Shaw Communications Inc.
Q4 2015 Earnings Call Transcript

Published: 23 Oct 2015

[Operator:]

Thank you for standing by. Welcome to Shaw Communications' Fourth Quarter and Fiscal 2015 Yearend Conference Call. Today’s call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. At this time, all participants are in a listen-only mode and the conference is being recorded. Following the presentation, there will be 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 will now turn the call over to you.

[Bradley Shaw:]

Thank you, operator, and thanks to everyone for joining us today to discuss our fourth quarter and fiscal 2015 yearend results. With me today are members of our senior management team, including Jay Mehr, Executive Vice President and Chief Operating Officer; Vito Culmone, Executive Vice President and Chief Financial Officer; Barb Williams, Executive Vice President and President, Shaw Media; and Nancy Phillips, Co-Founder and CEO of ViaWest. Our annual and quarterly operating results represent the continuation of our strategic and financial focus and for the year, we delivered consolidated EBITDA growth of over 5% and free cash flow of CAD653 million, meeting our 2015 guidance targets. Vito will discuss our financial results in more details in a moment after I touch on some of the key developments during the quarter. In Q4, our consolidated business delivered over 6% revenue and 9% EBITDA growth. However, subscriber losses of 74,000 accelerated due to aggressive competitive activity, the impact of the economic downturn in Alberta and the continued phone losses as we maintained our focus on high value customers and long term profitable bundling strategies. Despite the increase in subscriber losses, our Consumer Division delivered 3% EBITDA growth in Q4 and maintained a healthy 46% margin. Business Network Services launched a number of new products during the quarter including SmartVoice. This new phone product provides a unified communication solution to small business to enhance productivity by allowing employees to collaborate seamlessly across their traditional business, desktop phone, mobile devices and computers in or outside of the office. We also launched Managed Hotel Wi-Fi, which provides a cloud-based Wi-Fi product that is fully managed solution for the hospitality market. Early results from these launches are positive and represent significant progress relating to the strategic initiatives and direction we are taking following the realignment of our Business Network divisional earlier this year. Business Infrastructure Services continues to meet our expectations and the fundamentals of the data center business remains strong. We are experiencing increasing customer demand which is a positive indicator of revenue performance as we move into F16. Over the long term, we continue to believe that revenue and EBITDA growth will be in the low to mid double digits. During the quarter, we announced opening up two new facilities including the Hillsboro, Oregon flagship facility with over 50,000 square feet of space and the Calgary facility, which is opening this fall. Our Calgary data center is the state of the art facility and represents the first Canadian offering developed through our partnership with ViaWest. The launch of this new data center will allow Shaw business to help organizations meet their expanding ITs by providing a fully configurable hybrid solution backed by a 16 year track record with ViaWest. As we move into fiscal 2016, we remain committed to our strategic priorities and advancing our technology roadmap. In Q3, we announced that we are working with Comcast to begin a technical trial of their cloud-based X1 platform and that we will be the first in Canada to capitalize on their cloud technology. We are confident that our partnership with Comcast on the X1 journey will allow us to reinvigorate our video roadmap and bring momentum back to our video business. At the beginning of October, we launched our new Shaw home gateway, the XG1 which is a whole home PVR with our Moxi user experience. This set top is currently being deployed by Comcast and it is forward compatible with the X1 service. To-date, we are pleased with the progress of the trial. However, as it remains ongoing, we are not yet at the point where we will provide details regarding the partnership and the specific economics related to the long-term arrangement. The X1 platform that is to be deployed is entirely built on Comcast infrastructure. Commands such sound changes, user interface and video-on-demand titles will be powered directly by Comcast infrastructure and not processed in Shaw's facilities, so you can appreciate the complexity and the time requirements around the trial to ensure we have a robust service when we officially launch in F16. Another strategic priority for us is in the broadband space where we there have been a lot of announcements by the industry about gigabyte speed capability. Our customers will always have access to the best network available and we are completely aligned with the cable industry approach, DOCSIS 3.1 advantage and the broad go to market differentiated Internet experiences. Recall that our first digital network upgrade removed the first tier of analog channels. During F15, we removed all remaining analog signals from Vancouver and the lower mainland and we will continue this as part of our digital network upgrade which we refer to as Phase 2 in F16. At the end of the year, we plan to have over 95% of our customers all digital. This opens up significant amount of additional capacity within our network and plans for us to deliver DOCSIS 3.1 in 2016 remain on track. The customer experience remains front and center for us. Not only are we launching new products and investing in people and technology, we remain focused on capitalizing on additional efficiencies such as our call center realignment and our commitment to our focus to deliver multiyear program. Considering both the opportunities and challenges that we face going into fiscal 2016, we are targeting EBITDA to the range between flat and low single-digit growth over 2015, including the cost associated with the X1 platform. Capital investment is expected to be approximately CAD850 million in the consumer Business Network Services and Media Divisions and approximately CAD130 million in the Business Infrastructure Services division. In fiscal 2016, we anticipate the free cash flow of between CAD665 million to CAD680 million, representing year-over-year growth of 2% to 4%. Now, I invite Vito to provide more detailed overview of the financial results.

[Vito Culmone:]

Thank you, Brad, and hello everyone on the call. It's great to be here and with the full quarter now under my belt, I appreciate the opportunity to get into more detail regarding our financial results. I'd like to take this opportunity to thank all of my colleagues at Shaw for assisting me up the learning curve and in particular a shadow to the finance team for their great work day in and day out since through the reporting cycle. Let's first start with the fourth quarter where consolidated revenue and EBITDA were up over 6% and 9%, respectively, as Brad mentioned earlier. On an organic basis, i.e., excluding the results of the Business Infrastructure Services division, our year-over-year EBITDA growth in Q4 was 4.5%. Each business segment delivered year-over-year growth and let me address each one individually. In our Consumer Division, revenue was up slightly and EBITDA increased over 3% compared to Q4 2014. Despite the increased subscriber loss, total cable ARPU is up 2% year-over-year with a strong 9% growth in broadband. Business Network Services delivered revenue and EBITDA growth of over 6% and 7%, respectively. Margins remain healthy at over 50% while we continue to invest in new managed product and service offerings such as SmartVoice and Managed Hotel Wi-Fi, while also ramping up our sales force. Additions to the sales team will continue into F16, which will have an impact on EBITDA growth in the near term, however, we believe these resources and scaling will support double-digit revenue growth in F16. Business Infrastructure Services delivered Q4 revenue of CAD68 million, which is a 7% increase over Q3 2015. Reported EBITDA of CAD24 million includes a number of one-time costs related to employees as well as startup cost from Calgary data center. For informational purposes, the standalone US wireless business delivered revenue and EBITDA growth of 10% and 11%, respectively for fiscal 2015. We are extremely pleased with the progress and trajectory in this business. Our Media business delivered solid year-over-year growth this quarter with EBITDA up by CAD7 million or 17% due mainly to higher subscriber revenues combined with lower programming, employee related and promotional costs. For the year revenue and EBITDA from our media and assets declined by 1.5% and 3%, respectively, as reduced advertising on specialty channels and the effective disposition in the prior year have Historia and Series+ were partially offset by increases in conventional air time and subscriber revenues. Net income for the quarter on a consolidated basis was CAD276 million or CAD0.57 per share and included a one-time gain on the CAD158 million as we received the final payment from Rogers regarding the wireless spectrum. Total capital spend in F15 including the accelerated capital fund was CAD1.1 billion. We continue to invest growth capital into Business Network Services and Business Infrastructure Services. Total capital investments in F16 are expected to decline from F15 levels and we remain comfortable with CAD850 million as the base consumer business network and media spend. Our balance sheet remains strong with total debt of approximately CAD5.7 billion and our leverage ratio of 2.3 times at the end of the fiscal year. We continue to have ample liquidity through both our cash balance of CAD400 million and available credit facilities. With that, Brad, I'll turn back to you.

[Bradley Shaw:]

Thank you, Vito. To conclude, we are excited about the year ahead and we have some great new products that will enter the market and we believe we are well positioned to meet the demands of our customers and to deliver value for all of our stakeholders. Thank you, and we would now like to open the phones to answer any questions.

[Operator:]

[Operator Instructions] Our first question today comes from Vince Valentini of TD Securities. Please go ahead.

[Vince Valentini:]

Yeah, thanks very much. First off, Vito or somebody else, is it possible to quantify at all those one-time employee and Calgary startup costs within ViaWest in the fourth quarter?

[Vito Culmone:]

Yeah, hi, Vince, it's Vito here. Maybe I will take it and then ask Nancy to provide some commentary on the business. In the quarter also we had about CAD3 billion to CAD4 billion of a one-time related types expenditures, which when you look at it on an absolute basis, on a percentage basis, it sort of distorts the - what really the success and the momentum that we're seeing in the business. Just by way of referencing, US dollars, our Q4, both revenue and EBITDA performance improved 4% versus the prior quarter. So, we are really, really happy on the US dollar. There is a little bit of noise when you bring that back into Canadian dollars and some of the consolidation type entries. Maybe, Nancy, I will ask you to give a little color on that.

[Nancy Phillips:]

Yeah, I mean, as Vito said, it's an one-time impact to the business a little bit. There is some startup cost obviously as we start to bring on the Calgary asset, but this was primarily driven by some long-term incentive impact. But, listen, fourth quarter, we're very, very pleased with how our fourth quarter came in. We saw our strongest bookings quarter of the year and quite frankly in the history of the company. So the demand for our products and services remains very, very high. We saw Oregon side come online in July and had unprecedented early stage customers coming into that facility. We think it's on track to breakeven in half the time of our typical modeling that we've seen in historical data centers. And our margins remain very consistent with historical standards. And the fourth quarter really put us in a position to do some small acceleration of capital because of the growth we're seeing and early, early demand in the first quarter of this year. So fourth quarter for ViaWest actually was very, very strong. We had a little bit of slow start, but as we finished the year the demands remain strong and high and feel very good going into 2016.

[Vince Valentini:]

Great, thanks. One other question on the guidance for 2016, maybe Vito again. Can you explain a bit the difference between the bottom and the low end of the range that, if I read you correctly sort of zero to 3% EBITDA growth is what you are signaling? To get to the low end of that range, is there some uncertainty that you guys might have about how much demand and uptick there will be from customers for the X1 platform given it’s a bit of different economics than what you have had in the past when you have OpEx versus CapEx or you may be hedging your bets a little bit in case there is huge demand for that and may be a nice problem to have, but it may cause your EBITDA growth to suffer temporarily? Is that part of the reason why you may have some caution at the low end of the range or maybe expecting flat?

[Bradley Shaw:]

Yeah, Vince, I will start and maybe Jay you can pick it up here. Definitely at the end of the day I believe we would be disappointed with fiscal '16 ending up flat on the low-end of the range. So there is lots of balls in the air and you described a couple of them. And including obviously economic activity in Alberta, we've got the NGV cost that you are describing and the integration of that into the system and probably more back ended as far as really impact on our GUs. And Jay, any additional color you want to add?

[Jay Mehr:]

[indiscernible] that’s certainly not the low end of the range is certainly not how we're managing the business. There's a lot going on in this fiscal year and most of it is good, but there's a lot of moving pieces and so we’ve probably gone with a bit of a broader range than in past years. If you are trying to rework the math and there's not a lot of risk in the X1 number and similar to our previous comments on this. We don't really see degrading margins. We think there is a little shift from CapEx to OpEx. We see this as a business that we are going to make money on and not do harm to the margin. One thing you might not see clearly in our numbers is for sure we've got some pressure on content cost and it will be - it's certainly one of our key initiatives this year to try and change that relationships. It's pretty clear those relationship between video revenue and content costs, it's clearly asymmetrical today and I think we like that some symmetrical relationship.

[Bradley Shaw:]

Yeah, sorry, Vince, the only other item I will add is promotional activity. I mean, we saw some aggressive competitive activity in June and we let it go by the wayside and I think as we move into F16, we need to obviously protect our business as well.

[Operator:]

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

[Phillip Huang:]

Thanks good afternoon. A quick question on the guidance as well. It seems like you're some of your guidance implies low-single digit free cash flow growth for fiscal ‘16. So should we assume that dividend growth will also be consistent with free cash flow growth and does that sort of imply that growth will slow from the high-single digit that we saw this year to low-single digit in fiscal ‘16?

[Vito Culmone:]

Yeah. It’s Vito here again. I mean, I think it’s too early to make any extrapolations on dividend related to our FCF guidance. There are a lot of things moving through as you look at FCF, I will guide more directly to cash taxes and just for modeling purposes, you should use very similar levels to our F15 of 375 million. There is obviously pension related contributions that move around during the course of the year as we look at interest rates in some of the more macro asset performance that’s variable that we need to obviously take into account. But as it relates to the dividend, we usually give guidance on dividend and make it - in the January timeframe. We are very, very confident in our long-term prospects and the strategy that we’re undertaking and feel very, very from a different perspective obviously very comfortable with where we're at.

[Phillip Huang:]

Got it. Then just a quick follow-up on the operating environment particularly as it relates to Alberta. We certainly believe that telecom revenues are quite recession proof but as you mentioned, it was a factor in the accelerated subscriber decline. I was just wondering if you give us some color on the flow-through of your August 1st price increase versus prior price increases. Have you guys observed any resistance to taking a price increase whether it’s in terms of increased quote shaving or churn. [ph] Just wondering how does the current environment compare with, say, the prior cycle, say in 2009, do you think that most of quote shaving [ph is potentially higher this cycle just given the prevalence of over the top today.

[Jay Mehr:]

Thanks, Phillip, it’s Jay, I guess there is a couple of elements of that. Certainly in terms of the Alberta environment, we have seen a disproportionate impact on RGU results on Alberta compared with the other markets that we serve. And certainly if we go back to the first half of F14 there actually really weren’t materially RGU losses in Alberta, the strength of the economy was really driving our results. And so we've seen a shift in that and certainly disproportionate. We've ran into some incredibly aggressive activity in June competitively we’re excited in July and has returned to sort of normal intense competition that we face in Western Canada. And there was an overlap with that timing over the notification of our rate increase. And so for sure for customer to we’re absolutely price sensitive in looking for options we have a little bit of a perfect storm there in June. In general terms, we’ve seen the rate increase pass through similar to previous rate increases. We did make some commitments to our customers. This was what happened of course is we moved the September rate increase for a variety of reasons and we went back to our normal summer rate. We’ve communicated to our customers that we’ll be adjusting rates only on an annual basis in the summertime and so you'll see that normalize as we move forward.

[Phillip Huang:]

And just to clarify in terms of the competitive activity that you guys saw in the summer that have since fully subsided or did it sort of resurge I guess into the back-to-school timeframe as well, did it fully subside at this point?

[Jay Mehr:]

It fully subsided. In July and August we had good months given the seasonality of, July has had a little bit of negative seasonality of it but year over year we’re in good shape. And so far in Q1, we’re back to just the most competitive environment in North America; we’re not on the really deep one-year price discount on all products.

[Phillip Huang:]

Got it, thank you so much.

[Operator:]

Our next question comes from Jeff Fan of Scotia Bank. Please go ahead.

[Jeff Fan:]

Couple of questions more on the core cable business. When we look at your results, I mean, a lot of it is currently being driven by rate increases. But it sounds like if you obviously have a number of product and service enhancements coming with, excellent being one and it sounded like there is more on the broadband side. Can you maybe just help walk us through some of these product enhancements, I know timing may be sensitive but can you give us a feel that over the next 12 or 18 months that the service enhancements on the product will I guess support these rate increases so that if your competitors come up with new service enhancements that you're able to compete effectively. So maybe just talk a little bit more about that. And then the second part of the question is more related to’16. A lot of PDUs are now I guess looking at how they’re going to repackage some of their television channels, preparing for skinny based and pick packs. Your competitor, main competitor TELUS is already very flexible in how the package their television services. Wondering how what you're thinking is going into that going into next year and how some of your channel packaging may or may not change. I'm wondering if you can talk a little bit about as well thanks.

[Jay Mehr:]

Jeff, Jay again. Sure, lots of folks have issued press releases about things that are going to happen in F16 and 2017 and beyond. I think we have - we’re very as Brad said, we’re very aligned with where the industry is headed and the cable advantage on broadband and DOCSIS 3.1. My sense of it is that you'll see us announce product launches when we launch projects which is more of Shaw's approach to the marketplace as supposed to shadowing that. And that those product launches combined with the excellent platform will give us a very active next 12 months and what's exciting about it is, we’ll be bringing meaningful new differentiated products to market really each quarter and both of those streams have got stages that we step into the marketplace with some really compelling offering. So we’re going to be very active in the consumer cable business. In terms of your comments on television channels and packaging for Let's Talk TV, it's fair to say that all of us in Western Canada have offered sort of a greater level of choice for a long time and so we've seen customers read package, you'll see some changes in March from us to just impact the size of our packaging to make sure that we’re staying in touch with where we’re headed there. And also in the skinny basic, I don't think there is anything scary in that, I think the team has done a terrific job of building an elegant package that trips beautifully with our current packaging and provides choice for consumers. And then you see us as we go throughout the calendar year moving to the full the pay environment as you can appreciate to my comment on symmetrical versus asymmetrical content on negotiations with the broadcasters are not simple and so we are working our way through that through the calendar year.

[Jeff Fan:]

This is a quick follow-up, your comment regarding content cost is that - are you talking about from the PDU side of the business does that I guess flipping that onto the media side, how does that impact, maybe Barb’s business when we think about content cost or content revenue on that side of the business.

[Barb Williams:]

Hi, this is Barb. I think from our side of the business we obviously have a handful of very significant deals with our various carriers, which are at various stages of their terms. And as those deals come for renegotiation in our Let's Talk TV environment as we face different packaging options, we’ll be looking to be negotiating rates that offer standalone as well as small packages as well as larger bundles. So it's certainly does change the environment of the negotiation at bit. We work hard to keep the cost side of content from our point of view down as low as possible and provide good value to ultimately to our providers and also to customers. But if there is a change in environment and it still would be worked out as F16 and 17 happens.

[Jeff Fan:]

Okay thank you.

[Operator:]

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

[Drew McReynolds:]

My questions are on Shaw Media for you Barb. Just following upon the last question. Just in general, you talk about in your MD&A next-generation ad solutions for media, just wondering if that have to do with addressable advertising and even if it doesn't, can you just speak to where we are at Shaw in terms of bringing addressable advertising onto the TV platform. And then secondly just in terms of the tracking for Q1 obviously is seasonally stronger quarter than Q4, just wondering if you could talk to those top line trends. And lastly on the margin front for media, I know Q4 is a seasonally weaker quarter, just wondering some of cost efficiencies and reworking that you did last quarter as some of that kind of year over year margin improvement sustainable on a go-forward basis?

[Barb Williams:]

Sure, all good questions. From the next-generation advertising perspective, we do believe in media that answer here is to be smarter about using more data more effectively to help advertisers be smarter about reaching the audience that they are interested in reaching. So, we do see the power of television in the future being closely aligned with the intelligence of data and we are working both independently to understand how to move those projects forward as well as working cooperatively with the CRGC is working group because we do believe alternately there is an industry solution here that can continue to make television a very powerful opportunity for advertisers. So, yeah, there is efforts in that front and we believe that that there can be strong opportunity on the addressable front as well as putting advertising onto some of the other platforms where audiences are enjoying our content today like the VOD platform. So from good momentum there that we’re keen about. To your other questions, I think the restructure in April absolutely helped to get us on a better path both in terms of cost base that make sense to a business that's at the mature stage that ours is as well as sort of reorganizing the business to be more future oriented so that we are expanding the skill-base around the products that will move us beyond just being a pure broadcast company but help us to define products for other platforms of other lengths to work with advertisers in other ways and branded content et cetera. So I do believe that we have made an important shift in our opportunity to keep a strong margin in the business with the restructure that we went through. And we saw nice results in Q4 that the team is really pleased with which were in large part about cost control and that does reflect the restructure that he did. Finally to your other questions about Q1, it is an important quarter to us. We’re very, very focused on it. The election money has helped support the quarter. We’re seeing some upside in that. So, so far the quarter is looking not too bad actually, we’re feeling pretty good.

[Drew McReynolds:]

Okay thanks very much.

[Operator:]

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

[Tim Casey:]

Thanks. A couple of things. Can you make it’s for Jay. Can you talk a little bit about some of the dynamics we're seeing in the subscriber trends because I know you’ve articulated a focus on broadband but on a net basis, the RGU impact on the quarter seemed a bit negative? And then on ViaWest, you made comments that you were very pleased with the fourth quarter but I thought I heard you say on an organic basis that it grew at 4%. That seems to be below the average growth rate. So just wondering if you’re expecting a significant acceleration from that trend. And could you also speak to the free cash flow profile of ViaWest when we, just to a very simple analysis of EBITDA trends versus the articulation of the capital that you're spending there is. Do you expect this business to achieve free cash flow, positive free cash flow any time soon?

[Vito Culmone:]

Why don't we, it's Vito here, and I’ll ask Trevor also and Nancy to chime in on ViaWest as well. Sorry on the Q4, on the 4%, let me just make that clear that was Q4 over Q3 momentum, so that extrapolates to something much more significant double-digit. So that's not quarter over quarter, that’s Q4 over Q3 on that.

[Trevor English:]

Yeah, Tim it’s Trevor. Just on the Capex related to the business, we've always, I think Nancy articulated just the growth and the demand that we're seeing in the US environment. When we did open up a new facility and it’s doing extremely well. I mean we really look at that as - a lot of that as success-based capital and it’s a great capital to spend and a high return on that capital. And in the near term, we've always said that we’re going to invest in growth businesses and certainly see this as a very attractive growth business for us in the US. In Q4, you saw capital higher in business infrastructure services but a lot that capital again was related to the first data center in the Canadian portfolio and that was roughly CAD24 million in Q4. So just echoing Nancy's comments, this is exactly why we made the investment just over a year ago, really happy with way things are performing.

[Nancy Phillips:]

Fundamentals of the business remain extraordinarily strong; the demand in the market is only increasing. We are very pleased with the acquisition of AppliedTrust in July adding a whole security portfolio of services into our business, it’s only adding additional value to our customers. So I would echo, I mean this is a growth business and the capital of four high demand services and products that we are building is really what the focus of the organization is at this point.

[Bradley Shaw:]

We’ve always - we've always portrayed as if the maintenance capital within the business is roughly 3% of sales. So if we elected to, we can turn this into a very you know added component of our free cash flow profile but again we don't think the time is right to do that.

[Nancy Phillips:]

And I think one of the differentiators was clearly I think we actually believe we’re one of the leading companies in terms of capital efficiency because the way we build the centers. We tend to augment over a period of time based on the capacity rising. So as customers start to install and we see power and cooling requirements change over time that’s when we start to add additional capital into the existing center. So, not only is it a continued growth opportunity but clearly I think we’re actually one of the best in the business in terms of the way we build it on a success-based profile.

[Vito Culmone:]

Tim, it’s Vito here. Just maybe before we flip it back to Jay to address the first part of your question, you gave me the opportunity to address a couple of little things. First of all when you look at F16 capital versus F15, although it doesn't come through in our free cash flow as we defined obviously, F15 represented the last year of our accelerated capital fund. So we'll see those dollars flow through as well as - as far as F16 where we currently stand. And as we move into F17, we pick up another 60 million or so related to the cash taxes and that's the impact everything else being equal of the F16 representing the final year of our deferral - tax deferral pickup. So some nice momentum on FCF as we move forward here.

[Jay Mehr:]

And Tim you asked for some color on the subscriber trend. So I would say couple of things as they give you a sense of how we’re thinking about this. The Q4 results were driven by a very significant spike in competitive losses in June that was driven by deep discounting and from our primary competitor, we’ve seen a return to more rational pricing environment, and certainly the subscriber results trajectory from Q4 is not acceptable and there is not a way to think about our business going forward. We see a material improvement in consumer RGUs in F16 over F15. Couple of other things I would say to your comments. One is we talked before about the bundle change and promotional packaging and the impact on phone. You’ll see that the impact of the bundle change will lessen in Q1 and then Q2 phone RGUs will be an organic representative RGU number, so that’s just a timing on that. In terms of competitive responses that we talked to in our response to Jeff, I think our very active plans this year give us a number of levers both in terms of the X1 platform and broadband that will allow us to not only respond, if there is repeat of this sort of competitive activity and even play a little bit of offense. And then my final point on broadband subs is just to reconnect everybody with the nature of the competitive environment in Alberta and BC. Our primary competitor links Internet and Video together into three-year contracts and polls both. And so if you look at our results over the last number of quarters, the gap between video performance in terms net gain and Internet performance, you will see the gap of that is quite similar and it’s the pull through that pulls down Internet. And the way to think about that is we’ve always been very successful with millennials, we are very successful in the Internet only base, and so that’s the trend that they are seeing on the Internet side. So as we stabilize video subs, you will be able to start to see the gains in broadband start again.

[Operator:]

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

[Greg MacDonald:]

Macquarie, actually. So guys I want to go over CapEx just a little bit more to slog a dead horse, but it’s an important horse. In the past, you’ve indicated that capital intensity, kind of base case capital intensity on the cable side is around 20% of revenues, I am wondering if that’s still the case? And whether in the guidance for 2016, there is any growth CapEx still in that or whether that’s sort of unusual growth CapEx has already completed? And then maybe Trevor or Vito whoever wants to address it, a good way of giving us better insight on what the ViaWest CapEx profile and help us get what the free cash profile is on that business? Really good growth, and I am not going to debate whether spending CapEx on double-digit growth is valid, I think it very much. But what would help us is to understand is when you get a somewhat mature revenue and EBITDA line, let’s call it high-single digits, is it safe to say that that CapEx profile is going to be somewhere in the 10% to 15% or 10% of sales range. That would help us look into 2017 and 2018 and try and do some numbers based on the growth profile then, any insights on that would be helpful.

[Vito Culmone:]

Yeah, let me address the second part, and then maybe Jay you can pick up the consumer piece of it and Trevor, invite you as well. I think it’s a - I think what you’re asking for there is a very good suggestion as we move forward maybe splitting a little bit of our capital profile for ViaWest between growth and I will call it maintenance or whatever existing. That’s something that I think we look what are best fits forward on and give you some color to that.

[Trevor English:]

Yeah, maybe we think that way is well above providing a bit more granularity on the US versus the Canadian business. We are very excited about the growth within the US business. But I don’t want to give the impression that it’s going to be a 10% or 15% capital intensity business in 2017 or 2018. I mean, we still see tremendous growth within the business and the dynamics in the US specifically. We will probably continue to - if you back out the impact of FX, you continue to invest capital sort of approximates the US business EBITDA as long as the return on that capital is still there as we look at new greenfields. I mean, we still this year we’ve got a plan to build another new data center and ViaWest has history of doing one to two new greenfields a year and I think that will continue as we really like the industry dynamics.

[Greg MacDonald:]

Okay. But to the point right guys, it’s very difficult for us, it’s 46% of sales in CapEx this year in ViaWest in year to be quite blunt, I think because - I think the free cash was a bit of surprise to the low-end to a lot of analyst, so we are having a difficult time understanding. We are prepared to say, great, ROI is high, and I am happy for you to spend that CapEx, but we are having a tough time understanding what that means for 2017 and 2018, unfortunately markets look at kind of one to two years out?

[Jay Mehr:]

Yeah, point noted, and we will take it away and see what we can do going forward. I mean, just to Trevor’s point, we are very bullish on this business going forward and I think we are going to stop just shy of committing to what that profile looks like in 2017 and 2018, but if we can give you additional color to help you understand, what a full capacity return is versus the growth and I think that allows you to get maybe as excited as we are in business.

[Trevor English:]

I think going back to when we initially announced the transaction, we always positioned it and maybe there was - it was a bit unclear on an unlevered basis it was going to be sort of free cash flow plus or minus 10 and I think that’s still the same message and when I say unlevered it’s really EBITDA less CapEx and we are still comfortable with that going forward I would say.

[Greg MacDonald:]

And on the cable side guys, is that a 20% business now.

[Jay Mehr:]

Yeah, exactly. You know, the way we’ve talked about it for the last number of years is about Canadian CapEx and we are not talking about business infrastructure, we are talking about Shaw business and consumer media, we’ve talked about that in CAD850 million range and we would guide to that again. I think - we think that’s a great number for this year that’s allowing us to invest in what we need to invest. Note that there has been a significant degradation in FX exposure to CapEx and we have been able to absorb that within the CAD850 million run rate, so we are getting even more bang for our buck, which is a great thing about DOCSIS 3.1 and CCAP and all of the tremendous things that are happening on the technology side. I don’t know that we are really in a position with some many moving pieces to get multiyear capital guidance except to say, we have - the cable industry in general has an enormous cost advantage on the capital side compared to our primary competitors, and so we will sort out the timing on how we exploit that.

[Greg MacDonald:]

Okay. Thanks very much guys.

[Operator:]

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

[Maher Yaghi:]

Yes, thank you taking my question. So I just want - I have two questions. The first one is on capital allocation and the second one is on Home Phone. So on the capital allocation side, I wanted to ask you - I mean, you have a relatively low debt levels compared to other companies. I wanted to see how do you feel in relation to how you have deployed your capital so far? And if there are ways you believe to improve the capital allocation ratios by either using other acquisitions or potential buybacks. The second question - sorry, the second question I wanted to ask you is, this morning, the CRTC said that there are more Canadian subscribe exclusively to mobile than to wired phones. We have seen cable companies in the US like Comcast join with Verizon for example to offer a combined product offering, triple-play, quadruple play to continue to be successful in the marketplace. How do you view your product offering and is there ways to improve it by offering mobile services somehow through partnerships with other companies.

[Vito Culmone:]

Maher, it’s Vito. I will - maybe Trevor and I will address your first part of the question perhaps and then Jay you can take the second one. In regards to capital allocation, of course, we are committed to investment grade and we are currently sitting in the 2.2 net debt to EBITDA range and we guided to 2.00 to 2.50 around that. So I would say, we start at the point and then we determine obviously how much money we have available within that and investment in the business is our primary focus and we are happy to stretch that investment, where it’s the right thing for our long-term interests and good for our shareholders all with the envelop of obviously maintaining an investment grade. So I think when we talk about share buybacks and share issuances under the DRIP, but what not, those are all - I will call them quarter-to-quarter type decisions and things that could move around a little bit. But I wouldn’t expect any material departure from us for the last two years.

[Trevor English:]

Yeah, I will just add that capital allocation and priorities, there is a key for us as a management team and you will see us, that’s where we are investing in our growth businesses where we see strong return like business network services. You heard Brad mention, both the exciting product launches that we announced this quarter. Jay mentioned DOCSIS 3.1 and we talked a lot about the capital that we are investing in our ViaWest business as well.

[Jay Mehr:]

And then I will take the Home Phone voice question from here. We are [indiscernible] so I didn’t see the CRTC stats, I won’t specifically refer to them. Obviously understand the Comcast, Verizon announcement. I think it’s fair to say, if you look at our product roadmap and where we’re headed as a company, that where we are most bullish on broadband and video that we think there are opportunities in voice and that we’re exploring industry developments and other developments along with our Wi-Fi strategy and things that we’re doing on the Shaw business side and figuring out what the appropriate go to market is to reenergize IP voice product and so we are - we start to review that there is opportunities in that space for Shaw.

[Maher Yaghi:]

Okay. So just a follow-up on that. I know, the - maybe you can - I mean, is your Wi-Fi coverage broad enough to launch something like some of the cable companies in the US where they launched their own exclusive Wi-Fi wireless network. So far it hasn’t worked great, but I mean, is that the way you’re thinking or more offering a combined Wi-Fi plus full wireless offering. Because as I mentioned, the CRTC said that 20% of Canadians have exclusively relying on wireless this year versus 14% on the landline phones. And I mean, you need to participate on that broad direction to be able to compete in the marketplace.

[Jay Mehr:]

I don’t disagree with some of your comments, and I would do have an exceptional Wi-Fi network and we are building developments [ph] on top of that in terms of our next products and services, which I think make it quite exciting. We think there is - we don’t think you can look at this business through the lens of the legacy products and services, and I think you need to look at the business through the lens of cloud-based services and next-generation IP services. But I mean, I really can’t go further than that without signaling something that would be - we’re not in a position to signal.

[Maher Yaghi:]

Okay, thank you.

[Operator:]

The next question is from Robert Peters from Credit Suisse.

[Robert Peters:]

Hi, thank you for taking my question. Just touching earlier on your comment around the kind of plus 2 minus 10 on the simple free cash flow for ViaWest, just kind of looking at the guidance for next year, that implies some healthy growth in that section of the business, which I think is being consistent with your commentary. I was wondering if you could kind of maybe give us an idea of how much of that growth is driven from the new facilities that have been opened up this fall versus any kind of future plans or growth that exist in that facilities?

[Nancy Phillips:]

Yeah, I mean, we are in the process of - actually we just opened in July, the Oregon facility have seen obviously the strongest bookings, pre-commissioning of that facility and obviously very good demand in the very first couple of months of the quarter. So it will be obviously a positive in terms of how we look at our 2016 and beyond. We see continued strong demand within the existing facility. So within that, approximately 100 million of US capital that’s being spent this year, we are building a new data center in Dallas and we are augmenting additional or existing footprint of data centers as we see continued growth. So that’s largely where that capital is allocated to in the 2016 forecast.

[Jay Mehr:]

You know, the capital guidance that we gave for business infrastructure services is basically all in the US. The Calgary, one data center is essential being completed.

[Nancy Phillips:]

Yeah, it was about 34 million in 2015 - roughly 24 of that I think was in fourth quarter, of the 70 million that was in the first [ph] quarter. So that’s largely behind us. There will really be some incremental associated with customer acquisition.

[Robert Peters:]

Perfect. Thank you very much.

[Operator:]

We have a follow-up question from Drew McReynolds of RBC Capital Markets. Please go ahead.

[Drew McReynolds:]

Yeah, thanks very much for taking this and I will be relatively quick, Nancy, You had talked in previous quarters just about potential M&A within ViaWest down in the US. Just wondering if you can update us on the just dynamics, M&A dynamics in that space in the US, obviously we will hear a little bit more in early December on this, but just want to get your thoughts. Thanks.

[Nancy Phillips:]

Demand - it’s a busy market, I am sure, you watch some of the transactions that are happening over the last several months, 2015 was a busy year. It continues to be. I think we are very - I know, it has been a very disciplined company as we take a look at acquisitions. We did a - I am very pleased with the AppliedTrust acquisition we did in July, albeit small, we think it has - we will have a tremendous impact in the service portfolio and we are already seeing very good early traction take down with our customer base that will service this. It’s clearly, security is top of mind for most companies and I would say that the fact that they are a security assessment and mitigation company is an important component in terms of the IT spend today. So we are - we take a look at a multitude of things that will happen to be a great tuck-in service that we’ve been looking at. And we continue to take a look on an opportunistic basis for the rates such they are going to help us scale the business and continue to expand our footprint.

[Drew McReynolds:]

Thank you.

[Operator:]

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

[Bradley Shaw:]

Great, thank you operator. Thanks everyone. Talk to you next time.

[Operator:]

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