Rogers Communications Inc. (RCI) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rogers Communications Q4 2014 Results Analyst Conference. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, January 29, 2015 at 8 a.m. Eastern time. I'll now turn the conference over to Bruce Mann with the Rogers Communications management team. Please go ahead, sir.

Thank you very much. Good morning, everyone. We appreciate you joining us. Here with me in Toronto this morning are Rogers' President and CEO, Guy Laurence; and our Chief Financial Officer, Tony Staffieri. We released our Q4 results about an hour ago. If you don't have them, they are available on the newswire on the rogers.com website and the purpose of the call is to crisply provide you with a bit of additional color upfront, and then we'll answer as many of your questions as time permits. The remarks and discussions will undoubtedly touch on estimates and other forward-looking types of information, which ultimately could differ from our actuals. So with that, the cautionary language included in the earnings report and also in our annual report apply equally to the discussion on the call and they're both available on the rogers.com website. So with that, I'll turn it over to Guy and then to Tony, both, for a bit of additional perspective on the quarter and then we'd be pleased to take your questions.

Well, good morning, everyone, and thank you for joining us today. Let me say, I'm pleased that we've made our overall guidance of 2014 and that we now have a shift in the trajectory of wireless ARPU and network revenue growth, which is in line with the plans that we've set. However, before talking through the results in detail, given I've been here a year, I thought it would be useful to recap the overall scope of what was accomplished during 2014 so you can get a sense of where we are. A year ago, I said that I viewed this as a multi-years' journey to restore our performance back to an industry-leading profile. We have now completed the foundation year of that journey. During the first quarter of 2014, I undertook what was dubbed The Listening Tour, crisscrossing Canada, meeting stakeholders, both internally and externally. In addition and importantly, we secured the beachfront spectrum in the 700 megahertz auction, which we are well along in the deployment of. In late May, I shared with you that I will spend the latter part of Q2 and most of Q3 putting in place a more customer-focused structure. We created a separate customer experience function, a new enterprise business unit and reduced the number of senior management positions by 15%. Whilst it generated cost-savings in the short term, I said we would reinvest those savings in key customer focused areas, and those investments are also well underway. We strengthened our senior management team with key hires from Google in the U.S. and Cisco in Canada. And we announced just last week the new president of our consumer unit, who will be joining us from Deutsche Telekom in early Q2. These are experienced proven leaders, who bring global best practices, a customer-centric mindset and experience of dealing with complex regulatory frameworks. In the fourth quarter, we turned our attention to executing on our 3.0 plan and introduced the first of the new commercial propositions focused on our customer base. NHL, ROAM LIKE HOME and Shomi all launched in Q4, although in fairness most of them came in the second half of the quarter and will take time to feed into the financials. During the past several quarters, as I disclosed to you before, we have moved away from using heavy discount price offers in order to attract and retain customers. We call this initiative a shift from volume to value. I said that these would cause vibrations in our figures, particularly in the customer metrics, but that we needed to go through this period and it would take some time. So turning to this quarter. How should you interpret these figures? First of all, the overall revenue growth is solid with 4%, which Tony will go into in more detail in a minute. Of particular note is wireless network revenue and postpaid ARPU growth of 2%, which has come directly from our move from volume to value. Media revenue has also benefited this quarter from our investments in sports. I'm sure you'll want me to comment on the customer metrics, which appear at first glance to be [indiscernible] with our financial success. During Q4, we stepped up our discipline in removing short-term pricing practices from our wireless and cable subscriber basis. We started tackling the practice of rolling forward various promotional and retention offers. There are portions of our existing base that were put on in past years as Band-Aid solutions to more systemic issues, which we are now addressing. In addition, our subsidy policies were adjusted to be in line with the economics of our customer lifetime value objectives. The strict and disciplined application of these commercial policies to new and existing customers impacted the subscriber numbers in the quarter, but this was expected and it was in line with our internal forecast. It's one of the vibrations that I've told you should expect. To reiterate, you should continue to expect some degrees of vibrations on volume metrics in coming quarters. But also note that as we experimented with several other changes during Q4, the subscriber metrics were actually improving on a year-on-year basis as we exited the quarter. In summarizing the whole of 2014, we delivered what I said we would. We actually delivered quite a lot in 1 year. We have a new plan, we've reorganized the company, we've infused new management where required as well as empowering existing management with a new agile -- more agile structure. We started the long journey to fix some of our fundamental execution issues. And importantly, we delivered on our financial guidance that we set out at the beginning of the year. Now there is a considerable achievement given the degree of change in the investment we undertook. So where does that leave us? Well, let me remind you that [indiscernible] 3.0 is a plan to reaccelerate our growth relative to our peers, and progress will be measured over a series of quarters rather than overnight. The bottom line is we have put a lot of important change behind us, but we still have a lot of execution in front of us. Looking forward to 2015, I fully expect that we will continue to see some good momentum on the key financial drivers and the resulting figures. The plan shows a gradual and planned improvement as the year progresses, and Tony will talk to more of that in a minute. I would describe our 2015 plan as ambitious given the double cohort, but achievable. I don't want to share too much of granularity of our plans publicly with our competitors, but I can tell you that you will see some meaningful progress in terms of revenue, brand, customer experience and how we go to market. At the industry level, we have 2 spectrum auctions. I can't really comment on these given the industry Canada rules. There are also some key regulatory decisions in both wireless and the cable space that will provide clarity as to whether pro-investment facilities-based competition is still a priority in Canada. However, we are not waiting for those decisions and our focus remains on execution. So I hope that brings you up-to-date, and let me turn this over to Tony, who will speak more -- in more detail regarding the financials. Tony?

Thank you, Guy, and good morning, everyone. Let me quickly provide a bit more detail and color around the fourth quarter results as well as our 2015 guidance, and then we can get to your specific questions. In Q4, we showed progress from a financial perspective when we finished the full year 2014 in line with our guidance. Adjusted operating profit came in at just over $5 billion, CapEx at slightly under $2.4 billion and after-tax free cash flow at just over $1.4 billion. During the fourth quarter, we continue to generate solid cash flow and strong operating margins, building on the year-over-year trends you saw in Q3. Those trends showed continued positive movement in ARPU, revenue and cash flow, reflecting our shift in focus from subscriber volumes towards subscriber lifetime values and bringing additional value to our customers in unique ways other than simply price-related. In looking at our trajectory over the year, you'll see the consolidated revenue grew 4% in Q4, up from 1% growth in Q3 and from flat in the first half of the year. Overall, growth was led by wireless, which was up 3%; and media, which was up 20%. Adjusted operating profit was strong at the consolidated level, up 6% year-over-year, driven by Wireless, which was up 4%, Business Solutions up 17% and Media up 59%, offset by a modest decline in Cable, where we ramped up service and customer value-related investments. And we accelerated the top line growth at the same time as we delivered additional operating leverage, with consolidated margins up 60 basis points to almost 37%, reflecting productivity improvements we've put in place across the business. At Wireless, Q4 network revenue was up 2% and improved year-over-year for the third straight quarter. In terms of postpaid ARPU, we saw the first year-over-year increase in 7 quarters with a 2% increase versus a decline of 0.7% last quarter, decline of 1.4% in Q2 and a decline of 4.9% in the first quarter. The reversal of that decline reflects our focus on lifetime value and discipline around pricing and promotions. As I described in previous quarters, our new roaming constructs have had and continue to have an impact on our Wireless revenue and ARPU profiles, but we believe we're headed towards the right value propositions for our customers in the long term. For this quarter, postpaid network revenue, excluding changes in roaming, would have been up 4%; and postpaid ARPU, excluding roaming, would have been up over 3%. Total roaming revenues, both inbound and outbound, were down about 15% year-over-year and are now less than 7% of our wireless network revenues. This quarter, we launched a ROAM LIKE HOME value proposition for customers traveling to the U.S. and it's shown some good elasticity in terms of customer adoption. I expect we'll see this trend continue as we shift an increasing proportion of the subscriber base to Share Everything plans, where customers are most able to take advantage of these value enhancements. We now have about 30% of the Rogers brand postpaid base on the Share Everything plans, which are increasingly accretive to our overall ARPU. While there was an uptick in Wireless postpaid churn, which led to the reported negative postpaid nets in Q4, we can, as Guy outlined, attribute much of this to our increasingly disciplined execution around pricing, promotions and subsidies not just in the market, but increasingly around how we manage our base with an eye towards overall customer lifetime value. And this is apparent, when you look at the improving profile of ARPU and adjusted operating profit. We are pleased with the trending we see when we compare the profile of new customers' ARPU compared to that of an exiting customers' ARPUs in the quarter, where the difference continues to widen. To be clear, we continue to expect to gain our fair revenue share of the market, but will do it in a very disciplined way. We also continue to manage the migration of consumer customers from 3-year contracts to 2-year contracts. As we exited 2014, only about 21% of our total postpaid base remained on expiring 3-year contracts, which gives us an increasing degree of confidence that the double cohort impact coming up in mid-2015 will be a manageable transition. In terms of higher value customer upgrades and additions, smartphone demand has remained strong as we activated 836,000 in the quarter, which is the highest number in 2 years and a 6% increase over Q4 of last year and approximately 1/3 of those activations were new subscribers to Rogers. I also want to quickly point out that our reported postpaid subscriber metrics do not currently include subscribers to our wireless home phone product, which had a cumulative base of approximately 92,000 subscribers, of which approximately 9,000 net new subscribers came in the fourth quarter. I point this out as effective with our reporting of results for the first quarter will begin including the subscribers in our postpaid base, consistent with our wireless counterparts in the U.S. In the quarter, we continue to demonstrate success around our cost management and efficiency initiatives on Wireless, which provided the operating leverage to drive adjusted operating profit growth of 4% with solid margin expansion of 90 basis points to 42.6%, despite higher equipment sales relative to last year. Turning to cable. Revenue was essentially flat this quarter, balanced by higher internet revenue, a bit of additional revenue associated with Source Cable, which was acquired in November; and modestly lower TV and home phone revenues. Cable adjusted operating profit was down year-over-year on a 2% increase in certain programming costs and quarter-specific customer value enhancement investments combined with the impact of the year-over-year change in subscriber levels, partially offset by productivity initiatives. The subscriber metrics were also somewhat softer in Q4 in part due to our pricing discipline that we began to implement in the Cable segment, similar to what we've described for our wireless business. But a lot of it is also due to the incremental loss of multi-product customers, particularly as our main video competitor continues the expansion of their Telco TV footprint with the associated competitive pressure on household bundles. At our Business Solutions segment, the shift to and growth of on-net next-gen revenues continues to drive improvements in the financial profile. Next-gen revenue now represents 75% of total service revenues and grew 13% year-over-year. These were, however, more than offset by planned ongoing migrations away from legacy off-net revenues. And you see this shine-through in the 17% growth of adjusted operating profit in the quarter, as the mix continues to shift to higher margin on-net business. In our Media segment, you can see revenue increased 20% year-over-year largely from incremental NHL revenues. Excluding the incremental NHL impacts, the underlying Media segment, on an organic basis, would have been down about 2%. While we see solid growth in our Sportsnet and radio divisions, these are more than offset by continued softness and structural shifts in conventional TV and print advertising. We are off to a good start with our landmark 12-year NHL deal, which is performing pretty much bang on to our internal expectations. We added almost $100 million of revenue in the quarter and were breakeven from an adjusted operating profit perspective, but this was expected in the first portion of the season in our first year. We continue to expect the contract to be operating profit accretive for the full season with much of the margin being generated during the play-off period in the second quarter. Overall, Media's $19 million increase year-on-year in adjusted operating profit was the result of some solid cost-saving initiatives, particularly in the television and publishing divisions. So overall, on a consolidated basis, we reported adjusted operating profit of $1.2 billion or 37% margin overall. However, I think it's important also to highlight that these are extremely capital-intensive industries. And while our operating margins are healthy, there is a significant amount of fixed investment that they need to cover. Our margin after depreciation and amortization landed at 20% in the fourth quarter, and this doesn't include spectrum costs which are not amortized for accounting purposes. Turning to our consolidated results below the operating profit line, you'll see that adjusted EPS was unhanged year-on-year with a higher adjusted operating profit growth offset by higher depreciation and amortization expense, combined with smaller increases in interest and income taxes, but clearly a good improvement from the trajectory we saw earlier in the year. Our free cash flow for the quarter of $275 million was up $166 million year-on-year, the result of higher adjusted operating profit, lower cash taxes and a more focused deployment of our CapEx in a way that better spreads the work more efficiently across the full year. Looking at the balance sheet. We ended the quarter with $200 million in cash and $2.6 billion in additional available liquidity consisting of $2.5 billion available under our bank facility and approximately $100 million under our accounts receivable securitization program. Leverage is at 2.9x debt-to-EBITDA and down at 2.7x when you give effect to the approximately $1.1 billion value of marketable equity securities we hold. We continue to focus on managing our leverage back down to within our target range below 2.5x. I'd also like to point out that Rogers continues to have a relatively low pension obligation deficit. The entirety of the deficit is relatively minimal, in the $300 million range, which represents approximately 1% of our equity market cap. And our expected incremental funding for 2015 is expected to be less than 1% of our free cash flow. Turning to our 2015 guidance. We're expecting continued growth in adjusted operating profit. In the range we've provided, we gave ourselves some room to manage around the double cohort effect later in the year. And on CapEx, the range we provided implies some potential incremental investments that could marginally take up our full year CapEx year-over-year. Overall, after-tax free cash flow is expected to be relatively consistent year-over-year at a substantial level of over $1.4 billion. Also for 2015, we announced this morning a 5% dividend increase effective immediately to a $1.92 per share on an annualized basis. To sum up, I would say that Q4 was solid from a financial perspective with some good progress on the revenue line combined with continued good operating leverage and discipline around capital spend together with driving operating profit, margin and free cash flow growth, all at the same time. With that, let's use the remaining time to get into whatever questions you'll have.

All right. Guy and Tony, thank you. And, operator, just quickly before we jump into the questions people might have, we will request to those on the call, as we do on each of these, for the people asking questions, if you could limit them to 1 question and 1 topic. And then that way, as we have a chance to everyone participating, we can circle back to the extent you have additional questions. And if not, we'll get them answered separately after the call. But that will give everyone a chance to participate in the limited time we have on what we know is a busy morning for everyone. So, operator, if you wouldn't mind explaining quickly how you want people to organize the Q&A polling process and we'll be ready to dive in.

[Operator Instructions] And your first question comes from the line of Simon Flannery with Morgan Stanley.

This is Daniel Rodriguez for Simon. Quick question on CapEx. Can you outline the key wireless and cable drivers behind the CapEx guidance for 2015? And quickly on the churn front. Can you just outline the churn trajectory in 2015 in light of the more disciplined approach you're taking in the marketplace?

Daniel, thanks for your question. In terms of CapEx, as we look to 2015 in both wireless and cable, as you would expect, it's largely going to be focused on network, in particular capacity and bandwidth capacity. For wireless, the focus will continue to be on LTE. When you look at our LTE footprint today, population covered is now at 84%, which is up from 79% back in the third quarter. So good investment going on there. When you turn to the cable side of it, it will continue to be on a couple of things, certainly on Internet capacity and as we bring our homes covered per node, we'll continue to bring that down to provide the bandwidth that we need. But also, in customer premise equipment, and in particular set-top boxes, our NextBox 3.0 continues to be deployed aggressively and you should -- you ought to expect to see continued investment in that in 2015. With respect to the churn profile, as we talked about in our comments, what you're starting to see is the application of commercial policy and discipline in our base. And that will continue into Q1 and in some of the following quarters, but you ought to expect the impact to erode as we progress into 2015.

Your next question comes from John Hodulik with UBS.

Question on roaming. Obviously, it was down 15%. A lot had to do with the ROAM LIKE HOME promotion. Can you just give us a sense of how you see that -- those trends playing out? I think it was a sort of partial quarter of that offer. I mean, does that get worse from here? Or as we sort of go through the year, do we -- should we start to see improvement there?

John, thanks for the question. A couple of comments in terms of roaming. It's important to keep in mind, there are 2 dynamics that are going on. There's roaming that's happening with respect to the U.S., and we're really pleased with the way the penetration or user adoption is working out for us, particularly with the new ROAM LIKE HOME plan, although it is early days. And so I would say, that piece of it is proceeding and we're probably close to the bottom of the U-curve on that. But the other dynamic is the international roaming side of it, and we'd launched in the second quarter of this year our new construct for that. And so we're only a couple of quarters into the international side of it, and so it will continue to have an impact, we expect, for several quarters as we work our way through that. But as I said in my comments, the overall roaming revenue is now at a point where it's only 7% of total network revenue. And so the impact on postpaid ARPU in particular has also come down to about 4% in total.

Your next question comes from Richard Choe with JPMorgan.

Given your guidance and material assumptions, should we be looking for postpaid subscribers to be flat or down this year? And as we kind of work through some of the issues and focus on value, could Rogers get more aggressive maybe later in the year to kind of reverse that trend?

So it's Guy here. What I would say is we don't give guidance on subscribers, and you can't put subscribers in the bank. You can only put cash in the bank. And therefore, we're not going to lead the witness on that one, if you like. In terms of aggressiveness or not aggressiveness, again, we're not going to signal to the market. We believed in a disciplined pricing regime. If -- obviously, we have to be competitive. Therefore, if competitors want to take actions, we may decide to follow them rather than lead them. But our focus is on disciplined top line and ARPU growth that translates into respectable profitability.

Your next question comes from Adam Shine with National Bank Financial.

Maybe one for you, Tony. We've talked very clearly about the discipline in terms of how the subscriber numbers evolved. Can you talk a little bit more about some of the moving pieces in the quarter in terms of the iPhone recessivity, the -- any supply constraints you might have had and obviously acknowledging the bigger-than-usual spike in smartphone penetration up almost 7 points in the period? And then I'll have 1 quick follow-up.

Sure, Adam. So I think, a couple of things. As we look to the dynamics, I would say, we're pleased with the way it's played out in terms of our focus on Share Everything. So your comment -- your question was with respect to smartphone, but it dovetails with our smartphone and much of what we've said around disciplined pricing. And so I've talked about the smartphone metrics. As I said, we activated 836,000 in the quarter. Almost 80% of our gross adds came in on smartphones, so a good increase in penetration of smartphones. 84% of our cumulative postpaid base is now on smartphones. When you look at our customer upgrades in the quarter, almost all of it, 98% of the upgrades, came in on smartphones. And so that piece of it is working well. When you turn to our Share Everything plans, which is another piece of it, again, over 60% of our gross adds on Rogers postpaid came in on Share Everything. And so we're already at a point where 20% of our total base is now on Share Everything plans and that translates to about 30% of the Rogers postpaid base.

Okay, great. And were there any iPhone-related supply issues at all to speak of and sort of any momentum into the Q1?

So what I'd say is that iPhone was obviously very popular and they had a lot of demand, and therefore you got some spotty weeks where expected shipments got delayed and then turned up. You got 2 trucks the following day and all the rest of it, but I wouldn't describe it as a major factor in the quarter or in this quarter.

Okay, I appreciate it. And just lastly, Tony, in terms of the last quarter, you gave a split in regards to HSPA versus LTE dynamics or usage. Can you just update us on that, if possible?

Yes. So as you would expect, we've seen good trajectory shift in that split. For the fourth quarter, roughly 60% of our data usage came in on LTE compared to about 40% on HSPA. Again, that's looking at the volume of data usage. And while in the past quarters, we've seen that shift quarter -- sequential shift quarter-on-quarter be in the 5% range roughly, what we saw in the fourth quarter is that sequential shift jumped to 10 points. So good adoption on the LTE and data usage ramp-up, dovetailing with the increase in pops covered that I talked about a moment ago.

Adam, it's Bruce Mann. Let me just add something really quickly to what Tony said. 2 things, one is with respect to the penetration of smartphones this quarter and we do mention it in the MD&A, we began including the, what we call, gray market phones or phones that weren't initially sold by Rogers, which historically we didn't. The trend doesn't change. It's just -- it was a little bit of a bump in numbers in terms of why you saw that unusually higher level of step-up. And then secondarily, to add to Tony's point on LTE versus HSPA, we're seeing the LTE base using like almost 90% more data on a monthly basis than the HSPA subs and they're giving us around 30% more ARPU as well. So just to support what Tony saying, it's going in the right direction.

And your next question will come from the line of Bob Bek with CIBC World Markets.

I just wanted to get some clarification on the cable growth targets out there, low-end sort of plus-1.5%, higher-end more like 4-plus. Assuming the vibrations on the subscriber side, we're still going to see negative RGU for this area. Can you talk a bit about what's driving that confidence in the numbers? I mean, is it pricing? Is it pricing discipline as you focus on value? Is it usage? Any clarification on -- I suspect Source Cable gives a little bit of positive, but anything else you can add to here as far as what's driving the growth?

To be honest, it's all of the above. You kind of answered your own question. I mean, I think that the part of the problem when you're looking in on companies like us is you tend to assume all the base is the same. But actually, you got multiple cohorts within the base that behave different ways, and there are opportunities to trade some of those cohorts up to larger packages. You see opportunities, other cohorts that maybe have lower speed broadband wanting to move to higher speed broadband. You have customers who have been used to entertaining a series of promotions over years that when they find out they're no longer available, they leave you and the art is in managing that mix. But I think where we're focused is very much on is shaping -- is being disciplined in our execution and shaping our propositions in such a way that people feel confident in the product and willing to trade off over the long term. And that's where our efforts are going, and it takes time to address the different cohorts with different offers.

Your next question comes from Glen Campbell with Bank of America Merrill Lynch.

Guy, I wanted to follow up on your last answer there. I mean, I'm seeing there is a trade-off you're making on, say, customer retention between, say, principle and pragmatism where you're wanting to stick to the gun -- stick to your guns on pricing. It makes a lot of sense. But if you're facing competitors who are willing to do 2-year deals to attract customers on the cable side, I mean, is the view that you're going to be sort of sticking to your guns on retail pricing and not do the retention discounting thing? Or would you describe your approach as sort of being more pragmatic? Can you give us a little help on that?

I would describe it as being more pragmatic. So I shouldn't -- of course, you set out with a set of principles on a Monday morning, but you also have to look at what's happening in the high street. And if you see activity that takes you beyond your level of comfort, then you react to it. But all the while, my belief is that you should continue to innovate and develop your product to get to a point where the necessity to intervene because of that activity is reduced. And since I have a long-term perspective, that's where I'm focused. But if I need to, I'll react. It's as simple as that.

And as a follow-up on that, I mean, on the wireless side one can make the argument that Q4 is actually a bad quarter to try to grow because the level of subsidies on devices spikes up and that maybe we should see results from that context. Is that a fair observation that there are better quarters to try to grow or not?

No, I think that's a good characterization, Glen, with the higher volumes that happened in Q4. I think what you see when you look at our subscriber metrics is a magnification of the principles that we're trying to apply both in our base as well as in the -- on the acquisition side.

Your next question comes from Greg MacDonald with Macquarie.

Guy, I think nobody is going to argue with the focus on profit. But the questions that I get from investors are the risk of sustainability on growth of ARPU alone. And so when I look at the market, potentially -- well, a fully funded wind potentially very spectrum-rich wind, it seems to me like there is a very real scenario where we inevitably go to a pricing environment in Canada kind of $50, 5-gigs similar to what we've seen in the U.S. and that's a market I'd point out that both AT&T and Verizon have responded to on price. I wonder if you might comment on the strategy overall on a couple of things. Number one, do you take -- do you assume that wind is dead on arrival, first of all, that I'm wrong in my assumption that the market could go to $50, 5 gig? And then second, what does the negative 17% gross add result tell us about whether Rogers is losing share to Bell and TELUS or this is an overall industry decline? What's the bigger impact there? Is this a share loss issue? Or is the overall industry declining on gross adds?

So it's not for me to comment on wind. You probably need to ask [indiscernible] what his strategy is. With respect to the U.S. market, what I think you see is a substantial lack of innovation in propositions. So when you have -- when customers can't see the difference between brands, then they result to comparing via only price. And at that point that they -- it's a bit of a downward spiral. And what the U.S. carriers have been focused on is extension of their coverage in the networks and also the distribution and in the market for smartphones and ensuring penetration with that. And when you're in that kind of gold rush, you don't tend to focus on differentiation. You tend to focus on execution of those metrics. So as the market matures, what happens is the need to -- in a market where there's not differentiation created by the operators, you'll always default to price. My philosophy is, is we can create differentiation and therefore I don't see us going down the route -- or certainly, from my perspective, down the route of where the U.S. market is going. So I probably have a far more optimistic view of the world than you do.

Add to that the decline -- the 17% decline in gross adds that you see in the fourth quarter, I wouldn't read any long-term trends into that. If you were to go back and look at the course of the last several quarters, while we had less of a decline in Q3, we were at a 17% decline in the second quarter. And so I think it's more a function of the specific pricing and promotions that are put out there and how we've approached it this quarter.

And, Tony, just to be clear, is this the quarter where you lost share? Is that reflected in the 17%? Or do you think this is an industry thing because of the increase in prices in late '13?

So I think no one should judge what happens in 1 quarter since none of our competitors have released their results yet. I don't think we should comment further on this.

Your next question will come from Jeff Fan with Scotiabank.

I want to follow up on the last question and, Guy, your comment regarding innovation and differentiation. Since you joined, there's been a number of new products that's been launched, the NHL, Shomi, as you talked about. Can you talk about -- like, are those the products and services that we expect to see that will differentiate Rogers? Can you just elaborate a little bit on perhaps areas that we should be looking at to assess how Rogers or whether Rogers can differentiate against your competitors so that we can kind of have some sense as to the pricing scenario that Greg mentioned is not something that we're probably going to head to?

Yes, that's a good question. So let me just take a bit of time to go through this one. So first of all, you create propositions. Let's take Shomi or NHL or ROAM LIKE HOME, and if we take those 3 examples, the first one launched on October 8, the second 2 were in November, as I remember -- November as I remember. So actually, they have been in the market very little time. So what happens, you have a proposition, you put it into the marketplace and you start advertising it and over time the awareness of the product builds up. The next thing you get is adoption of the product, which then leads to penetration, providing it's something that the customer values. And then they've got the product, they're using it. Then it has to feed into their view of whether that affects their overall -- their total value for money of what they're getting from a provider. And then it has to influence their behavior. So what -- so back to your question, what I would say is the kind of innovation I'm talking about is certainly in this dialogue, the things that we launched in Q4, and you would expect to see more of that kind of thing coming out across the quarter 2015. The thing you have to work out in your own mind is the rates at which you'll get penetration. You get penetration on multiple products that 1 customer might take 2 or 3 of the different propositions and at what point that affects their behavior in relation to their propensity to churn. At the same time, however, those products and propositions are actually positioned towards the higher end of our pricing matrics. And therefore, as customers do adopt them, what the earliest indicator you'll start to see is ARPU. So depending on whether we position the number -- the kind of propositions to be attractive, the number of propositions we have and the pickup in penetration rate, that will affect the rate of ARPU increase. And then secondly, it will ultimately affect the basis on which they stay with us or go to another operator. So I hope that kind of puts a bit of color around it.

And just a quick follow-up. Is it fair to assume that it's going to be a culmination of a number of things and it's we're not looking for you guys to come out with the magic bullet with 1 big product? It's going to be a culmination of various things?

Absolutely right. I mean, having said that, if you do have the magic bullet, if you could just e-mail it to me, I'll be very grateful. I'll take that as you don't, okay. No, no, Seriously, I mean, the -- and think about your own behavior as a consumer in this regard. Think about the fact that if you're working with -- if you're using a particular company's brand and over time you start to see more and more benefits of using that brand because they're adding value into what you're receiving, then what you see is this subtle shift in your own relationship with that brand and your behavior to that brand and your willingness to spend more with that brand. So actually what I'm suggesting here is nothing more than what you yourselves as individuals experience in using products in different sectors.

Your next question will come from Phil Huang with Barclays Capital.

Maybe a question for Guy. I just wanted to dig a little deeper on how you expect your volume to value strategy to play out this year. The Q4 financial metrics and 2015 guidance are quite encouraging. Obviously, the subscriber decline was the compromise. If competitors begin to take advantage of your strategy shift to accelerate their market share gain, at what point do you say, we need to fight back a little harder even if that means some sacrifice on margins? And in terms of your wireless subscriber volumes, are you seeing bigger market share movement in 1 region versus another or pretty evenly spread across the regions?

To be honest, I'd have to go back to the answer I gave to Glen. So rather than repeat it, I think I should stick with that answer. On the -- with respect to regions, you'll always see shifts in regions because you have other operators. Not all the competition is consistent in every province and therefore, as different operators dial up and down their activity. So, you see variations in subscriber metrics for instance, less so on ARPU, I would say. ARPU does vary by province obviously. But in terms of our trajectory and growth aspirations, they're proportionate to whatever is in the region. So there's nothing in Q4 that I would highlight as being particularly material in that respect.

And maybe just a follow-up on the initial -- on the first part of my question. On the cable side, subscribers similarly saw the vibrations in wireless. But I guess, unlike wireless, cable revenues and EBITDA didn't see sort of as much support from the strategy shift. Maybe can you talk about how your strategy may be different here?

That's a good point. That's a good question. So to be honest, just from being honest about the realism of changing a company the side [ph] is you start where the need is greatest and then you move on to the next greatest need. And so the work on the cable side was not as far progressed as wireless up until quite recently. But interestingly, I would say, our focus right now is as much, if not higher, on cable than wireless in relation to creating propositions and dealing with some of the underlying issues. That doesn't mean to say, by the way, that somehow there's going to be some magic shift in trajectory. You should view the evolution of cable probably as not dissimilar to wireless, although there are some differences.

Your next question comes from Vince Valentini with TD Securities.

Maybe a good segue from that is business solutions and where that fits in the focus list versus wireless and cable. I mean, the revenues were down 1% in the quarter. I know the next-gen revenues are up 13%. But are you seeing as much of the sort of momentum that you would hope to see in that area, Guy, with -- are you seeing a market is somewhat underserved where you could take market share? Or is there's still a lot more to come and maybe you can talk about some expansion plans for 2015.

So when we created the enterprise business unit, we announced it in -- at the end of May. We actually had a number of different groups working on enterprise scattered across the business and we had to bring them together and create 1 unit. The leader of that unit, Nitin [ph], only joined us in December and only completed induction at the end of December. So what I would say is a little bit tying back to the previous question is that we focus on getting a good grip on wireless and we see that feeding through to the financial metrics this quarter. We are well underway with our planning work and strategy on cable and with a high degree of focus on cable. And probably I'd put business or enterprise at the last of that list in terms of the fact that we're doing that work now. So you really shouldn't see or expect some fireworks in the enterprise side immediately. And even when we do engage with the market and start our work, it's more of a steady progression that is solid, rather than just trying to get fireworks for the sake of 1 quarter.

Your next question comes from with Dvai Ghose with Genuity Capital Markets.

When I look at the 5% increase in the dividend, I'm sure everyone is very happy to see. That's a very healthy yield. But as you know, since 2010, free cash flow has fallen every year at RCI, albeit in part due to cash taxes and other extraneous events, but nonetheless they are cash items. Your guidance is flat in terms of free cash flow essentially for '15, which would be a good achievement. But nonetheless, do you find this obsession in the market with dividends and dividend growth to be healthy or a major constraint when it comes to trying to do what you want with the business? And with the changes that you expect in '15, do you think you will be in a position for free cash flow growth from beyond this year?

Dvai, it's Tony. I'll capture most of it. When you look at our dividend growth, well, let me start with our capital allocation. We've been very consistent, and what we've said is, job one is to grow cash flow -- free cash flow on a consistent, sustainable basis. And this year has been a transition year in a number of respects. And so what you see, particularly on our CapEx line, is it increased slightly year-on-year, is that focused investment. We will continue to make the right acquisitions. And for the most part, they have been tuck-in and our largest capital expenditure has been on spectrum, which is critical as we look at it over the long term. So nothing there has changed and then to the extent there's cash left over from that, we will then have a very balanced view of return of cash to shareholders. In the last little while, we've steered away from share buybacks as we're focused on reducing our leverage on the balance sheet from where we are today and to focus it to get it back down to under 2.5x, and we'll augment that with dividends. And looking at dividends, we're looking at 2 things in our view. One is, what does it look like in terms of our long-term outlook and to the extent that we long term have a view that cash flow will increase, then it makes sense to increase dividends; and two, it really gets up to sustainability, what does our payout ratio on free cash flow look like. And when you look at our free cash flow for 2014 payout ratio, we came in at about 65%. When you exclude the one-time cash tax items that aren't representative of long-term cash taxes, we come in at under 60%. And as we model it out for 2015, again, as we adjust for cash taxes, which really is the only single biggest item besides CapEx that's increased significantly over the last few years and that's just as a result of our cap -- our operating loss carryforwards for tax purposes having been used up. And so when you take into account recurring cash taxes, our payout ratio for 2015 continues to be at a relatively conservative number and in line with what you saw in 2014. And so I would say the dividend is really part of our strategy and not necessarily as a result of any type of pressure that we see out there for a dividend increase.

Yes. And just as a quick response, Tony. So I believe, as 2015 is the last year of unusually high cash taxes and we normalize in '16, I just wanted to confirm that's still the case because that should obviously help in terms of free cash flow growth on a post-tax basis.

[indiscernible] to be helpful. As I've said in the past, our cash taxes as a percentage of adjusted operating profit has been sitting at about 12%, and we've been doing a fairly good job of bringing that down. And so as you look at it long term, we see cash tax as a percentage of adjusted operating profit as we exit the one-time items to be in the 10% range.

Your next question comes from Maher Yaghi with Desjardins Securities.

Guy, could you give us your view as to how much of the effort to reprice or shed low profit customers in the wireless business has been made so far? And would it be fair to say that you might have pulled back maybe too much in the second and third quarter and that had a disproportionate impact on Q4? As you mentioned before, you're going to test the market and is it fair to say that maybe you pulled too much? And in terms of Rogers 3.0, you made a significant proposition that you wanted to grow revenue for Rogers over the long term. Could you just share with us your views as to revenue growth potential for 2015, which was not provided in your guidance today?

So I'm not sure how many questions there were underneath there. So on the first part, though, with respect to pulling back, did we pull back too much in Q2 and Q3? No, I don't believe we did. So we have a long-term strategy. We've been very clear about what our long-term strategy is. We said that there will be vibrations in the number of metrics, but we said we're focused on revenue growth and that's what you see. So I'm very comfortable with the way that we performed within the market during the last year. We'll continue to experiment, which is why we said that there would be vibrations in the subscriber metrics. What you see is a better trajectory on the revenue and AOP [ph] metrics, and that's our strategy. And in terms of your second part of your question, which was how long will it take to play through. Well, as you know, customers come up for contract renewal -- if they're in a 2- or 3-year contract, it takes 2 or 3 years for them to come up and we have to make sure that we are presenting compelling propositions in front of them at the point that they do. But it will take at least another year to play through completely through the base just by the virtue of the length of the contracts.

Your next question will come from the line of Drew McReynolds with RBC.

Most of mine have actually been answered. Just maybe a follow-up on data growth. And, Tony, I think you gave some good statistics around LTE and the increase in data consumption on LTE. Just wondering, just tying us into Shomi and NHL games that are live [ph], I know it's still early days. But to what extent are you seeing an uptick in your data growth on the LTE network related to that increased video streaming? And with respect to what you've seen to date, are you comfortable with your network performance supporting that type of data growth as we look forward?

[indiscernible] so we're not going to reveal exact figures on that, but I would describe myself as extremely satisfied in terms of the data consumption associated with the propositions we're putting in the marketplace. The second thing is I have a small paranoia over making sure there is sufficient network capacity there when we introduce these segments because there's no point in putting a huge amount of work into creating a proposition only to find out that your customer can't benefit from it. So way before we had solidified the propositions, such as NHL, which launched on October 8, we actually put in place plans to increase our network capacity, and they continue a pacer that we stay ahead of the curve.

And we have time for 2 more questions. Your next question will come from Robert Peters with Crédit Suisse.

Just to actually kind of circle back in terms of building out capacity, but talk maybe more on the cable side of things. We saw earlier this month at CES the debut of a number of affordable 4K TV sets and some services in the U.S. have announced plans to explore broadcasting 4K content and streaming 4K content. I was just wondering if you could talk in terms of how you see your network in relation to having the capacity to handle 4K or if there's any more additional investment needed?

The -- good points, again. I would say that the evolution of 4K is one of the contributors that goes into our capacity planning models. And there's obviously CES as well there's nothing that I saw that would take me beyond the assumptions that we've already got in our plans for 2015. I do think the evolution of 4K and things like this will drive demand, and then of course it becomes our job to monetize that. But I do believe that we've anticipated that in our capacity planning. There is no change, of course, I need to make as a consequence of what was at CES.

And we have time for 1 more question. That will come from Tim Casey with BMO Capital Markets.

I want to push back a bit on your contention that you can compete against the rollout of 5 by just -- by not having to rely on price. I mean, the innovations you've introduced, I think, one could argue that they are also innovating and some of their products are priced lower than yours and whatnot. So how confident are you that you can still maintain your share of the traditional cable market given that they're not standing still as well?

Well, you assumed that what we've introduced in terms of innovation thus far is the only things we're going to introduce, and that wouldn't be a fair assumption. By the way, I'm not saying that the competitors aren't innovating. When I was talking about innovation earlier, I was talking more in answers to the question about whether we are likely to see the commoditization that you're seeing in the U.S. as a result of a lack of innovation. So there is innovation in the Canadian marketplace, and it's our job to be more relevant and more attractive than others. And thus far, in terms of what we've launched, we're talking about a small number of propositions that launched in the middle of Q4. We have a full roadmap for 2015. So we'd have to see how this plays out, but I wouldn't -- I think I understand what you're saying, should you be pushing back? But I think you got to, again, look at this in light of where we are in the process right now, and we have a lot to unveil yet.

As a follow-up, is there any more light you could shed on the path to IPTV at Rogers?

So as I said in the previous quarter, we are targeting to have a recent products released at the end of the year. The IPTV as a roadmap is a difficult technology to introduce and get the user experience right, but there is considerable focus on that as there is on the cable in general. And therefore, I have nothing more to update you on other than it's still very much in the labs and it's still very much has a large team dedicated to it.

Right. Well, this is Bruce Mann. I just wanted to, first of all, say thanks to the operator. And more importantly, the management team at Rogers wants to thank everyone for joining us on the call this morning and investing a bit of your time during what we know is a busy morning. If you've got questions that weren't answered on the call, please feel free to follow up with myself or my colleague Dan or Bruce. Our contact info is at the end of the earnings release, and we will get your questions answered for you. So thank you very much. This concludes today's call.

Ladies and gentlemen, this does conclude the conference for today. Thank you for participating. You may now disconnect your lines.