Rogers Communications Inc. (RCI) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Rogers Communications Q4 2017 Results Analyst Teleconference. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today on Thursday, January 25, 2018 at 8:00 a.m., Eastern Time. I'll now turn the conference over to Ms. Amy Schwalm with the Rogers Communications management team. Please go ahead.

Good morning, everyone. Thanks for joining us. I'm here with our President and Chief Executive Officer, Joe Natale; and our Chief Financial Officer, Tony Staffieri. Today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2016 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Joe to begin.

Thank you, Amy, and good morning, everyone. Today, I'm pleased to share our full-year results, along with our performance in the fourth quarter and our guidance for 2018. Let me start with our full-year results. In 2017, our team delivered the best financial and subscriber performance we have seen in many years. We set a solid foundation for sustained growth as you will see in our 2018 outlook. Overall for 2017, we grew total service revenue by 4% and adjusted operating profit by 6%. We grew after-tax free cash flow to $1.75 billion. We delivered our 2017 financial guidance and returned $988 million to shareholders through dividends. Our growth was largely driven by wireless, which delivered service revenue growth of 7% and adjusted operating profit growth of 8%. These are the best wireless financial results we have seen since 2009. I'm pleased to report that we gained 354,000 net additions and delivered a churn rate of 1.2%. These are the best subscriber metrics we have seen since 2010. In Cable, we grew cable households for the second straight year in a row. This represents an important continuing inflection point for us, given we faced 4 prior years of decline. In Media, we saw revenue growth in our sports, television, radio and digital businesses. We remain fiercely focused on both local content and live sports. The team has worked hard to make Sportsnet Canada's #1 sports media brand for the third year in a row. Turning to the fourth quarter. We continue to generate strong financial growth. In Q4, total service revenue was up 4%, with operating profit growth of 6%. Wireless continued to deliver strong financial performance, and we're pleased to see ARPU grow by 5%. We set a new record high for postpaid gross additions in Q4. Unfortunately, this upside was diminished by a technical issue that impacted churn. During the peak promotional period, we faced a technical issue in our price plan system that prevented us from quickly processing the large volume of customer requests. Consequently, our postpaid churn came in at 1.48%. We have addressed the root cause, and this onetime occurrence will not impact our 2018 run rate. We remain committed to driving ongoing improvements in churn. In Cable, we reported strong financials in both revenue and profit growth. We also successfully balanced subscriber additions with ARPU performance. Today, 54% of our residential Internet customers are now on speeds of 100 megabits per second or higher. This is up from 46% a year ago. Turning to 2018. We have strong momentum, a clear plan for sustained financial growth, along with strategic capital investments in our core business. This morning, we announced our 2018 guidance. It reflects continued growth in revenue and accelerated growth in both profit and free cash flow. Overall, we are bullish about our future and our underlying growth potential. Consumer and business demand for data continues to soar, roughly doubling every 18 months. Wireless penetration rates continue to grow from 87% moving towards U.S. levels of 119%. This is bolstered by Canada's forecasted GDP growth, record low unemployment and generally healthy macroeconomic conditions. Our strong portfolio of assets, our strategic priorities and our great team are our strong foundation to achieve the growth that lies ahead. We remain relentlessly focused on our core business and driving the fundamentals that deliver shareholder value. Operational excellence and well-timed network investments will be the key to our success. You will see that we've decided to maintain our dividend at $1.92 a share. Fundamentally, we remain committed to growing the dividend on a long-term sustainable basis. We will return the dividend growth at the right time. Right now, we are steadfast in our focus to drive and grow the fundamentals. Growth in revenue, margins, adjusted operating profit, and free cash flow remain our primary focus in driving share volume, while improving our debt leverage ratio. Our 2018 guidance reflects strong growth in these fundamentals for the year ahead. In 2018, we will focus on our 6 strategic priorities: our customers; our people; our growth; our networks and technology; our investments in innovation to support our core business; and our communities. 2018 will be a big year for network. And I'm pleased to welcome our new Chief Technology Officer, [ George Fernandez ], next week. George brings a great depth and breadth of global experience across wireless, cable and telecom. Our networks are the lifeblood of our business and the foundation for everything we do. At Rogers, we've always invested to be at the forefront of commercially ready technology, to be at the leading edge. We've always been a leader. We led with 1G and 2G, then 3 and 4G. Today, we are at the advent of 5G. In 2018, we will see technology and applications develop for 5G. We are ready again, ready to make the right bets at the right time. In 2017, we accelerated the move to 4.5G LTE advanced technology, while setting the stage for a smooth evolution to 5G. Now, we have the latest equipment with better-than-ever unit costs and spectrum efficiency and equipment that is only very recently 5G ready. In 2018, we will ramp our efforts, trialing 5G across key applications and multiple frequencies. Over time, we will deliver a broad range of 5G services across mobility, broadband and IoT. To get us ready, we will reform 2G and 3G spectrum. We'll build a solid 4.5G foundation with 5G ready network equipment. We'll continue to densify our network with more macro and small cells in key markets. This is all about delivering best-in-class, reliable, worry-free experiences to our customers. I'm excited about the potential of 5G and what it will mean for our customers. In Cable, we continue to be impressed with the power of DOCSIS and what it can deliver. The next generation of DOCSIS will support upload and download speeds of 10 gigabits per second. We will continue to augment our node segmentation efforts and drive fiber deeper into our access network. In 2018, we will begin migrating to a passive network architecture. This NextGen DOCSIS passive hybrid fiber and coax network will future-proof our business. This transition is not a big bang effort. It is an evolutionary node-by-node and success-based investment. We're focusing first on neighborhoods with the greatest data demands and opportunities for cost efficiencies. We foresee a reliable road map to reduce CapEx and improve ROI in the years to come. I'm also excited to show that IGNITE TV, our new IPTV service license from Comcast, is in full employee trial. Hundreds of employees already using the service, and we're actively putting IGNITE through an exhaustive review. As I said last quarter, we will take our time to do this right and to pressure test all aspects of our service experience. IGNITE TV will deliver a high-value premium service with the most advanced features and video experience and a robust product road map. I have the service at home and I'm blown away by IGNITE TV and all that it has to offer. It's a game changer for our customers and the long-term success of our Cable business. We see strong growth potential in Cable with our superior broadband product and the capabilities that will come with IPTV and smart home offerings into the future. Underscoring all of this is a relentless and extensive focus on customers. I truly believe what gets measure gets done. So in 2018, we are placing 50% of our company-wide bonus plan on the achievement of customer metrics. We will simplify our products and overhaul critical moment of truth processes, such as residential moves, handset upgrades, service repair and price plan changes. We'll further enhance our website and mobile and digital properties for a more reliable, consistent experience across every customer interaction. Ultimately, we strive to be clear, simple and fair in every interaction. As customer service improves hand-in-hand, we will drive greater cost efficiencies. Before I turn it over to Tony, I'd like to thank our team for their tremendous commitment to our customers and to each other. You worked incredibly hard last year, delivering these great results. I'm immensely proud what we have accomplished. I know we are ready for the opportunities that lie ahead. Tony, over to you.

Thank you, Joe, and good morning, everyone. Thank you for participating on our call. And I'm pleased to share with you some additional highlights on our continuing strong financial performance. In the fourth quarter, we continue to generate strong service revenue growth, expanded overall margin by 14% and delivered ongoing growth and adjusted operating profit. Our margin expansion reflected solid traction on our cost efficiency programs. These programs included, as examples, a streamlined management workforce, management of noncore discretionary costs and continued renegotiations of rates and turns with our third-party suppliers. These cost initiatives more than offset our significant growth in net equipment subsidies in our Wireless business as well as the decline in Media profitability. For the full year, our cost management efforts supported overall management expansion of 80 basis points. So good progress on this front with more opportunities into 2018 to achieve the margin expansion goals we've previously communicated. 100 to 200 basis points of growth in Wireless and Cable margins in 2018 over 2016. In Wireless, we reported service revenue growth of 7% in the fourth quarter with more subscribers and strong blended ARPU and postpaid ARPU growth in the quarter. Wireless blended ARPU and postpaid ARPA grew 5% and 6%, respectively. Blended ARPU growth accelerated nicely from Q3 2017. Effective in Q4 and on a prospected basis, we reduced our cumulative postpaid subscriber base by 207,000 subscribers to remove a government account migrating to another provider over the next few quarters. We believe this provides us better reflection of our underlying organic performance. The account carried an extremely low average ARPU. On a normalized basis, the loss of this account is accretive to blended ARPU by about 1%. Wireless adjusted operating profit grew 9%, and our flow-through rate of revenue to AOP was 52% compared to 34% a year earlier, resulting in expanded margins of 60 basis points. These results were achieved despite making significant customer investments. The net cost of handset subsidies increased 17% year-on-year in the quarter, reflecting a material increase in retention spend. Device upgrades were up 7% year-on-year on renewals with a higher sales mix of premium phones. Turning to Cable, we grew Cable revenue 2%, adjusted operating profit by 3% and margins by 80 basis points in the fourth quarter. For the full year, we also grew AOP by 2% and margins by 80 basis points. Higher AOP and margins were driven by cost efficiencies, together with the ongoing product mix shift to higher-margin Internet services. Our Internet competitive speed advantage continue to track well in the fourth quarter with healthy Internet revenue growth of 9%. Fourth quarter Internet comprised 48% of total Cable service revenue compared to 44% a year ago. Despite aggressive pricing during the quarter from our main competitor, we added 13,000 total service unit additions and 17,000 Internet net additions. We also delivered Internet ARPU growth of 5%, trending higher from Q3. So on the Cable front, financials were very strong, driven by our Internet business. We continue to expect healthy Cable margins in 2018, notwithstanding projected launch costs and subscriber license fees for our new IGNITE TV. In Media, Q4 revenue and AOP declined as the Blue Jays made to postseason in 2016 and due to lower print revenues since we announced the strategic shift to digital in late 2016. In 2018, we expect growth in Media margins driven by higher revenue and improved cost structure. Now I'll go through some additional details in our financial results. In Q4, free cash flow was largely impacted by the timing of CapEx spend. Overall CapEx and capital intensity were higher and in line with our updated guidance provided last quarter and previous messaging that spending would be weighted to the second half of the year. Wireless CapEx increased as we ramped up deployment of our advanced 4.5G network, laying the foundation for 5G. During the quarter, we began upgrading our radio infrastructure to the latest technologies and activated the AWS-1 spectrum acquired in 2017. Higher Cable CapEx was driven by the integration cost for IGNITE TV and higher network investments to further increase speed and capacity and incorporate the latest technologies in our fibre-coax network. Moving to overall performance below the operating line. Adjusted net income was up 19%, largely on higher AOP and lower depreciation and amortization. Net income increased as a result of prior year losses, largely related to our legacy IPTV product. With respect to our financial flexibility, strong AOP helped generate operating cash flow of $1.14 billion. We supported dividend payments of $247 million in the fourth quarter. We ended Q4 with a debt leverage ratio of 2.8 compared to 3.0 a year ago, driven by higher AOP and lower net debt. Over time, we expect profit and free cash flow growth to fund debt repayments and generate further improvements in the ratio. Our balance sheet remains healthy with liquidity at the end of the quarter of $2.7 billion. We have solid investment-grade credit ratings, stable outlooks and attractive rates on our outstanding debt with further reduction opportunities on this front in 2018. Turning to 2018. Our financial guidance released today reflects our expectation to grow total revenue in the range of 3% to 5%. Profit growth now defined as adjusted EBITDA is expected to accelerate to 5% to 7%. Free cash flow growth is also anticipated to accelerate in 2018, despite our increase in CapEx to a range between $2.65 billion and $2.85 billion, focused on network investments. A few comments to help you interpret these guidance ranges. As I mentioned, we will commence reporting adjusted EBITDA starting in Q1 of 2018 as opposed to adjusted operating profit, and our guidance ranges were provided on this new basis. The only difference between the 2 metrics is that adjusted EBITDA will include stock-based compensation expense. We believe this is a better reflection of our underlying profit and allows for better comparability. This change will have no impact on our year-on-year growth rates. We will adopt the IFRS 15 revenue standard beginning in Q1 of this year. We will provide our results under both the existing standard as well as under the new IFRS standard to allow for a clear and transparent understanding of the changes to our figures. We do not expect any meaningful impact to our growth rates under the new standard, so our guidance ranges provided today are the same under either accounting standard. The new standard, however, will materially affect our revenue categorization, more revenues allocated to equipment revenue with a similar reduction in service revenue. We will provide more information on the impact of the new standard throughout 2018, starting with the release of over 2017 annual audited financial statements in early March. Overall, we are very pleased with our financial performance for Q4 and 2017. We're confident in our ability to deliver an even stronger growth profile in 2018. We're focused on driving sustainable growth in our core business, including improving our overall cost structure. Ultimately, our goal is to deliver the best experience for our customers and greater return on investment for our shareholders. With that, I'll ask the operator to open the line for questions.

[Operator Instructions] Your first question will come from the line of Aravinda Galappatthige with Cannacord Genuity.

I want to just start with the -- sort of the wireless market in Q4 given the level of activity that you saw. When you kind of look at sort of the churn number -- the postpaid churn number that kind of spiked a bit, and I know, Joe, you alluded to that, would that -- if you kind of exclude sort of the promotional period during that mid-December time frame, was that sort of trending differently prior to that? I'm just trying to get a sense of how it kind of played out through the quarter?

Sure. I'd be happy address that. If you look at leading into the promotional period, we were overachieving on churn. Correct me if I'm wrong, Tony, but I think we were ahead the previous year by high-single digits in terms of basis points improvement year-over-year.

That's right.

And it was that 5 days of intense promotional activity where we have some issues with our price plan change system that really inhibited our ability to kind of address customers and requesting a price point change. So as a result, they chose to go elsewhere during that period. But fundamentally, our capabilities around managing that churn profile will not change in 2018. It's very much something that was incidental to that period of time when there was a large volume of customers coming through. Please bear in mind that in Q4, and in fact in every Q4, there are about 14 days or so between the Black Friday weekend, the days before Christmas and Boxing week that represent for us about 60% of our volume. So have being impeded for 5 days during that period was really the anomaly that drove the churn, nothing more fundamental than that.

Great. And just on the dividend, because I know there's been a discussion around that. Can you just maybe sort of elaborate on your decision there to maintain the dividend? Obviously, you're making progress in terms of your leverage down the road. You are still guiding strong free cash flow growth, notwithstanding the higher CapEx. And obviously, your payout ratio is among the best in the sector. I mean, if you just maybe elaborate on sort of the decision to maintain the dividend at this point.

Sure. Would be happy to. First of all, let me say, as I alluded to in my comments, the job one for us is driving shareholder value and driving shareholder value by focusing on our core business, to grow and drive the fundamentals, the revenue, AOP or EBITDA now, free cash flow and return on capital. Just to be absolutely clear, our capital priorities are: number one, to invest in profitable growth in our core business, and you're seeing that we're stepping up our capital investment. We've got the spectrum action -- the spectrum auction on the horizon. These are all fundamental to the future of our business; number two, is the strong balance sheet. We will bring leverage down this year. I'll ask Tony to comment on that in a second; and number three, shareholder return of capital. So we are committed to sustainable dividend growth. And our 2018 guidance, I believe, really reflects the confidence that we do that overall. You look at the growth in revenue, EBITDA and free cash flow as a step up from where we were in 2017. We're really pressing on the gas and the key drivers. And when the time is right, we will take a look at dividend growth and get back to shareholders with our views and intentions.

On the debt leverage, we continue to view a range of 2 to 2.5x as the ideal debt leverage ratio for us. As I said in my comments, we ended the quarter at 2.8. It was a healthy decline from 3.0 a year ago. If you flow through -- when we look at our projections and you flow through the guidance ranges we've provided and work that through in your models, you'll see that our expectation is to continue to have healthy improvements in that debt leverage ratio over the course of 2018. And so a good plan to work meaningfully towards our 2.5x threshold in the near term.

We'll now take our next question from line of David Barden with Bank of America.

A few, if I could. Just first, just talking about the promotional period, especially those 3, 4, 5 days, where the pricing got fairly aggressive starting out in the West and then coming back to the East. I guess, kind of looking at the origin of that, it seems to have originated with Rogers. Could you kind of talk about what the game plan was, and kind of how you saw that unfold and kind of what your learnings are from that kind of exercise? And is it something that you feel like you might want to try to attempt again or maybe avoid? The second question is related to the government contract. I guess, I just want to make sure I understood that you've pulled it out of the sub numbers, but it's still in the revenue numbers. What would have the net add number look like if you hadn't done that? And then, I guess, the final question, Tony, if I could, was just on the guidance. The EBITDA guide and the CapEx guide seem to be going up about the same amount and yet free cash flow is still growing. What is the part in the cash flow statement that's kind of allowing free cash flow growth to occur even as EBITDA and CapEx are kind of equal?

David, I'll talk about Q4 and the marketplace, and ask Tony to talk about both the government contract and the guidance overall. As I said a minute ago, we're seeing these promotionally intensive periods get shorter and taller, if you want to think of it at that way, whether it's back-to-school or Black Friday. And we sat looking at the period before the Christmas holidays and said, "The market is kind of quiet right now and wonder when we're going to see the heightened activity that we know was becoming even more intensified." I think we've trained customers to kind of wait for promotional periods. And we made a call to pull forward that promotional volume or pulled forward that seasonal volume. The debate we had was, do we pull it forward or wait for someone else to pull it forward. And we thought the best way to kind of create a smoother promotional period was to create a sale or promotion for 5 days, a very limited duration, 5 days, only in Western Canada, in Alberta and D.C. And we launched a 5-gig for $60 with a 5-gig bonus of -- for 24 months, largely focused on bring your own device. That quickly got escalated over the next couple of days by our competitors and landed in being a 10-gig BYOD and available on a term with handset subsidy in Alberto, D.C., and Ontario, which really grew to reflect just the intensity in the marketplace and the reaction very quickly. I was very pleased by the fact that we got record gross loading. Our sales and distribution machine did a phenomenal amount of work in that period of time. The challenge as I said was, we had an issue within our -- with our price plan change system that affected our call center and really hurt us from an operational responsiveness point of view during that period of time as a whole. Just to be absolutely clear, we're focused on driving the right mix. We're focused on driving the right value in the marketplace. There will always be promotions during seasonal periods. There were promotions a year ago. A year ago, the big promotion that was in the marketplace was $40 for 4 gigs. And we'll see that come from time to time. But we're focused on price discipline, and we're focused on smartphone-driven mix of business and managing our base as an overall philosophy.

David, on the second -- two questions you had, one related to government contract, so to be clear on that, the total contract is worth 207,000 subscribers or lines for us. So we took that out of our opening cumulative base in the fourth quarter. Not going to get into disclosing the specific numbers of migrated. But of that total contract, I would say, it's early stages of migration, so was a very small amount that started to migrate in the fourth quarter. On your second question related to higher adjusted EBITDA guidance for 2018, higher CapEx, and therefore, higher free cash flow. The other piece that's in there for you to think about is interest and cash taxes. And so we've done fairly good job of reducing our average interest rate, and we think there is opportunity into 2018. And then as well on cash taxes, we continue to look for ways to ensure that we are efficient in the way we look at cash taxes. And so without providing specific guidance on those 2 specific numbers, I'd suggest you look at those in factoring the free cash flow for the full year.

We'll now take our question from the line of Jeff Fan with Scotiabank.

Couple of questions. Again, just related to the period in Q4. But more specifically, I guess, question for Joe is, what kind of takeaways you have in terms of how the customers or the market reacted to the promotions that were launched by yourselves and then followed by your competitors like -- because I guess that it's the first time that we've seen that much data being offered for that kind of price plan in the market, and certainly, the reception was huge. What were some of the takeaways that you can -- do you think you can share with us in terms of what the market may or may not be ready for? And then the second part of the question is because of the increase in all the volumes in the quarter, what were the kind of customers that were coming in? I mean, there's usually what we've seen in the past is, when these plans are offered, the optimizers tends to be the ones who are the ones lining up to get savings. So I'm just wondering how this translates into ARPU impact in the following quarters?

I think in terms of the market learnings overall, I think, it reinforced the fact that there is certainly a voracious appetite for data in the marketplace. We've said, time and time again, that market consumption of data is doubling every 18 months or so. We continue to see very strong ARPU performance and growth around that. As you saw, Jeff, we posted 5% ARPU growth normalized for the government contract. It's 4% overall. Within that is about 9% data ARPU growth, if you kind of peel that away a little bit in detail. And we're seeing the momentum carry forward in 2018. So it's not sort of a one quarter wonder from that perspective. I think at the end of the day, the learning for us as an organization is that operational execution more than ever is fundamentally important, because the periods of time are becoming, as I said, shorter and more intensive. And customers especially around the end of Q4, are kind of waiting for something to happen or something to break. We -- it was a very busy Black Friday. Record volume days through Black Friday through Cyber Monday and then quite -- absolute quiet heading into Christmas. And we kind of sat there and waited to see when will this spark. And as I said earlier, do we wait for it to spark or do we spark something to get going. Clearly, execution for us was a challenge. Otherwise, I think, we'd have seen a very different outcome. We believe that, that period of time cost us about 35,000 nets to put a very specific definitive number on it and cost us about 15 basis points of churn, so that you can normalize quickly through yourself what that operational step created, overall. I do believe that it's an isolated incident, it was very specific in terms of what happened. I won't get into details because of some competitive and sensitivity around it, but we've found the root cause, we've corrected it, and it's been isolated and behind us. I think that was the biggest learning of all for us as an organization. I think the other big learning for us is that our team rallied. Our team rallied across every aspect of Rogers from the call center to the stores, the people in the field to management. They rallied around the challenge that we had and found all kinds of creative and clever workarounds in the moment and recognizing that it was a 5-day period that went by in a heartbeat, overall. And what it's done for us is, it's sparked a level of activity and initiatives around making sure that we have the flexibility, resiliency going forward for promotional periods to come, and I think it'll make us stronger and better as a result of that. I think overall, as I said a few minutes ago, we are completely committed to ARPU growth. We're committed to a healthy mix of customers. We did see a very strong mix of customers in Q4. Now that's a interesting sort of irony in the situation as a whole, given the challenge we did face. On the business front, we saw most of our loading come from small and medium business, which is by far, our healthiest category, next corporate and third sort of IDB or employee purchase funds. A year ago, the mix was exactly the reverse of that. If you look on the consumer front, a very much stronger mix of smartphone customers in the quarter, and therefore, better lifetime value and better overall churn profile as a result. And behind the scenes, not as reflected in the numbers, that is the focus of our organization to keep driving for quality and value and a stronger mix of customers, both across consumer and business.

We'll now take our next question from the line of Vince Valentini with TD Securities.

First, just a clarification of a question, just to make sure I understand this. So if you back -- if you had not adjusted for the 207,000 customers on the government contract, your ARPU growth would have been 3.5% instead of the 4.5% you reported. And the 4.5% is your excluding the 207,000 subs, but the revenue from whatever sub you still capped is still in the numerator, is that the right way to think about it, Tony?

Short answer is, yes. So I'll repeat what you said. ARPU growth, excluding that, so the impact of taking out the subs, but including that revenue was 1 point in the quarter. And so it was otherwise at 3.5% blended ARPU growth.

Perfect, okay.

I should add...

It has to -- 3.5% is still very good number by the way, so that's -- congratulations on that aspect of it. My question unfortunately, maybe...

Thanks, Vince.

My question's sort of -- maybe a bit more negative and people seem to be tiptoeing around this issue. But -- I mean, the promotion you put out there in December was identical to what Freedom had been doing a few weeks earlier. It's the first time we've seen you guys kind of respond to what Shaw and Freedom are doing and almost acknowledge it, they're starting to have more impact. So I mean, can you comment on, are you getting more worried about them? And specifically, I'm shocked that you're not raising your dividend given how strong your financials are. Is the board worried that Shaw's competition may start to hurt your numbers and your debt reduction plan over the course of this year, so that's why you're holding back on the dividend?

Vince, let me be clear and equivocal, the promotional activity in Q4 had nothing to do with any one of our competitors as a response and when are competitors [ full stop ] . As it relates to competing with Freedom Mobile, we've been competing with some variant of Freedom Mobile from or -- way originally for 10 years. We've seen these types of rate plans in the market on and off over the last number of years. And the impact that they're having on us is very small at the margin, nonmaterial, not a consequence, overall. And there's absolutely zero concern from the board, from management, about that impact whatsoever. The dividend policy that we put forward is only driven by the fact that we believe our #1 priority is around driving growth in our core business and driving the fundamentals to drive shareholder value. And if you want a really great piece of evidence around that, just take a closer look at the guidance that we put forward for the year. Last year we grew revenue by 3%. Our guidance is putting forward 3.5 -- 3% to 5% revenue growth. Last year we had very healthy flow through in 2017. So just kind of help you understand exactly the improved flow through of that we're postulating in 2018. Free cash flow, free cash flow was 2% last year. We're putting forward 3% to 5% free cash flow as guidance for the coming year. On top of that we're saying we're going to spend somewhere between $240 million of incremental capital around an already stepped up capital plan from the previous year, again, to invest in our core business, right? And these are not plans or ideas or innovations that are new and fuzzy. This is our core business. This is, as I mentioned, upfront, an investment in the advent of 5G and getting ready through the latest in 5G ready equipment for 4.5G LTE. This is an investment in the latest version of DOCSIS and a move towards a passive network and future proofing our Cable business, which will give us, not in the long-term, but in the short- to medium-term, 10-gig full-duplex capability as a whole. It's also important to understand that these plans, both the financial plans and the guidance that we put forward, haven't changed over the last many months. We've put these plans in front of the board last summer, in August, when we did our strategic review of the board and put them again in front of the board in October at our board meeting, reviewed our budget in December with the board and again, yesterday. And the plans have been fundamentally the same, the guidance have been fundamentally the same. So to even suggest that they reflect some reaction from a competitor is just not at all the case. I hope that answers your question very clearly, Vince

We'll now take a next question from the line of Tim Casey with BMO.

Can you talk a little bit about what you're seeing on that trend side since that 5-day period and when you had the system issue? Was -- did it normalize through the back end of December through the Boxing week? It's usually a little more intense. And then what are you seeing and what are you expecting as we go forward so far this year?

So yes, we did see it normalize. There certainly was some cleanup effort through the -- a week or so after the promotion as a number of customers were calling us to try to -- given they couldn't get through for a period of time, but you know let's -- we've normalized to normal levels, and we started the year back in a normal run rate. So we fully expect to get back in the zone that we were at for most of last year, Tim.

As a follow-on, given there were issues at the call center, do you think it impacted anything in terms of loading on the wireline side? And can you just -- any detail you can provide us on when you think you'll be in market commercially with X1?

We don't believe that it impacted our Cable or wireline loading. The channel mix for Cable and wireline is a little different overall. And we continue to see good performance through the latter half of the quarter on the Cable front. Recognize the fact that the results were good despite the fact that our competitor has a very aggressive promotion in the market at $25 Internet only for 300-meg service. So you look at Internet revenue growth, Internet ARPU growth in the quarter, you look at the loading for the year in the quarter, we're generally pleased with the balance of subscriber growth and ARPU performance, which is really what we're focused on is that balance. We could easily push the button and grow our subscribers, but we want the right subscribers at maintaining ARPU profile. I think we've done reasonably well on Internet. And we've been doing it, I would say, one hand tied behind our backs. The launch of IGNITE TV, our Comcast XFINITY IPTV product, will be a game changer for us. Right now, it's in employee trial. I think, as of end of this week, we'll have 500 employees on the trial, and we're adding in the neighborhood of 120 to 150 a week. So it's really starting to grow at scale. It's really an effort by us to really make sure that every aspect of the service or service experience, order for billing is completely pressure tested. This is a premium product for us, and therefore, it must have a premium experience. Over time we will evolve the employee trial into an external customer trial and there will be layers of commercial soft launch as I mentioned before, and that includes friends and family and then a wider circle. And then some point later this year, we'll have a full-on, above the line, TV commercials, billboards commercial launch. We're not going to get into the timing of that, that's very competitively sensitive to us as you would imagine it would be, Tim, as a whole. We're very excited about with respect to IGNITE TV. It's not just a TV product, but the road map around the smart home that's following right behind it. There's a very robust, very exciting road map around integration of smart home monitoring, around the whole bunch of solutions around home automation, home management, around IoT in the home, that we think are game changers. And the platform is one that will more easily integrate all of it. It even has a room for place in the home and home phone as an IP application on this platform, that will fundamentally work differently from kind of the more standard voice applications. So it's not just the launch of IGNITE TV, but it's a launch of that entire connected home strategy, that will give us the ability to really fight with both hands and continue driving the right fundamentals in the Cable business.

We'll now take the next question from the line of Drew McReynolds with RBC Capital Markets.

First, for you, Tony, on Cable EBITDA margin target for 2018, pretty consistent, I think, with what you've said over the last little while. You did say notwithstanding launch costs, which I certainly understand, and you also said notwithstanding X1 licensing fees. So was this 100 to 200 basis points year-over-year increase excluding those 2 items then, just for clarification?

So thank you for the question, Drew. To be clear, the margins that I described, the margin expansion into 2018, are inclusive of those costs. And so I won't get into the specific timing. But as Joe alluded to with the launch of our IGNITE TV product, there'll be costs associated with that launch. Our subscriber base fee model with Comcast is largely a variable cost model, and so we factored those into our cost. And so the number that we're sharing with you is net of all those costs.

Okay. That's great. One last, I guess, clarification here. Can you provide us just what percentage of the postpaid base would have been upgraded in Q4?

Yes, Drew, the -- as I said in my comments, we're very aggressive in investing in our customer base. We saw volumes increase 7% year-on-year. We saw -- if you took that as a percentage of our total postpaid base, subscriber base, it'd be at just under 6.5%. So a step up -- a material step up from what you would have seen in previous quarters.

That's helpful.

And it's important to understand that, that upgrade focus we've had is driving real revenue, not just washing the subsidy cost of the upgrade. Really worked hard and make sure we're targeting that portion of our base with the incoming ARPU profile that certainly pays some subsidy, but also provides accretive revenue and flow through.

One last one for me, bigger picture, maybe with you, Joe. A lot of talk through the fall on your examination of non-telecom assets within the Rogers asset mix. Lot of cord cutting, cord shaving inflection point type of talk out there in the TV market. Can you just refresh for us the strategic benefits that you see with respect, specifically to sports and sports assets like the Blue Jays, Sportsnet and the MLSE, just provide an update there on where or why they fit within the broader group? That would be great.

Would be happy to. First of all, sports is a very important part of our business. And sports media and sports broadcasting remains a very important part of viewer preferences and audience appetites, overall. So it will continue to be a very substantial and strategic part of our business going forward. Very proud of the fact that Sportsnet is #1 sports broadcaster in Canada for the third year in a row. We've got a game changing NHL deal, a game changing broadcast opportunity around the Blue Jays, which has become Canada's team overall. And I really believe that sports are fundamental to the future of the business and the future of the in-home experience as a whole.

I hope to clarify as well, Drew. To be clear, there are no plans to sell the Jays, and we've been consistent on this point. We do see, as Joe said, tremendous value in the Toronto Blue Jays. That isn't reflected in our total share valuation. And we'd like to see that better reflected in our overall valuation. Beyond that I'm not going to say much more than that. I think we seem to say, it fuels more speculation, and so just thought it'd be important that we clarified that.

We'll now take the next question from the line of Simon Flannery with Morgan Stanley.

Joe, I think you talked about an opportunity that you saw to ramp up your commercial revenues in your Cable business. Can you just talk a little bit about what you see for that going forward? And Tony, thanks for the color on IFRS 15. We did see Verizon highlight a EBITDA boost from differing commissions. You mostly talked about the revenue impact. Can you just talk about anything you might see on the expense side as well?

Simon, just to clarify your question. When you say the commercial side, I'm assuming you mean in the business category, B2B?

Exactly. SMB enterprise, exactly.

Yes. We believe there is a very strong opportunity in the B2B business around Cable. I really believe that we've been under indexed with respect to share in that area. If you look at our Cable peers in North America, if we did nothing more than kind of get to their same level of capability, then that's a tremendous opportunity for growth for this organization. The Cable investment is there already. The plant is in the ground already. It's a question of organizing the sales force and organizing our efforts around going to market on that front, and Dean Prevost is squarely focused on that. He's got great background in terms of addressing the needs of small and medium business, and it's one of our important priorities for that enterprise business as a whole. We have a lot of things working to our advantage at that front. The -- if you look at DOCSIS 3.1, the opportunities to support small business and a lot of great features, I think, that are very useful for the small business category. If you look at the efforts that we're making around our network build, both in Wireless and Cable, we talked earlier about, the capital that we're investing in 4.5G LTE capability and node segmentation. By definition, what we're doing is, we're running 5 or 2 different parts of our network. We're going to make sure we're very thoughtful in that fiber, making us way close to business parts and places that are not served by our current Cable footprint. So along the way, we will get an economy of scale and scope, frankly, at a very incremental cost that will make the economics of that expansion really, really attractive. So it's an opportunity for us that we think is material. And it's just a question of organizing around it, and we got all the ingredients to do that. So it'll be a very important year for us on this front as we drive forward on that basis.

Simon, in reference to your second question on IFRS, to help clarify, when we release saw results at the end of the first quarter, we will disclose figures under the old accounting as well as the new accounting, and provide year-on-year rates for each of those. So the intent is to give you a very transparent and clear apples-to-apples comparison of old and new. When you look at the impact of IFRS on the absolute dollar values, I talked about earlier the revenue categorization, so you see a bit more of the mix shift from service revenue to equipment revenue, and on the EBITDA line, as a result of deferring, as you said, commission expenses. And there is a few other, but very small at the margin expenses. So it is largely commissions that's deferred and amortized. That will have a slight increase to EBITDA or adjusted EBITDA, I should say. But importantly, it's going to be the year-on-year growth rates for each and we'll be very transparent with both methods.

We'll now take the next question from the line of Greg McDonald with Macquarie.

Joe, question is on -- related to the dividend, again, but it's just more trying to understand how the board thinks about this definition of when the time is right. You mentioned the 600-megahertz auction as having an impact. Certainly, the question mark in terms of how much it could cost. Is the board and management thinking when it comes to dividend timing or timing for an increase, again, is it thinking uncertainty on spending items like that? Or is it thinking ultimately just balance sheet leverage? Because as we all know, there are potential for asset sales.

The -- overall, the focus is a mix of those items. It's continued sustained performance in our core business. It's driving the right leverage on our balance sheet. It's making sure we have the cash to invest in our core business and the upcoming spectrum auction of 600. We don't have any sense of where that's going to go, but it's a very important auction for us. On the heels of that, the other auctions around 5G frequencies are also important. So we're going to remain balanced and prudent on this front. We are committed to sustainable dividend growth in the long term. We have every bit of confidence in the guidance we put forward and the future growth potential of our business. So it really comes down to a moment of time we believe that's right to take the next step in dividend growth. But focusing on the very core drivers, revenue, AOP, free cash flow, return on capital, I think, are great things for the future of this business, will give us all kinds of options in terms of what to do with that growth. And I think you're relying on us to make sure that we take that cash, take that growth and apply it to the right mix of investments. We have been focused on value, and we've done, I think, a very good job of focusing on the value drivers in 2017, and the same will be said of 2018. And I think we are very well poised for long-term growth and long-term shareholder returns. I hope that answers your question, Greg. Looking for a specific date or trigger, it's not about specific date or trigger. It's about assessing on a regular basis that balance and the capital priorities I talked about earlier.

Yes, it does. And I'm not debating impacting, the stock's done quite well, even without a dividend increase over the past year. So obviously, the growth message, the market likes. But some people might want to focus on this issue of timing. And I guess, the follow-on question I would have is, with the spectrum auction unlikely until the first quarter 2019, does that -- are you kind of implying that you are not going to get a dividend increase at this time next year either just because of that issue? Or could other things affect that?

No. I'm not telegraphing or implying anything. I'm just saying we will continue to assess it over the course of time and there'll be more clarity around all the factors I talked about every given quarter going forward, and we'll keep you updated as we go along the way.

We'll now take the next question from the line of Maher Yaghi with Desjardins.

People might argue that it's not really what a new competitor in the wireless market can do to pricing, it's what the incumbents do to themselves that can cause harm to the industry. When you look at -- you look back at the promotions that were happening in December, do you think it's justified that you guys go out with those kind of promotions, when, as you said, Joe, it was not a reaction to what Shaw was doing in the market. Can we draw some conclusions on, was this the right strategy to go out with to draw attention or to grab attention from consumers? And the second question I had is, as you said on, if we adjust for ARPU in the quarter, 3.5% growth. As you look out in 2018 with the churn that we saw and the change in customer accounts due to these promotions that took place in December, what kind of ARPU growth are we to expect in next couple of quarters? Are we expected to see some deceleration -- significant deceleration or a slow and steady decline?

Okay. Thanks Maher for the questions. First of all, it is important to understand that the promotion was 5-day long, 5 days. Thursday through Monday, December 14 through the Monday. So it is very short period of time. It is that time of the year when there are promotions out there for all kinds of categories of retail service providers in the marketplace, it's that time of the season. I don't think it's right for me to comment on our competitive pricing promotion strategy as an organization. I think it's a highly sensitive base of thinking, and it's not useful to our shareholders to comment on it openly on a call like this, given the competitive sensitivity around it. I will say that we are 100% committed to lead our ARPU growth. And on ARPU growth, we think, we have good momentum. We posted a good number in Q4, and we expect the momentum to continue into the future. And everything within our analysis understanding of our businesses that we are well poised to make it happen.

We'll now take the next question the line of Philip Huang with Barclays.

Just wondering if you are able to share perhaps your estimate of the impact about technical issue during the peak promotion season, because clearly we're just trying to get some, I guess, back into what churn would have been and given that churn, you expect churn to normalize into Q1. I just wanted to do kind of see to what extent the technical issue was the primary cause, and that when do we can expect churn to continue to improve in 2018?

Sure, Phil. I think, I mentioned this earlier, but if I didn't, I'll go through it. We believe the impact for that 5-day period was about 35,000 deactivations. If you normalize for 35,000 deactivations, it's about 15 basis points of churn. So [indiscernible] brought churn from 1.48% down to 1.33%. And as part of that, the Government of Canada is about 3 points of churn. In terms of -- when you take the number out of the base given an adjustment, it actually is not [indiscernible] churn as well. So it would have been a very strong churn performance. And we were running, leading up in December 14, we were running high single-digit year-over-year improvement in churn. So very much was that isolated period of time. And as I said little while ago, we've seen it settle back in to normal levels as we've kind of gotten through that period. So we're not concerned.

Right. That's super helpful. And with the push out of the iPhone X upgrade this year due to supply issue, do see Q1 being a less -- a perhaps less -- a bit of a blip in terms of seasonality, compared to a normal Q1 that tends to be relatively quiet?

I'm sorry, Phillip. You were just a bit garbled, I didn't hear the question overall.

Yes, sorry. Can you hear me better now? It's about the...

It's better.

Yes. I just want to ask about the push out of the iPhone X upgrade volumes this year because of the limited supply. Perhaps there might be some pent-up demand that sort of creeps up into Q1 more so than perhaps in prior years. Are you expecting sort of the industry to see, I guess, a seasonal slowdown as a result of the volumes despite the -- what sort of already happened in Q4? Or do you think that things have been -- things are likely to continue to follow what we've seen in the prior years in terms of seasonality?

Yes, we saw a very strong iPhone sales unload in Q4. And we've seen no sort of delay or push into Q1. And we're well poised in terms of support and inventory capability for Q1 on this front. And we'll continue to kind of drive forward with that product offering in the marketplace.

Ladies and gentlemen, that is all the time we have for questions. And this will conclude the Q&A session for today. Thank you for participating. And you may now disconnect your lines.