynolds:]

Okay. And I’m just curious, obviously that’s different than either Manitoba totally incumbent. Just wondering kind of what your rationale overall is four doing something that I think is a little bit unique on this front.

[Vito Culmone:]

Yes, I think, two primary drivers. I mean, one, first of all, this is how Wind has been accounting for it historically. But I think the primary reason is when we look at where IFRS is going frankly and from a revenue recognition perspective, I don’t want to be speaking for the incumbents in the marketplace. I think the way this is accounting for it is probably the way things are leading going forward and recording your revenue effectively on a sale basis. The second piece that’s very important and that might be different from where the incumbents are at is we have two contracts. We have a contract for the sale of the equipment and we have contract for the sale of service, where I believe for the most part the industry has one embedded contract on the two. So that makes us very comfortable with our accounting.

[Drew McReynolds:]

Okay, got you. Great. Just two others from me, also for you Vito, just I haven’t had time to kind of go through this, but in terms of your fiscal 2016 EBITDA growth guidance, can you let us know what the fiscal 2015 EBITDA number is that that is based off?

[Vito Culmone:]

You know what, may be let me come back to on that one well big data, I’m sure I have that on my finger tips here.

[Drew McReynolds:]

Okay, okay, and that’ll be great. Then lastly, on the CapEx guidance versus our numbers bumped up a little bit in fiscal 2016 and in 2017, I know you’re not going to give guidance for 2018 but directionally, obviously post the LTE upgrade, are we to expect a sequential downtick in other words have you kind of brought in a lot of stuff forward given all the technology deployments in LTE in fiscal 2017? Thanks.

[Jay Mehr:]

So Drew it’s Jay, I’ll start and then Vito may want to add. Sure when you look at fiscal 2016, I think, when we reconcile our numbers to what you guys have it to be clear the incremental capital is on the wireline side not on the wireless side and it’s driven by two things. One it is driven by our commitment to the two-year value plan that we launched March 1 and what that means for customer premise equipment, for five years we’ve competed in the marketplace with a competitor whose customers are primarily on contract, in a asymmetrical basis where we are primarily on month-to-month. And we are making the adjustment to move to the two-year value plan as you saw was wide open today as a continuation of that strategy. And then you’ve seen some additional network investment not in support of the launch of 115, but to make sure that we’re in a position to respond to any competitive developments that happen going forward and being able to increase that. When you look at F-17 the wireline expenditure group is similar to F16 so the incremental number there is just the extra six months of wireless as you see just to be clear F-17 capital which we wanted to share with people because it has been a topic of much discussion it includes completing the LTE build everywhere, it includes completing DOCSIS 3.1 everywhere and it includes the X1 set-top rollout everywhere. So I think with those major projects you can pretty easily do the math on what the trending would be throughout 2018.

[Drew McReynolds:]

Okay. Thanks for that.

[Vito Culmone:]

I’ll just jump in on your previous question regards to the 2015 base that our EBITDA guidance is predicated on. I will give you the three numbers from a business unit perspective. The consumer number 1,686, the BNS number is 256 in the BIS number 95, which obviously is very consistent with what we reported as far as our fiscal 2015 numbers.

[Drew McReynolds:]

That’s great, thanks Vito.

[Vito Culmone:]

Thanks.

[Operator:]

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

[Tim Casey:]

Thanks. Just wanted to talk a little bit about the X1 rollout, in the past Jay you’ve talked about how that would be an incremental rollout rather than a forklift rollout. You’ve said that the X1 box will be available across the network but I’m assuming you’re going to be incenting your best customers to upgrade. I’m just wondering how we should think about the penetration going forward of X1, directionally speaking.

[Brad Shaw:]

Sure, thanks Tim. I would say a couple of things about X1 and our next-generation video rollout generally. We’re very happy with the results on FreeRange TV in the first deliverable, which has already taken our most valuable customers and lowered their already lowered churn beyond that. So step one has clearly worked. We’re doing a market-by-market rollout in F’17 of the set-top and reminding everybody that we are joining the Comcast roadmap as a moving train. So we will be launching the services that are available today, not the services that they started with along with the voice remote and all of the tremendous technology and innovations that our partners are going. I am not sure I have a lot to add in terms of penetration numbers that would be speculative. I could give you some economics that we haven’t necessarily shared in the past is everything is becoming clear to us. The total next-generation video if you look at our F-16 numbers has a $75 million impact and that’s not payment to Comcast, that’s all of our next-generation video cost. In F-16 that’s two-thirds capital and one-third OpEx. I think if look at F-17 it’s a similar total number in and around the same total cash number, but it shifts to one-third capital and two-third OpEx. That might help you work through some of the cost as we think about going forward.

[Tim Casey:]

Well, that’s great. Thanks a lot. And just a clarification, you mentioned there was $14 million worth of dividends from Corus I thought you were taking that on a drip so is that a cash number or…

[Vito Culmone:]

You are absolutely right Tim, we are taking it on drip, we are including it on our free cash flow calculation and we’re very explicit about that. I think when we look back to obviously the sale of the media results and what it contributed, I think, we feel comfortable but obviously the reader and analysts can make any adjustments they see fit that we see it as part of our go-forward free cash flow profile.

[Tim Casey:]

So just to be clear it’s – you are not receiving cash, but you’re including it in your free cash flow definition?

[Vito Culmone:]

Yes it’s correct.

[Tim Casey:]

Okay, thank you.

[Vito Culmone:]

Thank you.

[Operator:]

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

[Aravinda Galappatthige:]

Good morning, thanks for taking my question. Just get back to wireless for a second, wondering if you can talk a little bit about your plans on the distribution side obviously a key for wireless business anywhere. I was wondering what your plans are over the next 12 months that would expand the distribution in the West. And related to that, how far away is the plans are on bundling with the Shaw wireline products?

[Jay Mehr:]

Again Alek if you could start.

[Alek Krstajic:]

Sure. Jay, thank you. Well, look, in terms of overall distribution strategy I think when we took over – the current management team here took over WIND a year plus ago before the Shaw folks bought WIND, I would have characterized our distribution is probably too narrow, traditionally in wireless, you want to have a multi-channel distribution strategy, you want to have a bunch of corporate stores, you supplement those with a serious of independent dealers in a perfect world sort of look and smell and act like a corporate store, you shouldn’t be able to tell the difference based on who owns it. You generally would have some national third-party retail and then some unique relationships that help to drive distribution. We would be characterized as only having to have the first two channels of distribution. We brought some new folks into management that are now helping develop the strategy and how we are going to expand into other channels of distribution, I’m not going to reveal much more than that right now. As it relates to your question in terms of the Shaw bundling approach, I think there is no question that bundling is something that works and helps accelerate the growth curve on subscribers. I think that the right time to put the Shaw brand on a wireless product is when there is no reason to ever apologize for anything and that’s post an LTE launch, and I think that distribution flows from that as well. So I think that the types of distribution channels we’ll have in the east will vary from what we’ll have in the west based on having a WIND mobile stores as well as Shaw stores selling a wireless product. That was the end of my answer.

[Aravinda Galappatthige:]

So that’s – just a housekeeping question with respect to the WIND margins, obviously its surprise to see the upside in Q3. I was wondering is it possible for you to provide us with the year-to-date margin for WIND and also if possible the adjustment that you noted for the subsidy?

[Vito Culmone:]

Yes, I know. I think we’re going to stay away from any year-to-date numbers. And as I said, I don’t know that I’d call it an adjustment for the subsidy because that’s effectively what we’re – the way we’re accounting for going forward and you need to be cognizant of the year-over-year comparisons. But I would – I’d characterize to say if you looking to reconcile what component of the subsidy versus making its way into the Q3 result. I’d bring it back to the $2 million to $3 million adjustment related to EBITDA versus cash EBITDA.

[Jay Mehr:]

And just building on your comments about EBITDA on wireless, we want to be clear that while we are please with the wireless EBITDA result in Q3, the game we’re not playing is one that optimizes EBITDA in the short- and medium-term. This is a growth asset and we’re focused on growth and Alek talked to you about some of the sequencing as we drive to growth, but this isn’t EBITDA optimization asset, this is a growth asset.

[Aravinda Galappatthige:]

Great. Thank you very much.

[Jay Mehr:]

Thank you.

[Operator:]

The next question is from Greg MacDonald of Macquarie. Please go ahead.

[Greg MacDonald:]

Thanks, good morning, guys. So looking at the wireless subscriber, as I think the numbers around 25,000 based on the gross number that was given $36 – a little over $36 in ARPU. Sometimes it’s helpful for us to understand trends by looking at these same metrics on a gross add basis, I am referring to ARPU. Is the ARPU different on a gross add basis on the $36 i.e., the customers that were sold in this quarter? Are those customers coming in at a different – presumably higher ARPU than the $36? And as the postpaid, prepaid mix different than what the absolute is right now on most recent gross adds?

[Jay Mehr:]

Go ahead, Al.

[Greg MacDonald:]

Alek, how are you?

[Alek Krstajic:]

Oops, sorry guys I hit the mute button on there.

[Jay Mehr:]

No problem.

[Alek Krstajic:]

Look as far as ARPU I think that given the sort of the market conditions with where the flankers have been with a slightly better product. I think the ARPU growth that we’ve experienced is actually been what we’ve expected. We have not been focused on trying to drop price and accelerate sales beyond what sort of a natural rate of growth that sort of in the market right now. And again, this is part of the sort of walk before we run. I want to make sure that we get all of our sort of house in order in terms of network before we push hard and accelerate. Now it should be clear to everybody though that our strategy is not to maximize EBITDA over growth. Very clearly this is a growth engine and we definitely want to grow. The long-term plan is to ensure that all of the new gross adds that we put on the network, put on the base are really at an ARPU level that starts with a $4, because we have to end up at an ARPU level that is $40s as quickly as we can.

[Greg MacDonald:]

So presumably Alek would be talking post LTE right or are you adding gross – or majority of your gross adds today over $40?

[Alek Krstajic:]

They are right around the $40 mark. I mean this is an internal discussion that we have quite a bit here with Glen Campbell, Bruce Kirby and others. And I want to keep pushing back on any rate plans that – aren’t going to get us there. Now what we do – there is always going to be some rate plans that are below $40 and then the key is how do you incent the folks at the distribution – in the distribution channels to ensure that we do everything possible to continue to up sell and get people into the $40s, because there is no question, that’s our objective.

[Greg MacDonald:]

Okay, that’s helpful…

[Vito Culmone:]

I think I’ll just chime in there. I think to understand the nature of your question obviously as far as, hey, what’s happening underneath that next level between postpaid and prepaid. I just characterize it as what you are seeing on an overall basis from an ARPU’s perspective of year-over-year growth of 3.6%. When you get into the postpaid, you are seeing something very similar that the postpaid’s are coming in at a healthy clip, balancing of course what Alek had mentioned which is a long-term game for us versus obviously the EBITDA results.

[Greg MacDonald:]

Okay, that’s helpful. Are you guys prepared to share the churn number right now?

[Vito Culmone:]

Not at this point. No. Thank you.

[Greg MacDonald:]

Okay. And have you indicated when you’re planning on disclosing more traditional metrics? I actually don’t know if you ever commented on that?

[Vito Culmone:]

Yes, we continue to obviously evolve our disclosure on wireless. We think we are – it’s important that we give obviously a fair degree of visibility from a reader perspective and analysis and financial community. For the time being, Greg, I think we’re comfortable what we’re doing and we’ll continue to evolve as we move forward.

[Greg MacDonald:]

Okay, that’s helpful. One last question guys. This is more of a broad strategic type question. You talked about in the past, well after the WIND transaction, optionality on assets sales you talked about real estate, you talked about certain cable assets perhaps that don’t fit the core Western market. And opportunities to raise I don’t know in $100 million, call it $300 million or $400 million. A, is that still under consideration? And then B, if you think about larger situations, obviously a big topic of discussion in the market rate now is whether the Ontario wireless assets within WIND are strategically important to the company to the extend there is value obviously either strategically important. How important is a wireless asset that overlays with a wireline asset to you? Is that something that strategically imperative in the future? And that doesn’t necessarily mean you sell this asset, it just could mean that you need to leverage this asset with other wireline players. How do you think about that?

[Vito Culmone:]

Okay. Greg maybe I’ll start off, there is a lot there in your question and then maybe flip it over to Jay. I mean as far as short-term assets, real estate, we’re always looking at obviously maximizing the value from a balance sheet perspective and shareholder. We really like our portfolio and what we have. And when you look at our balance sheet and you heard me, refer to some of this commentary in my script. We really like our balance sheet, committed investment grade, obviously committed to a dividend, dividend growth going forward at the right time. We don’t have any financings here for the balance of this year and as we look at our maturity here at 2017 we’ve got $400 million. So things are really, really in a nice spot for us from an overall leverage financing need perspective. Having said that, we’re always looking to optimize, but I’d say for the first part of your question, whether you are talking a real estate or items like that, I’d say its on the margin and – I wouldn’t say if there is anything material that we’re going to announce in that regarding that soon. Second part maybe over to Jay.

[Jay Mehr:]

Yes. If I heard you correctly in terms of the question about I think we all see the opportunity for the converged network in Western Canada and what that makes possible for consumers. We’re pretty excited about the opportunity that exists in Ontario to offer a differentiated Internet product. We don’t think consumers in Ontario need another $80 Internet product that our wireless products, that is exactly the same as what the big three are offering. We think there is a lots of room for single challenger fighter brand to come to the market with the unique value proposition that’s made possible by our sustainable cost advantage that Alek is bringing. So we’re excited about the value that the Ontario wireless market is going to bring to the overall asset.

[Greg MacDonald:]

So just to be clear Jay when you’re talking sustainable cost opportunity bring that to the market, I mean, I’ve spoken a lot in the past about that advantage you have in spectrum, but do you think that you need to do something with a wire, what’s call it, a cable company in Ontario to be able to mutually leverage that opportunity and maintain that that competitive advantage you have.

[Jay Mehr:]

No. We don’t think that we do. That having been said we were a company that’s open the conversations.

[Greg MacDonald:]

Right. Got it. Okay, thanks very much guys.

[Jay Mehr:]

Thanks, Greg.

[Operator:]

The next question is from Maher Yaghi of Desjardins Capital Markets. Please go ahead.

[Maher Yaghi:]

Yes, good morning. Thank you for taking my question. I would like to take another goal at your – at in the product launch. And look at it in terms of what is its expected impact on long-term ROIC. I think many people would look at the pricing strategy may be negatively, but to be fair, your CapEx is a lot less for you to offer 1 gig eventually on DOCSIS 3.1 then the typical Telco. So I would like to look at wireline products on a total ROIC basis and not just on an EBITDA margin basis. So could you look at – could you provide your view on how you’re forecasted ROIC returns that looks like right now on your wireline products, as you look for over the next five years compares to your historical ROIC patterns.

[Brad Shaw:]

Yes. Well, there is a lot there as well. I mean, I think…

[Maher Yaghi:]

I have another question after.

[Jay Mehr:]

All right.

[Brad Shaw:]

I think, you hit the nail on the head a little bit and as we make these strategic investments we really, really like our competitive advantage and what you describe. You’ve seen us up a little bit of our capital guidance here, not only do include wireless, but also to lean in a little bit as the – we’re never going to let our network advantage falloff and prepare to invest as we move forward not only for this year, but in the years ahead, clearly we see broadband and leveraging fiber deeper. So the return on investment is very, very attractive. Maher, it’s all embedded in, what are your market share assumptions, what are your growth assumptions. I’m going to stay away from any specific ranges of numbers. But clearly as we make these investments and as we launch these products, you heard Jay refer earlier to the overall ARPU sort of developments here as we move forward over the next three to four years. ROIC along with providing value and having an appropriate longer-term view is at the heart of everything that we’re measuring.

[Maher Yaghi:]

So as you look at, at this point in time, your historical strong high ROIC, you don’t see any – you don’t see risks and jeopardizing that with the new product pricing that you’re launching in the market.

[Brad Shaw:]

Yes. We – and again, it’s inherit in our assumptions around a churn and retention and UCS moving towards value plans and stickiness of customers obviously. But that is at the core of our strategic discussions and we’re confident the plans we put forth.

[Maher Yaghi:]

Okay. And the second question I had is on the wireless, I think a lot of people agree on the potential growth of that product and how it can help your business? But I think its no secret that a lot of people as well are concerned that it can consume a lot of capital to be deployed. And you mean, you talked about your 2017 CapEx guidance, which doesn’t looks like you need any external equity financing. But can you – when you look at it from a holistic point of view and you include the spectrum acquisition potentially that you need to make, you talked about earlier that you’d like to have more spectrum, et cetera. Are you, as a company when you look at it, at this point in time can fully finance this investment and be a numbers – top three type player in the market in wireless without having to endure potentially costly financings?

[Vito Culmone:]

Yes, we – 100%, I think we love our five-year plan here, as we look forward. Clearly, spectrum you refer to it there, that’s a bit of the – I call it the wildcard and what that all looks like as we move forward. And, but under a range of option to scenarios there we feel very, very comfortable that the position that we’re in and our shareholders are in as we move forward is on solid footing.

[Maher Yaghi:]

Thank you, Vito.

[Vito Culmone:]

Okay.

[Operator:]

Last question today comes from Rob Peters of Credit Suisse. Please go ahead.

[Rob Peters:]

Hi, thanks very much for taking my question. Maybe just for Nancy, we look at wireless margin sequentially we saw some improvement in the quarter. I’m just wondering if you could give any color on any of the outstanding investments, needed to grow the business and if we’re seeing a trough quarter in Q2. I was also curious if you could provide an update to where you think the margin could go overtime and what timeframe you might see that achieved.

[Nancy Phillips:]

Yes. In the margins that remain consistent with sort of our historical results. What I would say is that we – as Vito started, we are in the process of just turning up another large center in the Texas market in Plano, and feel very good about actually the capacity that we do have going into 2017. We’re well position not only on our colocation, but also in terms of our cloud and managed capabilities. We do have some augmentations going on. But what I would say is that, clearly there is, I think the margins have been very consistent. And what I would say is, I mean, there is some noise quarter-to-quarter, but overall, we’re very consistent. And I think that we feel sort of sitting in that high 30%s to 40% to 41% range is very consistent with our historical performance and I feel very strongly that will continue. Clearly, there is a longer-term view in terms of the richness of the managed services platform that that we are bringing to bear. That will have some contribution, because it is, it tends to be a more professional services based capability in the business. But I think the nice mix of infrastructure services along with our managed capability. I’m not anticipating much change in terms of our margin profile.

[Rob Peters:]

Perfect. Thank you very much. And if I could squeeze one brief one in for Vito, just on the dividend from Corus included in free cash flow. Can you just refresh us in terms of when we – when it converts from DRIP to the actual cash dividends?

[Vito Culmone:]

August 17 is when that flips over.

[Rob Peters:]

Perfect, thank you.

[Trevor English:]

Yes, maybe I’ll just add Robert. I think it’s important over the long-term when you look at payout ratios and things that, that’s why we’re including the dividend in the calculation. It is roughly $80 million and, yes, we’re not receiving the cash today under the agreement, we do have the ability to monetize those DRIP dividends we’re receiving that’s not our current plan. But we think, it’s important that investors in the street understand that, that is an $80 million a year cash flow that we have the ability to get today, if we wanted to sell those shares that not to say that we’re going to and then in a years time on a long-term basis that we have that ability to go off the DRIP in August 31.

[Vito Culmone:]

Yes, great additional color, Trevor. Thank you.

[Rob Peters:]

Perfect, thank you very much.

[Operator:]

This concludes today’s conference call. You may now disconnect your lines.

[Nancy Phillips:]

Thank you.

[Brad Shaw:]

Thank you, operator. Thanks everyone.