Q3 2019 Earnings Call
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Please be patient and operator will be with you. Shortly please be advised that your information will be treated in accordance with the Canadian personal information protection acts.
Which company.
I will likely DRAM for Roger communication.
Mask a person please.
First name David to last name Borough.
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Yes.
Yes, let it color.
Brown.
Yes.
Okay, and you're going to.
A year A.I.E.R.A.
Thank you and significantly happier customers, we work through this transition over the next several quarters, we believe our wireless business will be well positioned for the future.
Okay, we'll continue to post improved performance underpinned by strong residential and small business answer that results. Despite eight years of fiber to the home investment by our major competitor, we continue to increase our penetration and deliver healthy loading while almost doubling our cash margins during a period of major technology and product.
Vestments.
Importantly, during this period of strategic transition and heavy investments we've delivered a long term capital allocation program that strikes a healthy balance between maintaining a strong balance sheet investing consistently in our core networks and fiveg spectrum, and returning sustainable and notable levels of capital to shareholders.
While we have adjusted our 2019 outlook to reflect this expected short term transition in wireless we remain confident in the long term strategic positioning of your company.
Let me offer my perspective on the move to infinite and what we're seeing.
Q3 was the beginning of are critical and necessary shift in the Canadian wireless industry. The launch of unlimited data is fundamentally changing how Canadians use their wireless services had out and how operators drive sustainable growth economics into the long term.
As I said last quarter, we made these changes after thorough and thoughtful analysis on where the industry is going what matters most to our customers.
A quarter later, the supporting Cape size highlight these strategic benefits and the accelerated adoption of unlimited plans.
As you May recall, we led this change for three important reasons.
First and foremost to stimulate data growth.
Approach to overage in Canada had seriously decelerated data growth rates Canadians had become increasingly afraid to use data given the evolution of overs overage rates in our industry on a comparative basis average data consumption in Canada had fallen to one third the us average and the bottom quartile of the most advance.
Its global markets in the world.
Overall, this dynamic was both unsustainable and limiting to our future with Fiveg.
Second.
To drive a step change in the customer experience and as a direct consequence reduced the cost to serve our customers.
By eliminating bill shock.
Reducing friction and in many cases the tension between family members in the data share plan, we collect a simplicity dividend if you make things clear simple unfair customers will call less have fewer billing disputes they will spend less time, when they do call and there will be more satisfied overall.
Ultimately this drives their likelihood to recommend Rogers.
And third to improve the economics of acquisition and retention.
In 10 years handset costs have escalated from a few hundred dollars to cresting around $2000 today.
Last year alone, we spent $2.4 billion on smartphones with an all time record subsidy of 40% or over $950 million. Our recent moved to equipment financing helps drive affordability for consumers, while improving subsidy economics seal way and steel are for our business.
Overall, the rationale is straightforward stimulate the to use lower operating costs lower phone subsidies, while driving customer satisfaction and growing customer lifetime value.
Let me share some of the strong underlying metrics that we are seeing when we analyze our infinite base.
First 60% of customers are upgrading to higher price plans and 40% our downgrading, the resulting recurring ARPU is up 1% to 2%.
On average subscribers are using over 50% more data.
Likelihood to recommend is roughly 30% higher this represents an unprecedented lift in this very important metric.
In the call Center, we looked at the top call drivers around billing and overage, they're down 50%.
Online hardware upgrades are up 30%.
And as we limit and eventually sunset subsidy plans the shift from device subsidies to device financing is expected to drive significant cost efficiencies.
While the savings are modest this quarter given the competitive dynamic by one player in particular, we expect the market demand for lower monthly device costs will stimulate penetration of these plans, particularly as subsidy levels reduce.
Data overage fees currently represent roughly 5% of wireless service revenue in the third quarter. Our results were impacted by approximately $50 million and reduced overage fees given customer adoption of these new plans.
By this time next year, we expect to eliminate overage revenue by over 80%.
In parallel data use is expected to grow and so as recurring ARPU.
By the second half of 2020, we expect to return to ARPU growth, reflecting a markedly faster transition than the unlimited experienced south of the border for those trying to draw a parallel to the us market in a few years ago. Our entry price for unlimited plans was set at a significantly different point and therefore, we believe we will return to own.
Overall growth more quickly.
As Canada's largest wireless provider, we chose to lead this change we believe this move was inevitable and it was the right time before we ramp into fall into a fiveg world. These plans reflect a balanced economics for the industry excellent value and simplicity for our customers and they will drive meaningful data growth.
Into the future.
In addition for our Fido customers, we introduced data overage protection, which lets customers pause and purchase data when they reach their limit.
While it's early days this new service has shown positive results with 260000 customers on the new plans using 14% more data.
Let me share a few quick but important highlights on the broader customer service front.
In our customer solution center, our multiyear investments are paying off we've seen a 13% reduction in calls while supporting the major transition to infinite in wireless and ignite and cable and maintaining solid service levels.
Digital adoption is up 11% and growing.
We announced plans to open a new customer solution center in Kalona. The New Center is set to open next summer, we'll hand, a 1 million customer interactions each year. It will also inject 350 jobs in the local economy.
We also announced an exclusive partnership with enjoy.
We introduced Rogers pro on the go it's an innovative new service that lets Canadians order device online habit delivered and set up within hours of ordering anywhere. They want this free service will launch in the GCA later this month and other major cities next year.
Our wireless network investment program to Fiveg ready LTE advanced technology is paying off we are pleased with the recent recognition from Pvthree the international leader in benchmark in networks. They awarded Rogers Best in test for overall wireless customer experience this ranking as base.
Based on robust third party dried tests that measure the real customer experience across voice data and applications.
Looking back at our progress this quarter and looking ahead of the short and long term I'm confident we have the right strategy of the right plan and the right priorities to lead and win for both our customers and our shareholders.
I'd like to thank our entire team for their incredible dedication and commitment.
And with that let me pass it over to Tony Tony over to you.
Thank you Joe and good morning, everyone.
Our Q3 results reflect the first full quarter of our strategic transition to our infinite unlimited plans. So I'll start my remarks by outlining the impact of this transition to date on our financials.
We want to be transparent in describing the moving pieces of this transition. So that you can assess the progress on our underlying fundamentals and that is why we've disclosed the largest impact reflected in the approximately $50 million of overage revenue declined this quarter as a result of the migrations to our unlimited plans.
As Joe outlined we're extremely pleased with this success to date of our infant plans and the implications for our key underlying customer value economics. However, as we highlighted when we launched our incentive plans our results would be impacted in the short term by the timing and reduction of overage fees that customers.
Were previously incurring.
The faster than expected adoption of these plans is resulting in a faster than expected decline in these overage revenues.
As a result, rather than a transition and gradual decline in overage revenues occurring over a six to eight quarter time period. We now expect this transition to happen in as little as four to five quarters and have adjusted our 2019 full year outlook to reflect this dynamic.
Let me start by providing you with additional color on both the third quarter and on our unlimited plans in terms of overall wireless financials. We reported service revenue that was down 2% year on year as a result of the short term impact of the overage revenue decline even.
Even though adoption of the value rich unlimited data plans continues to accelerate the industry experienced a very competitive in dynamic market. In Q3. For example, some players continue to offer heavier promotional discounting and hardware subsidies than in our view didnt balance the economics of the value rich unlimited.
Plans.
Additionally related promotional activity, particularly on Adeline discounting further pressured our underlying revenue growth rate although too.
A somewhat lower extent.
Looking forward, we expect our overage revenue to continue to decline over the next several quarters at rates similar to Q3 based on current uptake rates of these unlimited plans by this time next year, our dependency on overage revenue will be dramatically reduced and will likely represents less than 1%.
Of our wireless service revenue.
Wireless adjusted EBITDA grew 4% in the quarter. Despite the flat revenue when considering the declining overage revenue the margin growth reflects our continued cost efficiency improvements, including some related to the infinite plans, which are already materializing.
Wireless margins remained strong at 49% and expansion of 180 basis points from last year.
We gained what we believed to be a healthy share of new subscribers in the quarter notwithstanding a heightened volume of switching in the market as reflected in our heightened churn rate this quarter.
We delivered 103000 postpaid net subscriber additions along with 27000 prepaid net additions.
Our expectation is that churn will continue to be elevated for us and likely be industry for the next several quarters as the transition to unlimited plans continues.
Our Q3 blended ARPU declined 2% this quarter again, largely as a result of the overage revenue decline I mentioned, excluding the near term impact of overage revenue ARPU would have been flat. We continue to expect similar levels of ARPU headwinds for four to five quarters as we ultimately transition the cut.
After member base to the higher unlimited data plan ARPU.
Turning to cable we grew revenue by 1% this quarter and adjusted EBITDA by 2%, our Internet offering performed strongly and continues to be a key driver for our cable business Internet revenue grew 7% this quarter, reflecting the movement of internet customers to higher speed and usage tiers and.
Larger internet subscriber base, we remain uniquely positioned to meet customer demand for faster speeds and higher data with our ability to offer ignite gigabit internet across our entire cable footprint.
In Q3 reported 41000 net subscriber additions net internet subscriber additions of 6000 improvement compared to the prior year. This reflects the 17th consecutive quarter of increasing Internet penetration rates. In addition, internet ARPU continue to grow year over year.
Cable cash margins expanded to 21% and cable Capex intensity was again, 29%.
This year and it's consistent with prior to.
And notably capital intensity. This year is down a significant 720 basis points from the 36% at the end of 2018.
As reflected in these results we continue to make good progress towards our stated goal of 20%, 22% capital cable capital intensity and at least 25% cash margins by the end of 2021.
Moving to media revenue was lower by 1% year over year, largely as a result of the sale of our publishing business in the second quarter and lower revenue from the Toronto Blue Jays.
This was partially offset by higher subscription and advertising revenue generated by our sports net properties, excluding the impact of the sale of our publishing business Media reported Rep media reported revenue would have increased by 2% this quarter.
Media EBITDA with strong once again up 78% driven by lower publishing costs and lower Toronto Bluejay salaries.
Turning to our consolidated results, we delivered stable revenue from a year ago and solid adjusted EBITDA growth of 6%, we invested $657 million in capex for the quarter, which decreased 6% year over year.
The decrease in capital expended expenditures was largely driven by our cable business, where we saw our initial set up investment for ignite TV decline in the quarter.
Capex intensity in wireless was 12% during the quarter, we continued augmenting our existing LTE network with our Ericsson four and a half GE technology investments that are also fiveg ready.
Our commitment to generate healthy free cash flow into returning significant capital to shareholders remained strong even during this heightened investment cycle and launch of our infinite plans, we generated free cash flow $767 million. This quarter, an increase of 22%. The notable increase this quarter.
Was the result of higher adjusted EBITDA, along with capital efficiencies in cable and lower cash taxes, we anticipate our cash tax rate to remain in the range of 6% adjusted EBITDA for fiscal 2019.
We returned cash to shareholders through dividend payments of $256 million and repurchased $93 million in class B nonvoting shares, bringing our total repurchases. So far this year to just under $300 million impressively, our total capital return to shareholders of 1.1 billion dollar.
Others in just the first nine months of this year is up 317 million or 43%.
Our debt leverage ratio at the end of Q3 was 2.8 times down from the three times, we reported at the end of the last quarter and I'd also remind you that this year's leverage ratio has a point to increase as a result of the new lease accounting standard, which credit agencies had previously taken into consideration.
With a healthy business and strong free cash flow, we expect to continue reducing our leverage over time moving closer to two and a half times in the future. However, given the current low interest rate environment, we expect to do so at a steady natural pace.
We had liquidity of $2.8 billion at the end of the quarter and have solid investment grade credit ratings with a stable outlook.
Additionally, our balance sheet is well positioned with long term maturities and low interest rates on our outstanding debt.
As you saw in our press release, we have updated our 2019 financial outlook. Originally provided in January to reflect the accelerated adoption of our Rogers infinite plans, we expect total revenue growth for the year to be between.
Negative 1% to positive 1% accordingly, our adjusted EBITDA growth is now targeted at 3% to 5% and our free cash flow growth target for the year is now anticipated to be in the $100 million to $200 million range capital expenditures are expected to be.
To be between 2.75 and $2.85 billion.
These changes reflect the short term impact on the business of the changes I described above but allow us to be fundamentally stronger by giving Canadians unlimited data on Canada is number one network as recognized by Pvthree Best in Test award eliminating date of overage fees to improve the customer experience improving our costs.
Cost structure through reduced inbound calls lowering our churn and driving more sustainable subsidies.
Along the way we will provide additional transparency for you to monitor our progress with that I'll ask the operator open the lines for questions.
Thank you.
I will now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad.
You will hear atone acknowledging your request.
If you are using a speakerphone please pick up your hands that before pressing any team.
And with draw your question. Please press Star then keno.
Our first question comes from Simon Flannery of Morgan Stanley .
Great. Thank you very much good morning.
I Wonder if you could just give us a little bit more color around the impact of the incentive plans. When you had second quarter earnings you'd obviously had a few weeks to see what was happening and.
What sort of change during the quarter I think the experience from the US was that the people with the biggest overage move the quickest and then it's sort of settle down but it sounds like you're saying uncertainty your guidance implies about a 10% company EBITDA for Q4 that there will be more to come that it's not going to really moderate for some time. So any color you could give about what you've seen in the last month.
For two that's really caused this change and that.
Any comments on the election, how we should think about some of the app political commentary around cutting cellphone rates. Thanks.
Okay, why don't I start Tony and then you can pick it up overall, so Simon in terms of.
Some color around infinite we've provided quite a list of insights, but let me.
Some color commentary around it.
Q3 was the first really full quarter of the change we expected somewhere in the neighborhood of 250 300000 migrations to infinite we've gone to a million.
Largely because customers to solve the value and inherently.
One of these plants and you just look at sort of our gross loading for the quarter, it's up 5% year over year in a very strong gross loading performance.
On the whole.
You look inside you'll see a couple of things that we find very compelling one is 60% of customers are upgrading.
To the unlimited plans, only 40% or downgrading and as we mentioned the underlying recurring monthly.
Fee or ARPU is actually up one or 2% so the overage.
The overage decline is what has been accelerated just as we anticipated as exactly in the same proportion than we anticipated but the volumes.
Far greater as a whole when we look inside that base, what do we see we see 50% reduction in the primary call drivers that we talked about which bodes well for the future in terms of the cost reduction opportunity around propensity to call around duration of calls everything we're seeing is lining up the high.
In the very clearly.
What we're also seeing is very strong early lifecycle churn I mean, it's very hard to draw a complete timeline around churn of infinite base given its only been one quarter, but if you compared to early lifecycle churn of other new customers are the people migrated in the past to our legacy plans, we're very pleased with the churn profile.
Now that we see from infinite customers on a pause there and gets only a chance and I'll take it back on the election.
And we had talked about our over the revenue being just under 5% of a total service revenue.
Originally outline our expectation that that decline of that revenue would take six to eight quarters. So what youre seeing is the same quantum just compressed in terms of decline over what we now think four to five quarters and as Joe said, it really relates to.
The volume of switch or to the new infinity plans compared to our original expectations.
While we reported Q2 results. So it's still early days in the launch of the plans and what we saw as a consistent.
Cumulative acceleration of the adoption of these plans. So our comments are as we look to Q3 and the next several quarters. We're just taking that current run rate and based on current volume trends our expectation is it'll be about the same impact.
In each of the subsequent quarters.
On the election fraud.
I don't anticipate a lot of.
Changer departure from what we've said in the past.
Overall first of all Canada has some of the best networks in the World I think it's really a recognized by our government, though we have some of the best networks in the world.
The government is very supportive of making sure we maintain thesis around investing in infrastructure in Canada, especially given.
World, Canada, the population density and all the.
Importance of making sure we connect Canadians.
And we're going to very much a line of the topic of affordability are moved to unlimited everything else that we've been talking about underground equipment financing is very much aligned on that front.
There is.
The potential of a new minister of industry, we're not sure we're waiting for the cabinet to be announced.
There is a new deputy in charge of.
The industry portfolio. So we haven't opportunities are down with people and just work through and talk about.
Hi, we built such a great network capability in Canada, and why perpetuating my capability into the future, especially around the digital economy in Fiveg is fundamentally very important so we're feeling good about things overall on that front.
Great. Thank you.
Thank you Simon next question area.
Our next question comes from David Barden of Bank of America Merrill Lynch.
Hi, guys. Thanks for taking the questions.
I guess I wanted to follow up a little bit on Simon's question, Tony just in terms of the ARPU outlook is is the messaging that that we're kind of at the 66 level and the net of the up.
Higher and plans and the continued pressure from overage will net out flat and so 66, you kind of like the right ZIP code as and think about.
Into next year, when things start to grow again or is there incrementally more overage pressure that uptick pressure as we will do in one Q.
And then I guess the second question was on the lower Capex Guide I think Tony you mentioned something about the.
Lower investment in.
Good night.
I think that the plan for the year was to invest pretty aggressively.
The advantage of the opportunities that bell might be leaving on the table with 50% of your footprint that doesn't have the fiber overbuild.
As it planned taste and if so what's kind of going on with that thank you.
Okay.
I'll start with the first one David in respect of ARPU I remind you, there's always a bit of seasonality and each of the quarters with respect to ARPU and so I'll.
Make my comments with respect to growth rates, rather than the absolute dollar ARPU that you were referring to.
This quarter, we had blended ARPU declines of of minus 2% and keep in mind when I talk ARPU on tucking true IRS ARPU.
And.
As I said the biggest impact if you're to compare it to private price previous quarter is roughly two points on the overage revenue decline. We also saw a little bit of softness in our base as a result of repricing on some items and I made reference to add align and so with the launch of on unlimited.
Infinite plans one of our competitors launched more aggressive pricing on AD aligned and we match that in the marketplace.
So that would be one of the more significant impacts that impacted our ARPU within the quarter. So as we look to the rest of the year, our expectation is that rate of decline.
Would be about the same as we get more volumes on the infinite plans where their underlying recurring.
Monthly rate is growing at a rate of 1% to 2% when we get some volumes it will offset some of that natural decline in so without getting too far ahead of ourselves, but as we think about the first part of next year, we see ourselves, possibly moving to roughly.
Flattish ARPU blended ARPU of still might be slightly negative, but improving over the first course of next year and then of course as we said we get into the back half of next year and in particular this time next year.
Having a substantial volume on these new implement plans that uptake will overshadow what would be left in overage revenue and we see ourselves returning to positive ARPU decline in the back half of next year.
Hopefully that that answers your question on the first part.
On the second part with respect to Capex intensity on cable and one of the big things as we launch some of the new products around the Comcast set of portfolios it started with.
The IP television product.
There is also the adoption of our Wi Fi hub, which is the ex parity platform and there's continues.
Improvements on those and new products on the horizon that we continue to invest capital and on the ignite TV product. For example, we continue to ingest some.
New apps, including Amazon, our sports net now app as well as.
As well as the zone.
Few and so while we continue to invest in that type of enhancement to the product the bulk of the fixed costs continued to come down that's offset by.
The continued increase in the pace of migration to date, we have over 200000 customers on the ignite platform.
Dismount. This month, we are stop selling our legacy product and so you'll see all new acquisitions move to the new ignite platform and we will begin a campaign of accelerating the migration of customers from legacy to ignite.
And that involves truck rolls as well as some additional investment in CPG notwithstanding that we expect to contain that within the 29% capital intensity ratio, we have for this year and.
As we look into next year and beyond we have a plan within cable to continue to bring down capital intensity and so it's really the cost efficiency.
That continues to offset the volume uptick that we expect during that migration process.
Great. Thanks, guys.
Thanks, Dave next question area.
Our next question comes from Vince Valentini of TD Securities.
Thanks, very much two things one.
The move to equipment installment plans I know it hasn't gone quite as fast as you had helped but.
Have you had any benefit from that in your numbers yet in Q3 and can you remind it's even if you've seen that in your sort of run rates in volumes, how long, it's going to take for any related cost benefits to if to flow through your numbers under underwrite for us and the second question is I mean, you seem very positive about the underlying.
And on the moved infinite and unlimited plans and the data usage increases the cost savings and so forth, but but obviously, it's translated into lower results for this year because of the pace of of migration can you answer. This question I mean without giving as hard numbers.
You would have had a plan for 2020 before that would have had some level of EBITDA growth in your mind would you now think that percentage growth in EBITDA in 2020 is higher than what you plan was three months ago, because the base is now lower and because of all the pot underlying positives from unlimited. Thanks.
All right.
Ill take the first one Tony will follow up on the second one so Vince in terms of equipment installment plans. We believe that is the right.
Focus and structure for the industry the impacting the quarter is modest.
As modest I think you know, we're just starting to see a change in a turn in that direction.
It was exacerbated by one of our one of our competitors, taking a very aggressive stance with subsidies during the promotional period.
We're really trying to.
Re architect the value proposition here for consumers to say here.
Here's an opportunity to get unlimited data to get worry free data.
And the like two to.
Stop some of the dilution from the premium brands that we've talked about mixing into flanker brand stop some of the line stripping that was going on in the premium brands et cetera.
And we think that the better model overall is to drive equipment financing and driving hard.
We think it creates better affordability given the construct of equipment financing for consumers.
In terms of financing the total cost whether it's the.
The tax costs, whether its fee.
A potential recovery value at the end of term et cetera. So I.
I think it'll take some time for that to shake out and I think you know the readiness around systems and capabilities, our hasn't been completely very yet overall.
But it's a big number that's a big number and we spent almost $1 billion last year on subsidy and you know when cellphones, where a few hundred dollars.
It wasnt as big a relevant at cost, but now as their cresting.
2000 and beyond.
It's it's behooves us take a look about how do we re architect to restructure that subsidy.
Profile and approach at the same time make sure we create constructs that are affordable for customers as a whole because it's just not the right way too.
Drive the future of the business, so they're going to see us really try to drive disciplined on this front.
You are going to see us really build capabilities that continue to.
Offer feature sets around financing the customers will find attractive.
And that's our view on it.
If I could pickup on that Vincent in answer to the other party of your question I think you're getting out you know is there an expectation that we would see some say this year on it.
And the answer is absolutely as Joe said, when we launched the plans it was.
Balanced set of economics on good value with unlimited plans.
But a much lower subsidy, but that was complemented with very attractive terms of 24 to 36 months financing that kept the of rate low for customers and significant would significantly reduce the almost $1 billion in subsidy on an annual basis that Joe talked about.
That wouldn't have all come into Q3 or Q4. This year just under IRS accounting a couple of things happen indirectly sort of gets smoothed over a 24 month period.
But notably hardware discounting or the subsidy that continued in the marketplace. Just the way IRS accounting works a significant portion of that discount is offset against the ARPU and so provided a revenue in ARPU drag for us in the quarter and willing Q4, as well and so when I made previous comments.
About.
The ARPU declines in the base.
Relative to our expectations that would be an additional factor for notwithstanding that we're confident that the industry as Joe said, well kind of realize the competitive dynamics are realized.
We need to get to this balance on subsidies and we'll have to see how that plays out.
Not only in Q4, but particularly as we head into the first quarter of next year. So we don't want to get too far ahead of ourselves to talk about how we think about EBITDA for next year on becoming back to the restated guidance for this year you should think about it as largely attributable to two main factors.
Our that we weren't expecting one is the heightened overage revenues.
A little bit of the additional idling discounting that occurred in Q3 that will impact us in Q4 combined with the heightened subsidies that impacts revenue because of the IRS accounting as I mentioned as well as margins over really the three big items that we weren't expecting that had a material.
Impact notwithstanding that we continue to post good cost efficiency numbers fear to look at.
Our wireless costs for this quarter Theyre down 8% year on year year to date, they're down 6% that's fairly significant.
And that excludes subsidy in that number.
If you to look at our cable side of the business, we kept our operating costs flat notwithstanding the migration that we've talked about to ignite.
Which carries considerable opex in terms of truck rolls and other related transition costs, but even with that year to date cable costs are down absolute 1% and then in our media business quarter costs are down 15% year on year.
Although.
Large part of that is bluejay salaries. There are other operating back office costs within media that continue to want to come down So I think.
You see is an underlying business with.
Good roadmap, we've talked about cost program delivering consistent improvements.
Each quarter sequentially and year on year, and you're seeing that is just as that overage revenue comes down need three factors that I talked about it's really masking that underlying trend.
Thank you Vince next question area.
Our next question comes from Maher Yaghi of days our Dan.
Thanks for taking my question. So I want to go back to the comment you just made.
On guidance, Tony So the delta on on the revenue for the new guidance versus the previous guidance of 600 million.
And on how the dies 240 million so.
You said in your and DNA that overage was about $60 million of impact in the quarter assuming.
All of that one straight to the bottom line.
I'm struggling to understand the reduction and your EBITDA guidance because as you mentioned just now your cost and operating the wireless business and the cable business is down year on year. So.
What is causing the reduction in EBIT beyond the overage here because the.
Assuming the overage impact in Q3 is also the same level or even higher I still don't get to $220 million EBITDA.
And I have a follow up question on ARPU.
Okay.
Couple of things mirror on one is.
The reduction.
In EBITDA from previous guidance the current.
Depending on whether you are 240 sort of takes the midpoint and I think if you were to look at the first half of the year given the lower revenue. We had we are trending towards the lower end of guidance, if I take that 7% to the midpoint of the new guidance range of 4%.
You get roughly on $6 billion of annual EBITDA $180 million versus your 240, but let's say, it's roughly $200 million to help you walk through pick about it as of the overage meld 50 million. This quarter were expecting about the same for next quarter and so that's half of it about a 100.
Million dollars, we saw some additional discounting.
And you see that in our blended ARPU coming down and so you can put that in the range of roughly $50 million.
Of unexpected run rate impact for the back half of the year and then finally as I said the subsidy piece of it our expectation was with reduced subsidy in the market that it would not only help ARPU because of the accounting that I talked about.
In reducing.
The offset to it but also reduce the net subsidy cost and that was expected to be in the range of.
50 million to $100 million in the back half of the year. So those are really the three components.
That impacted us that we weren't expecting.
As I said in my scripted comments everything else continues to be on track in terms of the underlying and it's really those three main components that bridge to the roughly 200 or $240 million that you referenced.
Okay, So and so why why where were you expecting that reduction on subsidy in the back half of the year, even before you.
Launch the unlimited plans.
That's it seems like that was a.
Implied in your guidance, but what.
What's what was the reason behind that assumption.
Oh, let me help you with that the of as we thought about where we are trending.
Year of we were already experiencing lower than expected revenue, we still had two thirds of our business to go and so our expectation was there were some things in revenue that we were expecting that.
I would allow us to continue to hold.
Our guidance on.
Each of revenue EBITDA and free cash flow.
And so as we reevaluated at mid year, what we thought the back half was going to look like vis-a-vis. The guidance ranges. We provided in January that with some of the new dynamics that we had factored in at that time.
Okay and on the right on the ARPU, if I look at.
Impact the 50 million comes out to $1.55 on our blend I if I look at at the year on year hits to five 2.7% slower.
So you have said in the past that.
Overage accounts for about 5% total ARPU. So on 1 million subs that transitioned on unlimited out of a total of 9.3 million.
You lost half of the overage it seems pretty high so I'm trying to figure out at all.
What were to go from here.
What we'll try to do marries rather than walking through.
With that detailed math on this call, we'll certainly share with you help you with the rig reconciliation for the benefit of others analysts on the call. We'll do the same in terms of sharing that but.
We are not quite at the halfway mark of reducing Overages. The simple answer and there are other items that were helps in terms of revenue in ARPU that offset that so.
As I said, rather than doing that reconciliation now prefer to do it offline with you and will broadly distributed.
Okay. Thank you.
Hi, Thank him there next question area.
Our next question comes from drew Mcreynolds of RBC.
Yes, thanks very much good morning.
Just first Tony.
Thanks for all the additional granularity, helping us kind of sort through this to two follow ups for me first.
Maybe Joe on the migration Ray dynamics, you're pretty clear through September what was happening just wondering from Rogers perspective, how you view the accelerated migration and the ripple effects were going to recalibrate here today.
And the benefits and pros and cons that versus maybe controlling that migration rate.
In a more measured way.
Then second kind of back to kind of Vinces.
I guess attempt on 2020 I'll make the same attempt do you think the point be here at the other end.
Has meaningfully or materially changed in terms of the economics of the business or.
Some of the growth targets and just dollar targets overall that you think the businesses heading to.
Thanks drew for the questions.
First of all on the.
Accelerated migration, let me be very clear, we're very happy with the fact that the migration this happening more quickly.
We knew there was going to be a J curve in this migration. We said originally be somewhere in the range of six straight quarters of the fact that is happening within four or five quarters.
And that the underlying assumptions around where the value drivers would come from our holding true is a good thing as a good thing as a whole we've really strive to make sure that the approach that we've taken is clear and simple you heard me talk about the simplicity dividend.
What we've asked customers to do is to migrate.
The entirety of their share plans over to infinite.
Therefore, creating very simple construct.
As a result.
We are seeing customers.
GAAP those very readily and I think it's I think it's a good thing because the underlying savings in terms of the cost to serve we're seeing evidence of that already and we do anticipate that there will be.
Another factor around equipment subsidy that we've talked about the sooner we get to those.
Points in time, when we migrated through.
The majority of our base.
The more quickly we can resume.
The type of growth that we believe is on the other end.
Including the ARPU economics, when we look inside this base just to repeat the point from earlier, we are seeing the an infinite customer on average their recurring ARPU is up one or 2%. After this migration dynamic so.
More is better with respect to migration path.
Versus you know.
A longer.
Approach to this so.
As I said, we expect first in the latter half of next year to have fully.
Work through the overage.
From roughly 5% today.
To somewhere in the 1% range about point and then we'll get the full benefit.
The upside that I've just described.
Surfacing.
And really being sort of the new.
Structure economically of a growth oriented wireless business, just wasnt sustainable to continue the overage go back to my comments earlier to continue to the overage regime that had been created.
Average was almost double that a couple of years ago. It was closer to 10% so like it or not we've been we've been eating through that overage through a series of complicated structures around data top ups and data bonuses and things of that nature, because overages, a big pain point for customers rather.
And continued to perpetuate that complexity, which drives all kinds of hidden factory costs in our organization, we said no less bite the bullet, let's get a very simple constructs.
And let's get to the simplicity dividends as quickly as we can.
And we had a great.
Passive instruction to look at we saw exactly what happened in the US we sat unwashed every chapter that movie we saw it evolved very clearly very specifically over time, we saw what was done well wasn't done. So when we saw that come up the other side with growing ARPU with cost.
Improvements with a margin there was up 10 points.
And vastly simpler business to manage and navigate and very different subsidy economics.
When you look at that movie, we say why can't that movie happened in Canada. We believe we can have an in Canada and along the way what do we create happier customers higher likelihood to recommend.
On a greater overall healthy business that sustainable well into the future. So we think the faster is better.
As opposed to finding artificial means to.
Prop up and slowed down the effect, including mixing and matching of share plans, where some members of the finally might be on limited on others are not on unlimited the complexity that drives in terms of a conversation would be amount. So we're very much committed to the simplicity of one.
Simple size and approach that fits the entire family, that's where the real gold isn't this and with that driving the right equipment financing structure around it I think is is exactly the direction. We should we had an issue and then on the faster the better frankly.
On the second part of your question drew in terms of 2020 EBITDA.
Again.
We don't want to make this a guidance call for 2020.
But to be helpful and here the moving pieces as we think about 2020, we've talked about the overage decline overshadowing.
The underlying growth in wireless and so we'll likely see a year, where the first half will continue to be.
Pressured on revenue.
And it won't be till the second half of 2020 that we start to see net net wireless revenue growth.
And that's true of ARPU as well.
On the cost side of it you should expect us to continue to deliver.
Type of absolute cost reductions inefficiencies that you've seen and we're fairly confident about our cost program on that.
And then the third piece of it in that one is really going to be driven by market dynamics, we continue to believe that.
Installment financing is a win win for us the industry and consumers in many ways and so it will be we'll have to see how the market.
Adopt those and at what pace, but that will yield significant savings.
For us and the industry in 2020, and so that'll be a big determinant of the overall EBITDA profile for the year.
I think I would characterize the year overall as.
Slower start in the first half of them and a different growth profile in the second half where that nets out for the full year in many respects is less rubber relevant on we think it's more of the quarterly direction of travel that's going to be important.
Yep understood. Thank you.
Great. Thanks to our next question area.
Our next question comes from Jeff San of Scotiabank.
Thanks, Good morning.
Lots of details have been given so I won't go too far into the details, but question for Joe and Tony.
You guys are obviously happy about the migration pace too.
Infinite.
But at the same time.
Lowering the outlook is probably was not probably part of that plan. So if you look back is there anything that.
Thank you. Thank you could have done would have done differently would have meet this transition, perhaps a little bit easier because I don't think anyone debating whether whether this move is.
Is inevitable is this I think both of those things kind of needs to be reconciled.
And then just lastly on the subsidies.
The.
Again, not to point too much to 2020 blood competition.
Subsidies in place.
And.
Your assumption that.
All operators are going to go to IP only plans at some point.
In the near medium term.
The industry.
So let me start until maybe you can talk about our views on subsidies.
Jeff Thanks for the question.
We spent a long time talking about the move to infinite.
We did a lot of careful analysis as I said.
And we drilled for ourselves the J curve and what it might look like.
The thing we can you know thoroughly test was the rate at which consumers would rally and gravitate towards these plans.
And you know that ended up being three times the rate than we had anticipated, which I think is a good thing. So to your point, we are positive around that that move looking back I wouldn't change anything.
Frankly, moving along discussion with our board before we did this we talked about.
The reasons for doing it and we stared from collectively on the ground.
This is the right thing for consumers the right thing for the industry.
Let's go do this and if it takes eight quarters great. It takes four quarters, great. We'll just figure out as we go just the pace at which is going to happen.
I think everything us that we anticipated is coming in largely in line, but we thought the pace was very hard to gauge. Despite the fact that we did a bunch of focus groups and we talked to customers and we saw initial great enthusiasm, it's really hard to figure out what does that pace.
You know would we have liked to have better view on what that might have looked like so we could have been.
No.
Had new they wouldnt, we wouldn't be surprised by three times a base.
Yes, but like the on the dates are right direction the rate move when we think.
When the change of thing overall frankly.
The second part of your question Jeff.
When we launch this we thought.
When we launched the infinite unlimited plans.
We also launched installment plans and but we kept in place.
The legacy subsidy model and it's less about the with the savings is less about whether its installment plan or the subsidy model, which bundled together the service with the cost of the phone.
It's more about the inherent discount that provided on the device and so back in July .
What we did say is we were going to keep the subsidy plans in place to help consumers understand the transition we very much like the simplicity and appeal of the phone as we said it was a great value in terms of connectivity with the unlimited plans.
And the device was very simple is the cost of the device over the term you want to the customer wants to finance it and so we thought that simplicity at terrific appeal.
But.
We kept in place the subsidy ones for those customers that weren't quite sure yet.
And we did them both at the same economics. So they were much reduced subsidy so in the past and on average.
As you would know Jeff the average subsidy would sit in the four to $500 range previously in terms of what was the pure discount on hardware provided to the customer per entering into a two year contract.
We reduced that substantially when we launched our plans in July in both the installment plan as well as on the subsidy.
Our point is that the market continue to offer subsidies throughout Q3.
Largely in the $400 plus range and in order to compete we match that.
We've seen that those numbers have come down post quarter end.
And so it's difficult to predict where the market is going to go.
In Q4, and as I said, particularly into Q1.
Our expectation is that.
As we head into the new year, we will move and we think it's the right move to move to all installment plan.
But if there continues to be.
Subsidy in the marketplace that some customers want.
As we see our competitors continue to offer it.
Then, we'll do the right thing and match.
Of course, but we think the the move to installment is the right plan and it's taking a little bit longer than we expected.
Great. Thanks for the color.
Great. Thanks, Jeff next question area.
Our next question comes from Tim Casey of BMO.
Thanks to from me.
Tony or Joe could you talk a little bit above what how we should think about.
The inherent cost reductions to come out of this migration in other words.
We need to get to a point where.
You bled off all quality overage sort of the end to 2020 before you see.
Before we will see a marked reduction.
In costs associated with with the the call centers and whatnot now.
In other words when will the simplicity dividend come through in the numbers.
Terrific to the plans.
And second just to talk about wireline for a second.
Tony You mentioned you were going to.
Invest in an acceleration plan of and you're no longer selling the legacy plants, but you're going to try and.
Accelerate the migration, how should we think about that in terms of financials et cetera.
Are you going to be able to do that with.
With your current cost base or is that is there another transitional sort of.
Onetime costs that you're setting us up for there. Thanks.
Well take the first on toning second one.
Tim.
In terms of the pace of.
The cost improvements.
Think of it this way think you know.
This quarter, we made an investment.
In.
Speaking to a million customers around infant implants.
Or supporting them through the transition.
Typical number of price plan changes in the quarter may have been one six there one seventh of that number.
And therefore.
There was a specific associated cost with helping customers make the transition.
What we're seeing is from the customers that adopted right away what their behavioral patterns are around calling and interacting and their early churn behavior as a whole so think of it as.
As we get through.
The bulk of the transition and as we come up sort of the other side in terms of the rate at which is happening this implicitly dividend will overtake the investment.
Effort required to make the transition happened I mean without sounding like calculus professor.
It is sort of that.
Bow wave, we are going to go through and I think we'll start to really see it manifests itself more clearly.
In the latter half next year as Tony was describing but in the Meanwhile, you can count on the fact that we'll be looking at all the specific details to make sure the direction of travel all those key metrics is going in the right direction than what we're saying right now is exactly that we're seeing that directional travel bear in mind that we talked earlier that.
We saw a 13% reduction in calls this quarter.
As a whole as a business, 30% reduction is significant events after taking into account the efforts required to transition a million infinite customers and the efforts required to transition of another 40% of the ignite customers, which are not insignificant efforts in terms of the customer head holding required.
And the digital adoption going up 11%. So we'll continue to have broader macro.
Plans that will deliver the cost savings that Tony quoted a few minutes ago, while we're looking specifically at this migration path to make sure that the benefits are materializing, which they are.
In the second part of your question Tim.
Related to the ignite migrations.
The migration scared.
Both capex and Opex.
As you would expect and so think about our cable capex, we've talked about being on a trend to continue to lower it and our expectation is notwithstanding.
The migrations that we're expecting.
We will continue to improve our cable capital intensity into next year.
From the 29% that we're seeing this year on the Opex side. There are some initial what I would call upfront costs as you would expect in terms of heightened training for our technicians et cetera that.
Following the range of opex, rather than being capitalized and so for a couple of quarters you may see.
Our cable margins pressured a little bit in terms of the net between.
The growing internet revenue and some of these investments.
Too early to call out now.
Much like infinite the pace of these migrations is still customer dependent and so.
It will depend on the pacing of that and so you may see some of that pressuring.
On the cost side for cable.
But.
We don't expect it on a net basis to be.
Significant.
Okay.
Thanks, Tim our next question area.
Our next question comes from Richard Choe Jpmorgan.
Hi, just wanted to follow up a little bit on the plans given the popularity.
The simplicity of them.
On the.
Way than we might see these planes expanded beyond the current.
I guess base that's been targeting.
Richard.
These plans are very much focused on the Rogers brand.
A brand that is premium offering in the marketplace that has a share construct around about is a brand that has a number of other service features and metrics, including the one we just launched we just launched prone to go where someone will come to your home your office and get you set up kind of a retail store on the go.
Approach. So it's really we're focused on that brand.
The vital brand is.
Focused more and lower price point.
Digital first high brand with cap plans.
And data overage protection instituted and organized by the customer and we think that is doing very well.
And we look.
Even in the midst of Q3 and everything that happened with the change to infinite photo brand performed very well. So we think one thing we managed to achieve with this is much cleared CRISPR brand differentiation between the two.
Our goal is to create a margin profile on Rogers or Fido that is roughly the same.
Again, one is a premium brand. The other is aimed at the smart shopper and therefore, we will be largely supported by a digital set of service and tools and if we can get to that place we become on somebody's indifferent to the nature of the loading and where it comes from and that's pretty much what we're focused on doing next year.
For the fighter brand and as well as perpetuate the move to infinite.
And then in terms of the margin and Theres alone moving parts, given the overage and some of the subsidy and promotions but.
And going through the migration or transition and then the transition with the.
Financing it seems like the second half of the next year could see a real uplifts and wireless margins is that fair.
Richard we entered the.
The shift on with a view that this was an opportunity to expand margins in our wireless business.
As we've talked about Theres, a few moving pieces.
The inherent subsidy is certainly a big part of that but.
As we said already.
Just to come out the other end with improved margins.
Thank you.
Thanks, Patrick next question area.
Our next question comes from Aravinda Galappatthige day of Canaccord.
Good morning, Thanks for taking my question I wanted to folks did not a little bit on December on this 1 million cohort of subs that have taken up about the.
The unlimited plan.
Yes, but I would tell you mentioned that the underlying auto growth is around 1% to 2% I'm trying to get a sense of what this call. It would have looked like prior to the migration.
They would they that once 2% common suggest that they like even previously somewhat higher priced.
Subscribers that kind of moved up a little bit too to unlimited, but then of course that can be a mix as well, but I'm really curious about is the ability of that $75 unlimited plan to pull up subscribers, who could have been 60 $65 attracted by the unlimited features and did you give us a sense of whether you're seeing.
As of a cohort of sub segment of those million that were previously not bucket that you kind of pulling up all materially.
Sure Aravinda.
So 40%.
Of the million.
Downgraded in terms of what they were spending on a monthly basis.
And 60%.
Upgraded so 60%, we're spending less than the.
Any final our price point and there is the distribution there that.
Ranges across a wide spectrum. So it wasn't just someone that was spending 70 bucks. It was a wide distribution and won't go to the details because that sensitive.
But so 60% upgrading.
40% downgrading is the very key metric.
The result in economics are strong as what we're seeing quite a healthy number of subscribers opting for the higher plants.
The plans that are pegged at 95 and 120.
Which is great, which says that you know.
Consumers are looking for worry free and looking to share the unlimited plans as a whole now looking for simplicity and the cost structure. We did two things that were very important one is we allowed our base to migrate to these plans out of the gates. We felt there was important that in the spirit of driving.
The simplicity dividend, we had to make it available to the base and the second thing we did is that.
We drove simplicity around the structure, where everybody in the plan needed to be on unlimited. Those two things created the 60 40 dynamic would you think is a very highly dynamic and that's why that youre seeing that 1% to 2% ARPU increase and.
We think the economics are working from my perspective.
Great. Thank you.
Thank you Arvin next question please.
Our next question comes from Adam Elkowitz at Citi.
Hi, Good morning, Thanks for taking my question I wanted to understand into the fourth quarter and the wireless competitive landscape. There's been some recent pricing changes in the next couple of days actually.
From linear competitors have that.
That is impacting what you're thinking about the plans and then on cable.
I'm kind of intrigued by the ARPU changes you're seeing.
Most of what we expect is ARPU flexibility on the Internet side, but it seems like your video ARPU is a rising much faster than your Internet Arpus, which are rising on 2% I think can you kind of go through how the pricing structure is working in cable and what's kind of driving that dynamic.
Sure.
I'll take the first of all Tony talked to the video ARPU commentary.
What we're seeing Q4, so far is a couple of things one is.
Subsidy overall in the marketplace has come down substantially we think thats. Good in terms of the competitive dynamic we have seen one of the competitors.
Raise the entry point.
Raise entry point to $85 for unlimited.
We don't think that drives the right dynamic as a whole.
I think it creates too much complexity around the said earlier mixing and matching subscribers were going to share plan overall I'm not going to comment exactly in terms, what we're going to do in terms of pricing move us again competitively sensitive, but we think we pick the right price point at 75.
And we think is driving the right mix of upgrades and downgrades.
And this driving the simplicity that we were after.
Overall, and I think there.
The discipline around simplicity and the discipline around subsidy are the magic ingredients here and we're we're committed to driving discipline in both those areas because we think thats how to re architect the economic structure that we've been professing.
The second part of your question, Adam If I understood. It right is really reconciling the ARPU growth between Internet and and the video piece of it.
I would say on the Internet side, we're pleased that we continue to see growth.
The growth on Internet ARPU continues somewhat to be dampened by the competitive offers that are out there that continue to.
It'll be beyond.
Three month period, and so as we said before we will continue to match on those as needed to win in the marketplace.
We do it first and foremost on products inferiority, but where we need to we will match on price and you're seeing that.
Temp and some of the Internet ARPU.
On the video side.
You're really seeing the strength of the product come through and so as we see customers might migrate from legacy too.
Ignite TV.
Our new customers coming in on ignite.
Thats accretive to us on on the ARPA basis ignited sold largely almost entirely as a bundle with internet on so when you look at the two products.
We continue to see 10 to 12 dollar ARPA increase on a household that converts from legacy too.
To the ignite platform and so it really speaks to the premium nature of the platform and for the premium.
Segment of the video viewer that's willing to pay for that functionality now having said that there is a admittedly a bit of an allocation that happens between internet and TV, but we try to stay true to that based on relative market prices between the two.
And so they are a fairly accurate reflection of market dynamics in each of them.
Sure. Thanks, maybe following up to to Joe's answer I noticed that upgrade rates on the equipment side and insight wireless continues to fall.
Gross has been about flat. So are you seeing any change in the mix of customers taking delay a d. as a result, and desire is that having a negative impact on ARPU is as well.
Yes.
Yes, gross is actually up 5% Adam.
So we've seen a great very strong gross performance gross loading I think it's a combination of our distribution strength.
And.
Of the.
The way, we positioned in merchandise infinite and the simplicity of it coming home to attract customers and say that's a makes a lot of sense, we're seeing the gross drug.
As a result about.
Sorry for a couple of second part of the question.
I was just if you're seeing a greater mix of be leia de customers pressuring ARPU as well.
No no the mix has been relatively stable.
Overall.
The.
We've seen.
Greater growth overall in terms of out of line.
Outlined retention and out of line growth as a whole.
We talked about the online discounting that happened in the quarter.
And that certainly had an impact because it.
Line discounting went from $5 a $15. So it should we think is aggressive.
Overall, but.
No we haven't seen any change in that mix.
Thank you.
Great. Thanks next question area.
Our next question comes from David Mcfadgen of Cormark Securities.
Hi, Thanks, taking my question.
Two questions.
So just looking at wireless.
Hi, there about a year from now you expect on yields to be only 1% as opposed to say, 5%. That's just wondering can you give us idea approximately what percentage and the sub base you would expect to convert and limited to get to that point.
And then secondly, when I look at your wireless operating expenses as you noted there down 8% in the corner I was wondering how much an average.
Is the is reduced call volumes I guess marci from migrate people over time limited. Thanks.
David I'll.
I'll take both of them in terms of the second part of your question.
Think about our opex really coming through a few areas.
Certainly call Center is one of the big ones that we've seen call volumes come down digital adoption is up 30% year on year. So we're really pleased with that transition.
As we said in our scripted comments, we're already starting to see some of the.
Infinite benefits come through on the call center in terms of material reductions and time spent on the call, but also once the customer moves to these plans a material reduction and the number of call backs we get.
As customer second guess their plan, it's the simplicity of these plans.
It really avoids that that second call.
And then also importantly.
The reduction in ensuring that entails for those customers that moved to the plant and while it's early days and it's only four months.
If you look at cohort to cohort of previous versus new others have substantial reduction in that churn piece of it.
The second piece of it continues to be it what we would call back office efficiencies in the digital adoption certainly helps drive some of that simplicity.
Is certainly a piece of it but continuing to incorporate things like AI.
Into some of our back office machinery is certainly helping.
So those are certainly the big buckets as you as you would expect.
And then David first party your question just repeat that.
Sure just wondering.
What percentage of your postpaid sub base, you would expect to be.
On and limited ticking down to say one person.
Your service and still on all fronts.
So.
Let me answer it this way for competitive reasons, we just want to be careful and anything that.
Allows our competitor to understand how many fido customers, we have versus Rogers.
So we're very sensitive about that.
For obvious reasons and so what we what we can say is by this time next year, we expect.
The vast majority of our Rogers customers to be on the infant implants.
Maybe just leave it that.
Okay all right. Thank you.
Next question area.
This concludes the question and answer session I'd like to conference back over to Mr. carpino for any closing remarks.
Great. Thank you everyone for sitting in on the call today, we will be available are.
Additional calls later today, thanks for your time.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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