Shaw Communications Inc.
Q1 2015 Earnings Call Transcript
Published:
- Operator:
- Thank you for standing by. Welcome to the Shaw Communications Fiscal 2015 First Quarter Conference Call. Today’s call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [Operator Instructions] And the conference is being recorded. [Operator Instructions] Please also note that an investor’s slide presentation in relation to the conference call is being displayed on the webcast. It is also posted in the Investor Relations section of the Shaw website under Presentations and Meetings and Press Releases. [Operator Instructions] Before we begin, management would like to remind listeners that comments made during today’s call will include forward-looking information, and there are risks that actual results could differ materially. Please refer to the Company’s publicly filed documents for more details on assumptions and risks. Mr. Shaw, I will now turn the call over to you.
- Brad Shaw:
- Thank you operator and thanks to everyone for joining us today to discuss our first quarter fiscal 2015 results. With me today are members of our senior management team, including Peter Bissonnette, President; Jay Mehr, Executive Vice President and Chief Operating Officer; Barb Williams, Executive Vice President and President, Shaw Media; Nancy Phillips, co-founder, President and CEO of ViaWest; Rhonda Bashnick, Senior Vice President of Finance and Trevor English, Senior Vice President, Corporate Development and Capital Markets. Earlier today we held our Annual General Meeting and released our Q1 financial and operating results. Our disciplined management and unrelenting focus on our operations continue to deliver strong financial results. We are off to a solid start in fiscal 2015 with positive momentum across our businesses as reflected in our strong subscriber metrics in residential cable and Internet. In Q1 we delivered consolidated revenue growth of 2% and free cash flow of 193 million. RGU losses of approximately 20,000 improved by more than 42% in total and by over 9% excluding satellite losses of approximately 18,000 compared to the same time last year. We are on track to achieve our fiscal 2015 guidance, including annual free cash flow of more than $650 million and remain confident on our underlying strategy and business outlook. Accordingly I am pleased to announce that today our board approved an 8% dividend increase to $1.185 per share, which will become affective at the end of March. This increase is consistent with our previously stated targeted annual dividend growth of 5% to 10% for F15 and a testament to the strength of our operational capacity to grow free cash flow. This increase also marks the 11th consecutive annual increase of 5% or more, continuing our strong track record of returning capital to shareholders. Over the past five years alone, we have returned more than $2 billion to our shareholders. Q1 also marks the first quarter under our new subscriber focused organizational structure. Our cable and satellite businesses segments were strategically realigned to better serve and grow the customer basis. This new organization structure is part of our focus to deliver a multiyear program to enhance the efficiency, productivity and improve customer service capabilities across our organization. During the quarter we also welcome the ViaWest management team and employees to Shaw with the completion of the acquisition in early September. We look forward to capitalizing on synergies and growing the datacenter platform operations in the North American market through a newly created business infrastructure services segment, which will include both ViaWest and our Canadian datacenter initiatives. We remain committed to providing our subscribers with greater choice and flexibility over what they watch, how they watch and when they watch their favorite content. In addition to our existing 13 TV Everywhere apps, we launched Shomi in November through a joint venture with Rogers. We continue to scale our WiFi network and now have over 55,000 access points and over 1.5 million active registered devices on our network. Our customers continue to value -- our customers continue to find value in this product which has now achieved 30% penetration of our Internet base, while maintaining 35% lower churn levels across the much wider user base. We just returned from the CES last week and it’s clearer than even that technology is putting customers firmly in control their experiences, and we couldn’t be more excited and we are not standing still, We are making the fundamental changes necessary for our Company to focus on opportunities that this new environment provides. We are taking strategic steps to transform and diversify our business mix and we are allocating resources to provide the greatest long-term benefit to shareholders and customers. We are doing all these things while respecting our roots as a pioneering cable company, where we care about every customer, viewer and employee. Thanks to everyone for joining us today, and we would like to open the phones to answer any questions, operator.
- Operator:
- We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Jeff Fan of Scotia Bank. Please go ahead.
- Jeff Fan:
- I’ll start with the question regarding your confidence in the rest of the year, because when we look at your guidance on EBITDA growth for the full year in the range of about 5% to 7%, that kind of implies that we’re going to see an acceleration from where you are in the first quarter through the year. So maybe can you talk a little bit about where some of those key drivers are and your level of confidence in getting through some of those drivers and achieving that full year full number?
- Jay Mehr:
- Jeff, its Jay. Maybe I’ll take that one first and talk you through it a little bit. We have great confidence in our guidance and have of course reaffirmed it. We certainly attempted to signal a much lighter Q1, because that’s what we saw in our internal numbers and we’re really right on top of our internal numbers in terms of results that you see today. So we obviously didn’t do -- to be transparent I hear your question. You’re not able to necessarily work your way backwards -- work your way forwards. Let me you through it a little bit. I think it’s clear and you’ve now publically seen the impact of our rate adjustments, which we delayed from September to January and obviously that created financial result in the quarter that we’ve delivered. We are quite comfortable with the choice that we made and still think it’s the right choice to be made. So that rate adjustment is in the consumer business, both on cable and satellite as we talked about, and I think we gave you a net number after sort of an adjustment across the entire consumer base including satellite of just over $3. That might even be a little bit light. Our business rate adjustments were also on January 1st, not as big a number, because the base wasn’t as big but still very much significant. The ViaWest number, because of -- and Nancy can give more detail if you want, because of the way the build has come on and the ramping up of the new markets, the ViaWest number growth fairly dramatically within in the year, which was always the plan, and again is right on the top of the number. The one number that we’re really not happy within the quarterly results today, and we can talk about that a little bit later if you want, is the business number but we do get that back on track into double digit EBITDA growth rates as you move into quarter three and quarter four. And then a reminder to everybody. The focus to deliver is a three year transformational effort that we’re one year in, and I won’t say that it’s early days, because I think we’re about a third of the way through our initiatives. There is a number of those initiatives that result in material cost savings in the second half of the year. So those are the ways to get there, and again just to reiterate, the numbers you see today were right on top of our internal numbers and our internal plan.
- Brad Shaw:
- Just little bit to add to that, we’re very comfortable with our strategy and what we’re doing and we don’t really see really this quarter as anything to take us off that and we’re still very comfortable with the initiatives we have going on at a high level.
- Jeff Fan:
- Great, and just maybe to follow up Jay, on the business number, can you just flush out a little bit on what areas you thought were a little bit weak and then why this is going to I guess improve back to the 10% growth rate and then a follow on for Nancy on ViaWest. My understanding is this business can have longer sales cycles. So I guess the confidence to rest of the year would suggest that a lot of these contracts are not only signed, but are pretty much ready to be deployed or already being deployed in your business. So wondering if that’s the right way to look at that?
- Jay Mehr:
- Why don’t we reverse the order and let ViaWest go first.
- Nancy Phillips:
- Yes, certainly. I think what our legacy markets -- clearly we’re seeing continued growth and certainly meeting our expectations on those fronts. I’ll remind everybody, we opened two new locations in calendar year 2014, one being Phoenix in the first quarter, and Minneapolis in the second. And those are sort of ramping markets for us. So number one, a little bit of ramp costs related to bringing those online, and as we scale; and then just timing issues in terms of some of those new contracts, but overall the pipeline is very good. We’re pleased with the progression. We’re really looking more at timing based issues and that’s the nature of our business a little bit, as we continue to progress through the next couple of quarters, but feel good about top line and bottom line expectations for the year.
- Jay Mehr:
- Great and then Jeff picking up on the business result, I think it’s fair to say that nobody is happy with this business result. For context, as we talked about on last call, our cable business, which is the bulk of what is now being reported in business network services has grown at 20% each of the last two years and we broke that down for you on the last call, that with acquisitions two years ago, that was 15% organic and 5% through acquisitions, and last year 12% organic and 8% through acquisitions. Obviously 5% EBITDA growth isn’t an acceptable result and is headed in the wrong direction. Focus to deliver for us is not just words. It’s how we’re committed to managing the assets of the business and we’re committed to managing those assets with a maturing revenue growth profile just like that and we’re committed to managing our growth assets as a growth asset, and Shaw Business Network Services is clearly a growth asset. So on the focus side and on the delivery side, we’ve done a tremendous amount of work. A couple of months ago we did a deep strategic start, began a deep strategic dive on our business strategy, because clearly we are all around it. We did not have the crispness in our business strategy that we currently have in consumer. That work is now almost complete and I think we have every confidence that our new simplified and [indiscernible] strategy will probably yield results. Second part of it is delivery, and speaking plainly, these results are a leadership change result, and we made a leadership change in the Shaw business, business unit last week. We are pleased to announce that Ron Mckenzie has taken over Shaw Business. Ron is a seasoned executive with a terrific track record, both at Shaw and in the B2B space, and I’m confident under Ron’s leadership we’re going to be able to deliver the results that we all know this opportunity provides.
- Operator:
- The next question comes from Vince Valentini of TD Securities. Please go ahead.
- Vince Valentini:
- A couple of questions on rate increases. Can you talk about any reaction you may have seen to the rate increases in January, and maybe just to clarify your $3 comment, Jay, that’s averaging over all RGUs in consumer cable and satellite I believe, but you are much more targeted I think. I don’t think there were any cable segment video or phone rate increases. Maybe you can confirm that.
- Jay Mehr:
- Yes, thanks Vince. In terms of the business, our business is responding well to the changes in rates, and certainly our subscriber story in Q2 continues to be strong and our call center activity looks good and churn continues to be directionally in the right direction. For sure this garnered some discussion online and in other forums but we’re quite confident in the value equation that we bring to our customer base. And so if you think about satellite, think about $3 to $4 increase more on the low end of that for our satellite base, and I included that when I was talking about the net average in the consumer business when we talked on the last call. And remember we’ve talked to about sort of low 80’s percent pull through when you adjust for customers who have lots of choicer packaging and also the promotional impact of customers who are on promotions and then the rate increase doesn’t happen till after that. On the traditional cable side of the house, we had primarily internet increases that affected about two thirds of our internet base and then we had some small bundled instances on TV and phone, not on the individual products but on the buy-throughs on the bundle and our sense is we’re going to net that slightly higher than the $3, when all this comes through again.
- Vince Valentini:
- And second question on rate increases. Would you at this point be contemplating going back to the September 1st schedule for rate increases this year so that in Q1 of ’16 you’ll have a bit of double rate increase effect.
- Jay Mehr:
- Yes, I think we’re looking at all of our options. Clearly we wanted to take some extra time and do a sort of 16 month cycle this go-around. I think we’re still weighing our options on what that means for fiscal ’16.
- Vince Valentini:
- Okay, and last one. The equity loss on the joint venture, can you just clarify what that is? Would that be Shomi?
- Barb Williams:
- Yes Vince that’s Shomi.
- Vince Valentini:
- And is that a one-time thing or should we see more of that as the year goes on?
- Barb Williams:
- Well, it will be a continuation of a pick up every quarter and whatever the results will be, we’ll be picking up our share through that line.
- Vince Valentini:
- But did you expect that it was -- it was pretty frontend loaded with the initial launch cost or is that a pretty good run rate?
- Barb Williams:
- There was definitely some frontend load in there for launch cost in that, but I think it's early to start predicting what the number is going to be.
- Operator:
- The next question comes from Glen Campbell of Bank of America Merrill Lynch. Please go ahead.
- Glen Campbell:
- I just wanted to dig into our operating expenses a little bit for media first and then on the core cable business. They are little higher than we were expecting and I’m wondering on the media side is that all front end cost or was there anything unusual in the quarter and then the same question on cable as well?
- Nancy Phillips:
- On the media side, yes, primarily that is content cost. First quarter is when all the new American content comes in and the way those first quarter costs roll out is basically dependent to great degree on where the cancellations come in and go from the American network side. We had a strong cost schedule with no cancellations, which is the good news. It comes within a little bit higher cost. The underlying operating costs actually are very well contained and actually are well in hand. So it's a content timing issue for the most part.
- Jay Mehr:
- And then on the consumer side we’ve typically lined up our annual increases in September because it coincided with revenue, and so this probably hasn’t been as visible before. For sure we have our merit increase, which happens in September. The largest network rate increases happen in September and there was some additional rate increases on some mandatory carriage services that came out of CRTC proceeding that impacted us in September. Really the only other rate increases that we have on network fees is we do have a smaller one that hits us January 1st, but the largest single increase in September. And so I think you’ve just seen the line-up along with all of the additional activity that comes with back-to-school, the quarter [indiscernible], and when you look at the four quarters of the year and so I think that’s why you see some expenses.
- Glen Campbell:
- And just to clarify, it sounds like in both those answers, there’s nothing really of a one-time nature in there. Would that be fair?
- Jay Mehr:
- We think that’s fair. Yes.
- Operator:
- The next question comes from Phillip Huang of Barclays Capital. Please go ahead.
- Phillip Huang:
- One question on the energy sector. Obviously we're seeing some pretty volatile times there. I was wondering what’s your visibility to potential impact your business if any at all as a result of the falling energy price, and obviously the Western Canadian economy. I’d imagine that the residential business should be pretty resilient, but wondering if you have any early thoughts of potential impact on the enterprise or SMB side of the business, whether you have any exposure at all?
- Brad Shaw:
- It is -- we’re all living this real time aren’t we, as the way things go and we’ll see that impact. But you're right, on the consumer side there tends to be somewhat more resiliency on these downturns. That being said there is certainly more choices out these days. So there is that thing you have to take into consideration. And on the B2B, as Jay says, we’re very comfortable with the opportunity where it's going. That’s new leadership in there. We think there is -- it's about value and we think we bring a lot of value in that space. I think it's even more so in a tighter economy. So I think that’s an opportunity for us. And then back to the consumer side, I think when you look at Wi-Fi and the value proposition, it will even resonate even more. And so we’re -- that being said, from a macro point of view there is certainly going to be impact that we have to be aware of, but we’re -- we certainly feel that we have things in a reasonably good spot to continue to grow and have those opportunities.
- Phillip Huang:
- Sorry, do you have any -- are you able to -- I know it's very early days, yet it’s happened so rapidly. I was wondering if you guys might be able to tell us what percentage of your customer says for example are exposed to that sector, or is that even sort of a relevant analysis from your perspective?
- Brad Shaw:
- If you look at the direct impact in this sector in the B2B space, it's not a crazy big number. The RGU number is significantly Northern Alberta, and so I think you will see some fluctuation in the RGU number. Those are deals that have been negotiated with best-in-class supply chain organizations. So they are at a relatively low monthly rate in our relatively low margin. And so I don’t think you're going to see a significant financial impact, and we’re not really in the enterprise space in a big way in oil and gas. So there’s not much of a direct impact there. If it's helpful, [indiscernible] put out a piece that suggested about 35% of our consumer and business revenue came from Alberta, and it was just about bang on, and a reminder to folks that British Columbia is our largest market, and represents a percentage of our revenue that starts with a four.
- Phillip Huang:
- That’s very helpful. And do you expect the timing of any impact to be relatively, maybe a few quarters out or do you think we would -- might actually see it relatively short term?
- Brad Shaw:
- We’re certainly seeing indication that we’ll see -- again it’s not going to move enterprise number. We’ll some impact in Northern Alberta and Fort McMurray and surrounding communities in the relative short term. I think the other stuff, it’s prettier, the impact and it’s certainly well -- the story has been well reported. And I don’t know that we have much more color to add to the story than what you’ve seen, what’s happened.
- Phillip Huang:
- Right. Got it. And then just a quick follow up on ViaWest. I know you guys have talked for some time about ViaWest customers demanding a little bit more presence -- created presence in the U.S East Coast. Can you maybe talk a bit about, as you look for opportunity to expand on -- towards that on the ViaWest platform, what are some of the criteria that you will be using in assessing those opportunities and whether you feel that evaluation expectations from near potential salaries are relatively reasonable in your view?
- Nancy Phillips:
- Yes, this is Nancy. As we’ve said early on, and I think as we, Shaw and ViaWest came together here in September, we are seeing certainly customer demand. Our existing customers are obviously -- like the product that they’re receiving in sort of the Western side of the country, where we have obviously deployments and certainly asking us, hey, when is ViaWest going to be in East. And so it’s certainly been top of mind pre-Shaw and remains a solid focus on a strategic level for us. Clearly we’re analyzing one of the right markets. So as we look from an organic or potentially through acquisition, the opportunity for geographic expansion, we look at both sides of the puzzle and have done a lot of work to evaluate where we think that might make sense. And then certainly, as you know, there is continued consolidation in the industry, but we’re always very mindful and disciplined around what’s the right criteria. Clearly ViaWest is appealing to a pretty broad set of enterprise customers, mid-sized businesses who are looking for both a combination of not only good data centers, quality operational integrity and rigor, but also looking for that optionality. ViaWest remains one of the companies in the country that not only has obviously seen great opportunity around the days and a segment but also an interest in our hybrid or managed and cloud base services. So we look for that mix. Yes, it’s had really good foundational pieces, which come in the form of the data center, but yes, it’s very important for us and we stay focused on it.
- Operator:
- The next question comes from Drew McReynolds of RBC. Please go ahead.
- Drew McReynolds:
- Three from me, just first for, perhaps you Brad. Just a big picture one. Just on the Shaw Media side, you did talk recently about going down to the show and thing, obviously all the new technology and obviously you guys are a big technology player, and moving all of that forward, lots, of change out there. When you acquired Shaw Media, arguably a little bit of a different landscape. You’ve done with that acquisition from a free cash flow perspective. I’m just wondering if you could just help us understand how the strategic importance of that asset is evolving as we get into that new world of OTT, or however you want to characterize it.
- Brad Shaw:
- Well, a couple of things to start. First of all, we love the media business. We look at it, what it generates from a free cash flow point of view, from a margin point of view, which are industry leaders. And so strictly from a business point of view, yes, there’s some macro trends we have to be aware of, and certainly having an impact on the business. But you have to manage them as well as you can. I think you’re right. From five years ago or four years ago from where it is now, things have changed quite a bit and content is becoming more and more important. Owning of the content is key. I think we’re on top of -- in regards to media, real change from a regulatory point of view on let’s talk TV, and what is really the impact of that. I think as we look at the media business, we realize things will be changing. The whole environment is changing and we want to make sure we looked at things in -- as we see things to invest in, an opportunity where it make sense. We want to do that. But we really want to see what the rules are going be to and what the playing field is going to be, but the marketing power we get, the TV everywhere strategy has worked so well. Those things I think we wouldn’t be able to do, and we love the brands, and we love what we’re able to do and we think there’s still opportunity to recreate things, and like any business,, you have to re-skin and re-have a look, and that’s what we’re doing and constantly doing that, and there is -- things aren’t is easy as shown. But I think we know that the content is still very important to us, and it’s just a matter of how we continue to make sure we can have it grow and mange it well.
- Drew McReynolds:
- Okay I appreciate those comments. And then just my second and third question, first on the satellite subscriber losses, just wondering if you can give us, not necessarily a specific breakdown but just some color on those losses, due to cord cutting versus competition? And then maybe Barb for you, just on Shomi, is there anything you can update us with in terms of traction, success, things that maybe are performing above or below expectations?
- Jay Mehr:
- Sure. We can start with satellite and then we’ll pass it to Barb. Reminding everyone of the seasonality of satellite, with Q1 being the weakest and I think you’ve seen the comparable number last year on the consumer side at 11. The Q2 and Q4 are the stronger numbers, and we’re certainly seeing normal seasonality, and we’ll see a better result in Q2, just because of it’s a better time of the year for us in the satellite business. Maybe I’ll insert a comment on 30 day disconnects in a minute, just to qualify that, so that we understand where we’re talking about it. We have not seen an increase in cord cutting across any of our businesses. We’re seeing kind of steady state in the video business and it certainly impacts the cable market much more significantly than the satellite market because of the real nature of our satellite business. Just before I pass it to Barb, as we’re sort of talking about subscriber numbers, we’d just like to remind everybody of the 30 day disconnect change and that in November the CRTC did their first part of their Talk TV and eliminated the 30 day notice period. We are actually implementing that tomorrow January 15th. So we don’t have exact numbers to provide for you but we currently -- and we have had 30 day disconnect notices across all of our lines of businesses. So that will be a significant negative RGU in Q2. So we’re headed into that change. We’re quite happy with where we are. Our sense is that negative RGU change is likely in the 20,000 to 35,000 RGU level. We’ll be able to release to you our November 30th pending RGU disconnects at our February 28. So we’ll know by the time, the next time we talk and people will be able to with certainty do that math. I wish I could give you more precision, but because this is the way we’ve done business and the way the industry has done business, we just really aren’t able to provide completely how much of it is customer choice and how much is 30 day, and what the behavior of the consumer will be in this new environment. So just wanted to put that caveat in, and then I’ll pass it over to Barb.
- Barb Williams:
- Sure thanks Jay. I would say overall we’re quite pleased actually with the way Shomi has rolled out. It’s only been a product out there for a little over a couple of months, and it’s been well received and well picked up to-date. It’s been interesting to see how much enthusiasm there has been for using the products through the set top box, and as predicted, we are seeing the TV product that we have been able to provide being really well used. All of that said, it’s a product that’s still in beta. So it’s very early stages for us. Still we’re -- as I say early signs of positive, but we have lots of interesting work to do with the product going forward.
- Operator:
- Your next question is from Tim Casey of BMO. Please go ahead.
- Tim Casey:
- Brad, could you just update us on how you’re approaching payout ratios? Because if we don’t adjust free cash flow for the accelerated capital fund, the payout ratios on free cash are quite high. So I guess, do you just ignore that and are you confident that beyond 2015 there will be a significant drop in the absolute level of capital spend or do you anticipate there will be more projects that you’ll have to bring online, and just wondering how we should think about payout ratios going forward?
- Brad Shaw:
- Well, a couple of things, and maybe the guys will want to add a bit. As we look at it in -- we look at the track record and how we’ve been able to manage the business over the years, how we’ve been able to strategically invest where it’s required, that makes sense, into high yielding businesses, and returning capital to shareholders and as we see forward, and as we see -- everything we’ve been able to do this year really gives us some comfort going forward that we can manage free cash flow, that the profile of this Company, free cash flow growth is exciting. And when you look at it from a CapEx point of view, and I think we give some guidance last call on a cable, core $750 million CapEx, very comfortable with that and I know the guys might have a little number with some of the other things added in there on a year-over-year basis. But we look at the business and we want to manage the business as well as we can and we think there’s plenty of opportunities we have, and we’ll continue to capitalize that, such as focus to deliver, and such as our WiFi strategy and our focus around broadband and the growth of Shaw business in ViaWest tied together is exciting. So I can’t say that I have a target in mind. I think 80% seems to make sense as you look going forward for us, but Tim, I can’t say it should be 75%-70%. That, we just really manage the business very well, and really see the opportunities as we go forward to make those decisions.
- Trevor English:
- Maybe I’ll just add, Tim. It’s Trevor. When you look at the dividend increase this year, that’s – about $530 million is the dividend obligation, and if you look at sort of our free cash flow guidance of $650 million, that’s sort of our 80% payout ratio for this year and this of course is the last year for ACF. So if you want to -- however you want to treat ACF in your payout ratios, we’d hope that when you look forward you could see that we’ve got that additional flexibility in our free cash flow profile for -- to fund the dividend and dividend growth, and of course that doesn’t contemplate any of the numbers around the actual cash savings that’s in place related to the drip that we still have, roughly do a 25% to 30% dividend, a participation rate. And in terms of long-term CapEx, like Brad said, I think we gave guidance last quarter again on the $750 million in the long-term. It’s a little -- with the new reporting structures now, it’s a little bit different but we still feel comfortable in sort of those figures in terms of the overall Canadian CapEx within the business of being roughly $850 million over the long-term.
- Brad Shaw:
- And just backing up Trevor’s math, so we said core cable CapEx, think about it around $750 million, accelerated capital fund we sold to nonstrategic assets in order to make some investments. We make the argument that those investments have worked and they’d given us a differentiated internet product, but the segmentation, it’s kind of hard to break capital between consumer and business, because the fiber node is -- you end up with a bunch of allocations. So take that $750 million run rate and add a $100 million to that for the combination of satellite and media capital, and think about ongoing capital run rate of around $850 million Canada, and that would include all elements of our business in Canada, including any datacenter investment in Canada. So really the only thing excluded from that sort of general way of thinking about the business is capital on the ViaWest side in the U.S.
- Tim Casey:
- Which is running somewhere around 85% in Canadian dollars?
- Brad Shaw:
- That’s correct. I think we’re still comfortable with that and it’s a little light this quarter, just from a timing perspective again.
- Operator:
- The next question is from Dvai Ghose of Canaccord Genuity. Please go ahead.
- Dvai Ghose:
- In the past one of my concerns was that your accelerated CapEx may have to be extended beyond this fiscal year because of a need to do an IPTV overlay, in order to defend your cable customer base; but despite the lack of it, IPTV overlay, your cable subscriber losses have really moderated. So you have in the past talked about a goal of an IPTV overlay. Companies like Rogers still do and they’ve extended their timetable again and again. Do you still see that need, given the fact your cable asset seems to be performing a lot better at least in terms of defense of basic subs?
- Jay Mehr:
- It’s Jay. I just have a couple of comments on that. We are quite confident that within that CAD850 million number, that there’s lots of flexibility for us to make the choices that we need to make, and so we certainly don’t see any step change investments in the business that we’re in Canada and we think we can move forward on that basis. We continue to do a tremendous amount of work around next generation video. I think you’ve seen us -- you’ll see us proceed in a way not too similar to how the industry is proceeding. We’re continue to deploy hybrid IP cable set tops, focusing on the IP user interface first, and transitioning multiyear over time. So I don’t think there’s any question that over the course of the next five to 10 years, there will be a significant movement of the base towards next generation video, but it’s going to come and we think it’s going to come just as the other members of cable apps think, in a measured way, hybrid approach and nothing scary in the transition.
- Dvai Ghose:
- That’s cool. Do you see any need to outsource to people TiVo in the interim as your peers at Cogeco have?
- Jay Mehr:
- For sure we’re going to need partners. The days of being able to do things all on your own aren’t there. We understand -- we think Cogeco has made an interesting choice and it’s a good choice. We’re not -- I don’t think we’re in a position at this point to release the group of partners. It’s a not a single partner and it’s not TiVo.
- Dvai Ghose:
- Fair enough. No, that sounds good. Secondly in terms of telephony, I guess for the first time since you rolled out in 2005, you saw, albeit a modest, but nonetheless a contraction in the base in the quarter. I assume that this is wireless substitution, and if it is, I’m wondering if it makes you rethink MVNOs or some sort of relationship with a new entrant in Canada?
- Jay Mehr:
- It is substitution for us sure, and I think its a little bit strategy too, Dvai. Brad is leading us into becoming a network and content experience company, and we have over the years pushed really hard, trying to sell home phone to university students and thinks like that, and I’m not sure that’s -- I don’t know that we want to spend a lot of time there. Philosophically where we sit today is we want to our customers to take services from us that they see great value in, and we want them to take more of it. And so if you are an internet customer, and you just want internet from Shaw, we’re going to -- we want you to buy as much internet as possible. We think we’ve got some great pricing models in WiFi to do that. If you want to take internet and video from Shaw, we would love to do business with you and find the right level of service. If you’re a triple play customer -- and we’ve got a very loyal triple play base that still values phone, and what’s neat about the segmentation of our home base is the portion of the base that values phone, they actually really value home phone. So I think it’s a change in sales philosophy, that we’re really not trying to value add phone at almost no cost in the bundles, to give it to a segment of the market that it doesn’t appeal to.
- Dvai Ghose:
- That makes sense. And then the last one, sort of an early financial one. Working cap is seasonal obviously in Q1, normally has a negative swing for you, but there was a $174 million negative swing in this quarter, which is pretty big. Is there any reason for that and could we expect that to be reversed during the course of the year?
- Trevor English:
- Dvai, its Trevor. We’ll take that one offline and maybe get back to you, if it’s all right?
- Dvai Ghose:
- Yes. That’s fine.
- Operator:
- The next question comes from Greg MacDonald of Macquarie Securities. Please go ahead.
- Greg MacDonald:
- I wanted to ask actually more of a strategic question. So I’m thinking about the change in subscriber viewing habits, and in doing so I’m recently wondering if cables codes and especially cable codes like Shaw, that have a differentiated broadband product, I wonder if these companies are willing to allow or think about lower ARPU in cable, if in fact the quid pro quo is a proportionately higher ARPU in broadband. So I guess what I’m asking is, based on the mix of the rate increases that you just put through, is there some permanency to that strategy, or was that just kind of a one-time thing for competitive reasons? And then a second part of that question would be, even after this rate increase on broadband, do you think you still have the pricing power relative to your competitor, that you can still increase rates based on the fact that you’ve got this WiFi related product?
- Jay Mehr:
- I think when you think about ARPUs, we’ve seen this over a number of years with video, ARPU dropping and internet ARPU increasing and we’ve really embraced a much greater level of customer choice. If you look at our $40 personal TV package and what we’re done with the small theme packs, we’re been in market what; three years already. You’ve seen customers take less and less video from us over that period of time, and really find the way. And we’ll see -- it’s premature to think about where Talk TV is going to take us. We think there is somewhat less exposure in the competitive markets in Canada because we’ve kind of already been through some of that readjustments where customers have gone off the traditional tiers, where they had to take unrelated services and transition into these lighter packages. And so that’s happening in the business already. On the question of value on our internet services, we think our internet services offer terrific value. It hasn’t been widely reported, but we did launch on January 6 an internet 5 Meg [ph] product that’s actually the lower price point than our previous internet service and is at certainly the lowest price point in the marketplace. We think that’s terrific for our product. It’s got 60 gigs [ph] in data, it includes a WiFi device, and so we think we’re very competitive in the market. If you walk through our prices, we’ve always been act a very small premium to our competitor, but we think we get there in terms of value. So I think its premature having just been through this current to think about what might happen next, but we think we’re very well positioned competitively in the internet space.
- Greg MacDonald:
- Okay, thanks Jay. And then just a quick follow-on on that. In terms of ability to offer more, if the market all the sudden went aggressively, much more aggressively towards online video, what’s the potential for the Company right now? You can talk technologies like the ability to bond more channels together, what not. What’s the potential for the Company right now to make a significant uptick, 100 meg [ph] products, stuff like that?
- Jay Mehr:
- Yes, our network is in good shape. We’ve got a three year technology and product road map that advantages all the levers in terms of capacity and customer growth and our ability to adjust. So we have greater flexibility than we have ever had. That having been said, one of the things that we’ve learned about internet speed is, you don’t want to get there ahead of the customer. A couple of years ago we were giving away 50 Meg [ph] internet services to all new customers, a new segment in the marketplace for customers that value the additional speed and value the additional usage and all of that, not only drive speed, but there’s a pretty linear relationship between speed and data usage and network capacity. So we like where we are today with sort of $10 increments for the various speed components. We think it finds a right balance of terrific customer value and segmenting the marketplace. There’s no real network driver to prevent us from making changes in the short-term, in the medium-term, though I don’t know that it make sense to get ahead of your customers and drive speed changes beyond that.
- Greg MacDonald:
- And just finally, thanks for that by the way. Finally, could you give us an update on the percentage of your broadband customers that actually use the WiFi infrastructure? And is there any way to measure the value the customer puts on WiFi as an addition to their home broadband? Is there like customer satisfaction stuff that you can quote or something like that?
- Jay Mehr:
- Yes. So 30% of our base uses WiFi, and because you only have to authenticate once, that’s an extremely active base. The likelihood to recommend of our Shaw Go WiFi is deep into the 80s likelihood to recommend to the friends and family, which is really the money question for us. Interestingly enough, for the customers who use Shaw Go WiFi, it’s actually driven the likelihood to recommend of Shaw’s Internet overall into the high 80s, which is the score we haven’t come close to seeing in the past. We’re also seeing a nice increase in likelihood to switch from our competitors because of WiFi. So there’s lots of good directional things in the marketplace. I don’t know if Brad wants to add.
- Brad Shaw:
- Only for an example. We did a little test. Community WiFi is our municipal deals where the WiFi is open to all, anyone that lives or comes into the network. And so we did a little test over about a month when we opened up all the WiFi, not only the community WiFi, but everything else. And year-over-year we saw over a 50% increase in net subscriptions with the same -- basically the same offer. So we’re playing around those things, we’re just seeing what works and what opportunities, but we get pretty excited at what we could do and the potential of it.
- Operator:
- The next question-- sorry go ahead.
- Rhonda Bashnick:
- I was going to say, we just wanted to go back to Dvai’s question and just close that off. It’s Rhonda. So just on the change in the working capital, so that was really just primarily related to the final some tax instalment payment for year-end.
- Brad Shaw:
- Yes, which occurred on October 31st.
- Rhonda Bashnick:
- Yes. And you’ll see that -- sort of every year that happens.
- Operator:
- The next question comes from Maher Yaghi of Desjardins. Please go ahead.
- Maher Yaghi:
- I have three quick questions that I want to ask you. First one is, can you just talk about the business drivers that drove you to delay a price increases that you made this year, to take them to 16 months? Maybe you can tell us what you were waiting to see in the marketplace that drove you to extend the price increases timeline? Second question is, can you quantify the impact of to move to a six month promo cycle from three months, or if you can’t put a number -- if you don’t want to put a number on it, maybe can you talk about how much of the expansion has passed through the cost structure on the consumer side so far? And third of all, thirdly since you launched Shomi, can you talk a little bit about is there -- if you saw any kind of resistance or move by customers to downgrade their TV packages to opt to take Shomi in your consumer space?
- Jay Mehr:
- We can start in terms of few of the business drivers. Pricing and packaging is one of the most important decisions that a business makes, and certainly in a business like ours, it’s something we take very seriously, do a tremendous amount of analysis and segmentation, and have a look at where we are relatively in the marketplace. When we were looking at the through additional September base and it came time and with back office systems and other things, you need to make this call a little bit in advance. We weren’t totally sure that it was the right move. We took a step back. We did some additional research and the marketplace settled down a bit and the results of a competitive rate increase that was announced from our primary competitor in October would certainly -- also on the Internet and therefore instructive [ph] that the marketplace might hold. So I think those are a sense of the timing and discussion, but they are complicated decisions. In terms of the promo cycle and it's hard to quantify that, I think we’re quite comfortable with where we are from a promotional point of view. We’re not driving rich promotions in the marketplace and we don’t think you’ll see -- I think you’ll see some nice stability from us on the promo side. I’ll pass to Barb on the Shomi question.
- Barb Williams:
- Sure. I think one of the interesting things about some of these types of services is that they seem to lead more to stacking than they do to cutting and certainly our early with Shomi in this beta phase has been that customers seem to be liking the added opportunity of Shomi as opposed to seeing it as an opportunity to cut or decrease the video package.
- Maher Yaghi:
- Okay, and just to go back on the promo cycle. Can you maybe just tell us if most of the impact of the promo and extension to six months has gone and passed through on the cost structure, or we should expect some additional cost to be incurred in the second quarter?
- Jay Mehr:
- It’s pretty much pass through now. So it really was impacted in August of the prior year. So you’re really just seeing it now. This is the final course coming through
- Brad Shaw:
- Okay thank you operator. Thanks everyone.
- Operator:
- Thank you Mr. Shaw. This concludes today’s conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
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