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Good morning, ladies and gentlemen. Welcome to the BCE Third Quarter 2018 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.
Thank you, Valerie. Good morning to everyone. With me here this morning are George Cope, BEC's President and CEO, as well as Glen LeBlanc, our CFO. As a reminder, our third quarter results package and other disclosure documents, including today's slide presentation, are available on BCE's investor relations webpage. An audio replay and transcript of this call will also be made available on our website.However, before we get started, I want to draw your attention to the Safe Harbor statement on Slide 2 of the presentation deck. Information in that deck and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking, and therefore subject to risks and uncertainties. These forward-looking statements represent our expectations as of today and accordingly are subject to change. Results may differ materially. We disclaim any obligation to update forward-looking statements, except as required by law. Factors that may affect future results are contained in BCE's filings with both the Canadian Securities Commission and the SEC, and are also available on our corporate website.So on that, I'll hand it over to George.
Great. Thanks, Thane. Good morning, everyone. Thank you for joining us.I'm on the slide that starts with the Q3 overview. The Company actually enjoyed an excellent subscriber growth quarter across TV, internet, and wireless. Up 78,000 subscribers or 41.5% year-over-year. It was our best ever Q3 wireless performance with total net adds prepaid and postpaid up 66% year-over-year. We grew our wireline broadband market share in the third quarter with 88,000 internet and IPTV net additions, and strategically important, added 77,000 new FTTH customers to our internet base.We had a very positive quarter for wireline with all of our operating trends heading in the right direction with an acceleration of revenue growth and also 1.2% EBITDA growth that continued with our industry-leading wireline margins. Worth calling out that it was our best quarter for our business unit in over 10 years. Our buildout continues on the fiber side. As well, we have begun in the rural markets a fixed wireless rollout that we've begun and now have completed in 19 communities.Turning to wireless. As I indicated, we had a very strong operating quarter. Net adds from a postpaid perspective up 15% year-over-year, our strongest postpaid quarter since 2012. Also, strategically very positive for us was that our prepaid business is now growing again. First quarter of positive net adds since the fourth quarter of 2009, so the Lucky brand is clearly working in the marketplace. And important for us, we would expect for the first time in many years that our revenue growth in prepaid will be positive now as we go forward into 2019.On APU, or what we used to know as ARPU, we were down .7% year-over-year, although impacted specifically by the federal contract, as I talked about last quarter. Without that, we would have been up .6% year-over-year and 1.3% year-to-date. And of course, we were impacted by the mix now that prepaid is growing again. In fact, without Lucky, we would have been up 1% year-over-year in terms of our overall APU. So roughly in line with the inflation expectation we had net of some of these changes in our strategic direction. But obviously, overall adding total revenue growth.On the wireline side, excellent quarter for internet. 53,000 retail internet net additions. Up 27% year-over-year. Our total was 48,000, but that would be because we had negative wholesale loading or subscriber additions, which of course, we would be very comfortable with as the average revenue off of our wholesale base would be literally 50% less than our retail subscriber base. And of course, part of that is our strategy with the rollout of the Virgin internet brand.I mentioned the 77,000 new fiber customers added in the quarter, and also strategically with the launch of 1.5 gig services in August in Ontario. We also since that time in September have added Quebec and this month we'll surely add Atlantic Canada.Also a very strong quarter for us relative to many other providers in North America with growth in our TV net adds of 14,000 in our wireline footprint. 40,000 IPTV net additions, up 10% year-over-year with very strong demands for our Alt TV product, which of course is a TV product where there is no requirement for a set-top box. And of course, that helps pull through internet subscribers for us because Alt is clearly [slowed] when we also have someone who chooses us as their internet provider.For us also strategically important as it's probably the first quarter since the rollout of our fiber that we've captured more than 50% share of the ISP revenue growth in the segment. And so that's for me a major milestone when we're starting to capture more than $1 out of $2 of incremental ISP revenue. And that's obviously consistent with what our strategy has been with investors over time with our fiber build.Turning to Bell Media. I think overall actually a good quarter, particularly in this space. This morning we'll see an announcement out, probably out already, of a new launch of Crave. The historical Crave product will continue. But also we are launching an additional Crave product, which will bundle for the first time all TNN and HBO and Showtime available in an OTT streaming service, and also available through the BDUs. And so for the first time consumers will have direct access in an OTT model where you would see first time Game of Thrones, Billions, and a number of other key product portfolios. We think this is going to help our BDUs from a distribution perspective, and also take Crave to another level in the OTT world.TSN remained the number one sports leader and top-rated specialty TV service in the third quarter with some nice growth year-over-year. And we are pleased with the decision out of the Free Trade Agreement that will reinstitute the banning of U.S. signals. And so that will clearly help our media business and help Canadian businesses as they will now when they advertise be advertising to all Canadians in the marketplace. Overall, it's a good quarter. The challenge in that space continues to be content cost, although we're feeling pretty good about the revenue streams that we're seeing and the underlying strength from a revenue perspective in this business.So turning now, I just want to make a few comments on 2019. We will clearly give full guidance in early next year. But I just wanted to share some things with our shareholders this morning. Over the past 120 days we have completed a fairly significant restructuring. That is now completed. In that restructuring we will have about 4% less management workforce going forward with the elimination of about 700 positions with an annual cash savings for us of about $75 million.Also we expect as we look forward into 2019 that for the first time in many years our capital intensity ratio will go below 17% on a consolidated basis. That was really driven by four specific items. One is our wireline fiber build will continue at the pace that it's on. Now that we're approaching 50%, there is clearly no reason to accelerate that. So our absolute wireline capital dollars will be pretty close in '19 as they were in '18.Also the rural fixed wireless program is significantly less expensive than the fiber program, so we'll get some additional footprint there, but not at the same cost as fiber. Our fiber build that is being absorbed by our wireline business will reduce the requirement for backhaul capital for our wireless business going forward for 5G because all of our locations will have fiber to them already. And finally, in 2019 because of these investments we've been making on fiber, we'd expect our wireless capital intensity ratio will decline by about 1% in '19. And of course, wireless is a bigger share of our overall business.So with that declining and the other four items, the mix will take us below 17 for the first time in many years. Although our strategy of investment in broadband continues in both wireless and wireline.On the pension side, we would expect our cumulative cash funding will be about $1 billion to $1.5 billion lower than it has been over the past five years. As everyone knows, we had an opportunity at one point to see a savings of about $200 million if the actual ratio -- solvency ratio were to go below -- go above 105. And at the end of October of this quarter -- at the end of the quarter, in September, we were at 100.5% in terms of our solvency ratio.Finally, we also have some good news from a tax perspective. The MTS, the acquisition which we thought would generate for us $300 million in tax savings now will generate for us $400 million in tax savings and we'll be able to utilize that extra $100 million as we go forward through '19 and '20.So all of those pieces put together we think puts us in a great position going into '19 from a cash flow generation perspective, particularly on the back of these subscriber additions we're talking about this morning.And with that, let me turn it over to Glen.
Thanks, George, and good morning, everyone. Let me begin with a high level review of our consolidated Q3 results on Slide 10. Our financial performance was strong across the board with total revenue growth accelerating to 3.2%, a year-over-year increase at all three Bell operating segments. This drove 2.2% higher adjusted EBITDA in line with our full year guidance target as we balanced industry-leading ARPU growth with subscriber profitability in a seasonally competitive quarter across both our wireless and residential wireline businesses.Consistent with this growth in EBITDA, net earnings were up 2%, which drove a 5.5% year-over-year increase in adjusted EPS to $0.96. EPS also benefited from favorable tax adjustments in the quarter and lower other expense, which I will detail a bit later in my presentation.And lastly, free cash flow. Although adjusted EBITDA growth and lower CapEx provided a healthy incremental cash contribution in the quarter, this was effectively offset by higher income taxes paid and a decrease in the cash from working capital, resulting in the year-over-year stepdown in free cash flow in the quarter.Let me turn to Slide 11 and wireless. In our wireless business, total revenue was up 5.9% driven by continued strong subscriber additions in a growing Canadian wireless market, and increased sales of higher valued smartphones, reflecting a greater volume of customer transactions compared to last year.Wireless EBITDA increased a solid 4.5% on the flow through of strong revenue growth. However, EBITDA margin declined 60 basis points to 43.6% due to a higher proportion of low margin product revenue in our overall wireless revenue mix compared to last year and rich handset discounts to match competitors' aggressive back-to-school promotional offers.On the capital front, as George mentioned, we continue and invest heavily in mobile small cells to optimize our mobile coverage signal, quality, and the data backhaul as we pave the way for 5G. Yet our capital intensity ratio remained best in class at an industry low of 8.3%. We expect this to contribute to a lower BCE consolidated capital intensity ratio going forward, particularly as our wireless revenue mix grows further.Moving on to wireline results on Slide 12. Revenue growth accelerated to 1.9%, reflecting stronger year-over-year organic performance across all main lines of business. Wireline residential revenue was up year-over-year on combined internet and TV growth of 4%. This result was moderated by the impact of upfront discounts and retention credits on service bundle offers driven by the high level of competitive intensity, particularly during this back-to-school selling period.In business wireline, Bell Business Markets had its best performance in over 10 years, delivering positive revenue growth on the back of higher year-over-year spending by large enterprise customers on IP broadband connectivity and business service solutions, as well as in increased data product sales across many key sectors, all of which is reflective of a stronger economy.In terms of operating profitability with increasing broadband scale, more favorable business market results, and the support of our cost management actions, wireline EBITDA was up a very respectable 1.2%.So overall, a strong quarter for Bell Wireline with improved financial performance and positive operating trends right across the board.Turning to Bell Media on Slide 13. In summary, good set of results in what is seasonally a low quarter for advertising spending in the industry. Total revenues were up over last year, increasing by 1.1%. Advertising revenues grew .6%, mainly on the strength of our live event programming in the quarter, which included the final rounds of the 2018 FIFA World Cup, as well as year-over-year increases in our specialty TV news service, CP24.We also enjoyed modest growth in subscriber revenue this quarter, driven by ongoing growth in Crave TV, as well as our direct consumer streaming services, GSM and RDS direct.Adjusted EBITDA improved sequentially with a lower year-over-year decline of 2.7%, which represents our best quarterly result of 2018. However, similar to previous quarters this year, overall performance was impacted by the higher costs for sports broadcast rights and ongoing Crave TV programming expansion.Let's move to Slide 14, which summarizes the key components of adjusted EPS, which came in at $0.96 per share for the quarter, or 5.5% higher than last year. Tax adjustments arising from favorable resolution of uncertain tax positions related to MTS contributed $0.08 in the quarter. This compares to tax adjustments totaling $0.07 per share last year.In addition to higher EBITDA, which drove $0.04 of earning growth this quarter, adjusted EPS reflected lower year-over-year losses from our minority interest equity investments. This was partially offset by a step-up in depreciation and amortization expense consistent with the growth in capital assets, as well as the increased interest expense driven by a higher level of outstanding debt and slightly higher rates.With our strong Q3 earnings performance we remain comfortably on track to meet our full year 2018 guidance target of $3.45 to $3.55 per share.Let's flip to Slide 15, and you'll see that we generated more than $1 billion of free cash flow this quarter. Adjusted EBITDA less CapEx, or what is commonly referred to as simple free cash flow, grew 5.8% year-over-year contributing $83 million of incremental cash. This quarter's results also reflected a step-up in cash taxes due to higher installment payments, in line with plan for 2018, and a decrease in cash from working capital.The working capital decline with the buildup of new wireless handset inventory ahead of Q4, timing of supplier payments, and higher accounts receivable, is attributable to the stronger revenue growth, particularly at our Bell Business Markets and Bell Media advertising, as well as the cash impact from matching the aggressive offers -- the discount offers I mentioned earlier on the latest wireless smartphone offers during the back-to-school promotions.Several of these factors should reverse out next quarter resulting in a sequentially stronger absolute dollar free cash flow growth generation in Q4.Let's wrap up on Slide 16. Our financial results we have reported through the first nine months of '18 reflect discipline, operational execution, and a clear focus on the fundamentals of the business. As we enter the fourth quarter, we remain competitively well positioned with strong momentum across our wireline -- our wireless and our wireline operations and with market-leading media assets that generate substantial cash flow for reinvestment in the business.So with no fundamental change in outlook, I am reconfirming all of our financial guidance targets for 2018. As we begin to look out to 2019, BCE's cash flow will remain strong and reliable with growth opportunities ahead from business performance, continued capital and cost efficiency gains, incremental MTS-related cash tax benefits, and a stronger pension solvency position. All of this providing a solid foundation for continued execution of our dividend growth objective.That concludes my formal remarks. I would like to turn the call back over to Thane and the operator to begin questions.
Thanks, Glen. So before we start the Q&A period, just to keep the calls as efficient as possible, I ask that you limit yourself to one question and a brief follow up, so we can get to as many of you as possible. If we have additional time, we'll cycle back. That being said, Valerie, please open the lines for questions.
Thank you, Mr. Fotopoulos. [Operator Instructions] David Barden, Bank of America.
I guess the standout -- one of the standouts in this quarter was the strong prepaid performance in the wireless market. Could you talk a little about is the strategy here to kind of make a stronger move in this market, and then kind of groom these subscribers up into the postpaid market? Or is something else going on? It would just be great to kind of hear the strategy there.
Sure. Actually it is in one sense what you just mentioned, David. I mean, we really were not in this space for a number of years competitively, as a number of investors will know. We've -- I think we're excellent at postpaid execution. We saw market opportunity on prepaid. One of our peers I think has done very well in that space. Clearly, there was a market there. So we've entered it with Lucky. Now that it's national, you can start to see that we're clearly taking some market share. And from our perspective that ultimately gives us an opportunity to migrate that base -- some of that base to postpaid, which we think is going to be strategically important going forward. And we think, as I've mentioned, one of our peers has done a good job of that the last number of years. And so we entered that a year ago.And what I'm really pleased with now is what's been a negative revenue growth line for us for eight years will turn positive. And of course, that's just a net contributor to the overall wireless story.
And if I could just do a quick follow up. I mean, another -- as you pointed out, the standout in the quarter was the business strength. Is it purely economic growth? Is there some sort of product cycle that's evolving in that segment? Is there reduced competition? Is there -- if you could kind of -- is this something we can expect to continue, or is this just an anomaly?
Well, it's -- first of all, as we all know, one quarter doesn't make for a trend. But we have on the last number of calls mentioned that the underlying business was feeling stronger across small, medium, and enterprise. And we have been pleased with the results this year. We think also competitively we believe we have taken some market share with just strong execution in the market. But the underlying piece, I think if Tom Little who runs that were on the line, he would share the underlying part of that too is some strong growth in the Canadian economy adding to that. And we've said over time that we needed that type of growth to help that unit, and so we're seeing that.But clearly, anything that's positive in that sector from our perspective is a bonus for the wireline business and helps contribute to what is I think one of our better top line quarters for the Company relative to expectations in a number of years for us on an overall -- from an overall standpoint.
Jeff Fan, Scotia Bank.
Just want to ask about the APU trend. And excluding the government contract, the APU still slowed from last quarter. So I'm just wondering if you can talk a little bit about, excluding the government contract, what's going on in the underlying trend. Is this some of the data promotions that we've seen and talked about? Is there anything else noteworthy that's worth pointing out?
Yes. I think it's two things. Great question. One I mentioned as well. Obviously, our denominator, numerator math is slightly changing on prepaid versus postpaid because of Lucky. And so we'll -- that's obviously going to have some impact. But overall, it's a weighted average overall better revenue growth over time. So that's one of the other elements. And then, I think the other one is clearly the buckets are larger, so the out-of-bucket revenue growth is impacted. I mentioned that last quarter. It's one of the reasons we talked about excluding a couple of these strategic items looking for CPI type of growth. And I think that's basically what we're seeing.The migration of customers to LTE has happened, and now the buckets have gotten larger. And as a result, you see the type of ARPU we've got, which frankly underlined those two things. It's still positive growth from an ARPU perspective. But that's really it. That's exactly -- what you raised is exactly the issue.
And just a quick follow up on the CapEx. I mean, it's amazing to see capital intensity in wireless at 8%, or it looks like it's going below that. A lot of investors I think have been asking -- talking about 5G. How sustainable do you think this level of capital intensity in wireless is, as you look out the next few years?
Yes. So we want to be a little careful there because of guidance comments. I think for sure we have directed the Street where we see where CapEx intensity will drop next year. But part of that is because we're so advanced on our LTE 4-band quad speeds that people are seeing 750 speeds off of our product today. And the fact that our fiber backhaul is really being built on the back of our wireline capital intensity. So we think that's contributing to the CPI that we have.Going out after that, as you start to overlay some 5G, the real test on whether or not that intensity level will go up will be a function of how much revenue growth you've had in wireless over say that 24-month window from now. And so you do get some headroom on that intensity on the back of the higher revenue growth. Whether or not it goes up from where it is, where we're talking about next year, for some of the 5G that may be the case. But I don't think we're today ready to give that type of direction to the investment community.
Simon Flannery, Morgan Stanley.
Just staying on the wireless service revenue growth, it's -- I think it was 2.5% year-over-year. In the quarter obviously you got some good volume growth, but some headwinds from -- as you were just discussing. Given your CPI comments, do we sort of trough here and sort of stabilize in this 2%-plus level? Or could we have another quarter or two of deceleration before it picks up again? And related to that I guess is how far through this out-of-bucket absorption are you? Is there still a lot of out-of-bucket revenues that could get kind of put into the main build over the next few quarters? Thanks.
Well, I want to be careful on a month-by-month or quarter-by-quarter ARPU forecast. I would say this, we tried to give some direction on '19 overall, on where we see the cash in the business. And then, from an ARPU perspective -- I mean, on a blended ARPU perspective, using the old term, clearly as prepaid is a bigger mix because we didn't have prepaid growth, that left some impact. The -- and the federal government's still got to work its way through, and then that will normalize itself out as we get into next year. Probably the latter half of next year that's finally through in terms of that entire base moving over to us. Those are kind of two key components of that. But underlying all of that, we still really feel quite strong about the execution of our postpaid business. Hopefully, that's helpful.
Great. And on the overage?
Well, overage is what I've said. I mean, that's a function of the competitive marketplace, quite frankly. The larger buckets clearly is where we've seen right across the entire country, not the acceleration of the ARPU. It's -- part of that is the buckets are larger than they were before. Now the next acceleration of speed, when that happens maybe we see another acceleration of larger bucket use. But right now, what we've said is really what we're seeing.
Our next question is from Phillip Huang with Barclays.
George, I just wanted to -- a question on the prepaid opportunity. I know it's so early that is for Lucky Mobile. But just given the strong acceleration, was wondering if you might be able to provide some color around the profile of the, I guess, average prepaid subscriber. Obviously, I was wondering if you could give us a sense of the prepaid ARPU you've been able to load subscribers at. And also, given the greater reliance on self-service, I was wondering if you could give us a sense of the type of margin that is achievable for the segment just relative to the postpaid segment.
Yes, it's a very different segment. And it's a segment we clearly, as I said, weren't competing in. I think a lot of it is in some of the city markets, so that's an opportunity for us to grow market share. Because it's a no credit check product for us, it also opens up some markets we weren't pursuing. That's another piece for us in terms of that. In terms of ARPU, we're not really giving -- we don't mix the ARPU out. It's not really any different than what traditional prepaid was, although we think it will be higher as we execute it.What I love about it, it's not any more than a two-month payback from a cash perspective on any -- every subscriber. And so that's a really nice way to grow some EBITDA, although not huge dollars. Better than a drain the other way. And the key strategic point obviously is to capture a share that where really one of our players was taking all the share in that space, and migrating those customers from our Lucky brand to our other postpaid brands over time versus not getting that opportunity.And so we do think '19, as I mentioned, for the first time probably since '09, we'll actually see some positive revenue growth in that category. And of course, that's helpful overall for wireless.
That's helpful, George. If I could do a quick follow up on the fixed line side, obviously very healthy acceleration in both your internet and IPTV subscriber growth. And 2018 being a year of expanding fiber in Toronto, I was wondering if you could comment on your wireline subscriber performance across the various regions you're in, in Quebec versus Ontario. Thanks.
Yes. Careful competitively. But I would say we were very pleased with the results across the board. Frankly, we'd still like to see even more traction in our Toronto fiber footprint and we think that's just execution in the marketplace. In the other areas, frankly, we had just tremendous results. So now it's just head down, strong execution in Toronto, pushing the Alt TV in that marketplace because it's very conducive to the condominium market. It's a two-stream product. No set-top box and a pull through of Internet, which is perfect with fiber, and of course, with the 1.5 product now in the market, we think that's working.Having said all of that, we did add 77,000 customers moved or were added to our fiber footprint. And that's by far our largest quarter. I think we've been running at about 45,000 up until now.
Aravinda Galappatthige, Canaccord Genuity.
George, I just wanted to focus on the fixed wireless opportunity that you touched on in your prepared remarks. And perhaps a little bit more color on the size of the opportunity. I think in the past you have indicated the size was around 800,000 households. I just wanted to get a sense of the magnitude of the opportunity. I mean, are these substantially areas where you have sub-10% market share and you're kind of looking to get towards mid perhaps 30%, 35%? And that gives the sense. But I just wanted to get some color around the size of the opportunity. Thank you.
Yes. So for those that don't know, it is what you've said. We'll do 700,000 to 800,000 households over the next -- we won't give the exact timeframe for our competitors. But it will be executed on. It's in communities now where -- you're right. In most cases we have sub-10% market share. These are customers that may be sitting on a satellite service offering or frankly on even -- some of them even on dial-up internet where frankly there's been no solution.What we're doing -- because we're putting fiber to every cell site in anticipation of 5G, then those cell sites now have fiber capability. And then, there are products available now leveraging our 3.5 spectrum that we can use that allows someone to have a fixed product in the home and speeds of 25 to 50 that they will get off of that, and a competitive product. And then, we obviously have the ability to bundle that with our satellite and even in some cases obviously our local access.So our strategy around that is -- I guess now I've laid out for the Street to see. It is those communities. And it brings the communities in Canada that up until now have not had the broadband speeds that other markets in the country have had. So it's a growth opportunity for us. Great for Canadians and a great leverage of our 5G technology setup because of the fiber backhaul investment we're making. So I'm pretty excited about it as you can tell listening to me.
Maher Yaghi, Desjardins Securities.
I wanted to just -- I mean, the math on the impact of the government contract on your wireless ARPU makes sense. I just wanted to understand. From my calculation it looks like it's peaking right now. The negative impact probably another difficult Q4, but then we cycle through Q1, Q2, should start to relieve itself. When you look at after we go through this transition, are you expecting, George, to get back to 1% to 2% postpaid ARPU growth, or we're more into the 0% to 1%? And I have a follow up question on wireline.
Well, first of all, we're -- we answered this one way. Let me just try another way. And I'm obviously not going to give ARPU guidance for one year, two years out in the percentage. But some of your comments about the federal contract moving through, you are correct. So some of those will mitigate. But the offset of that, of course -- which we'll come back obviously in the first quarter as we always do and share with the Street how we see the market. The offset, of course, is the mix issue. What analysts are going to want to start to do I think is do, okay, a postpaid assumption, a prepaid assumption. Prepaid is no longer declining in your base. The blended ARPU is kind of -- for us now it gets to be a funny number to compare on. And so we're going to have to decide even internally here how we direct the analyst community to understand the difference between the two items.So we'll just have -- we'll see how that unfolds. But if you step back, this type of overall subscriber growth for wireless is what's going to drive the top line revenue growth of the Company and that's what I'm so thrilled about with the quarter. Because we've got all cylinders hitting on postpaid and prepaid in terms of market share growth.
Yes. We've been trying to split postpaid and prepaid. Maybe you can help us by giving us the numbers eventually. That would be even more helpful.
It would also be very helpful to my competitor. So we'll balance that off against the free cash flow generation of the Company. And you guys know us.
Yes. No, I understand. And on internet, I noticed a nice acceleration of internet loading and the quality of the internet loading seems to be better, more retail oriented than wholesale. But can -- I wanted to ask you, when I look at last year versus this year, it seems like you are less competitive on the wholesale side, more competitive on the retail side. Can you talk about maybe just what's going on? Is Rogers more competitive on the wholesale? And when you look at the quality, the ARPU generation from an internet load, how do you see it going forward?
So I would say, first of all, your observation about our focus is correct. Our focus is on retail. One of the reasons we launched the Virgin internet brand is it's competing at the -- a different price market that was there in the wholesale market. We might as well compete for that. And also compete at the retail price, not at the wholesale price. And then, of course, with the migration we're talking about on the fiber side, that's obviously a high quality retail customer base as well. And then, I think you see in our overall revenue growth of wireline -- and we happened -- because our competitors disclosed their internet revenue growth, we can see that we captured more than 50% of the internet growth in the quarter. And so maybe it gets a little bit away from just subscriber growth now and now more a mix of subscribers are wholesale versus retail that will drive it. And our focus is 100% on retail. The wholesale is a regulatory obligation, not a business strategy for us.
So let's focus on wholesale, but still decent revenue coming from that segment of the market. What's -- why has it changed in your view going from let's say telco ISPs -- telco delivered ISPs to cable?
Well, I don't know why. You'd have to ask the cable companies on strategic focus. On our focus, it's the launch of the Virgin internet brand to compete with wholesale. But we access the retail revenue stream. They get the benefit of competition, and we get the benefit of a revenue stream that would be double what we'd get through the wholesale market. And that's really our strategy there. That's really -- that's -- basically it's retail pricing for us and retail top line growth against wholesale growth. And as everyone knows, it's a regulatory requirement for wholesale, not a strategy of Bell's.
That's -- makes more sense. One last question on the pension, maybe for Glen. Trying to just figure out if there's a difference in -- between the $1 billion to $1.5 billion of lower anticipated cash funding, and the $200 million of potential savings in current service costs. Are these mutually exclusive or inclusive?
Good morning, Maher. Yes. If you look back over the past five years, our current service costs, pension contributions, coupled with the voluntary contributions we had to make into -- the contributions we made into the plan, you'd get a number that's north of $3 billion. I think it's around $3.3 billion. If I look out forward at the next five years, I think the material special contributions are behind us. And I know we've discussed that before. Current service runs at about 400 a year. So the number we quote doesn't take into account contribution holidays is I think where you're going. I think we have $1 billion or more opportunity reduction in cash drain because of not having to make these special contributions to the plan.Now accelerate that one step further and we all see that we're headed for a rising interest rate environment over the next 12 months and 24 months. A 50 to 75 basis point increase in interest rates is going to take us well beyond that fully funded position we've been chasing for 10 years and get us into a position of being north of 105%. And that allows you to take contribution holidays of up to 200 a year. So that number could even be bigger.
So I should add them together if you ever get to above 105?
Yes. That would be a great day.
Batya Levi, UBS.
Can you talk about the churn differences you are seeing for your standalone broadband product and when you bundle it with video? And how you think about the competitive environment for the bundle and how you've balanced the subscriber growth versus profitability going forward.
Yes. So in our churn rates on broadband, wholesale is by far our highest churn rate and it's our lowest ARPU, so clearly not a strategic focus for us. Our lowest churn comes when we do have bundles - our TV product and our internet product combined. A duo, I guess, is what we would call it. We always have some of the take in local access as well. We clearly have 3 million local access customers still. So if you have a triple, it's even more powerful for us. But right across the board our churn levels are lower when we have the multiple product in the household.And one of the things for us with our Alt TV strategy is historically the condominium market was stronger for our peer than us. The buildout of fiber combined with the TV product that doesn't require a set top box, that's priced reflecting the no requirement for a set top box, so anywhere from $10 to $20 cheaper than traditional TV because they don't have the set top box with a truck roll for that type of set top box install, saves us money. We're passing that benefit through to the consumer. And you combine that with our internet, we think that's a good package for us going forward. Opens up a market that may be part of the core cutting market or the core never market for us.And I think you see that in our results today where we actually saw TV subscriber growth across our footprint, and specifically clearly in the city markets. Because our decline of any was in the satellite, even though that was better year-over-year. That's where the decline still is.
Okay. One follow up. Comment about next year with lower capital intensity, cash savings from the restructuring plan, and lower taxes. Can you talk about how you think about capital allocation going forward?
Capital allocation? Yes, sure. I think we've had this question many times and I think our past performance is the best indicator of the future, and that is one of balance. We've been respectful of ensuring that we maintain our investment grade credit rating and ensuring no action we take that puts that in jeopardy. We've followed a dividend growth model year-after-year in showing adequate return of capital to our shareholders. And we're proud of that and think that cash flow generation in the Company allows us to continue that.And finally, we invest heavily in the networks we need to support the future. And when you listen to what George has said on our fiber backhaul build and how far we are in 5G readiness, the fact that we're now approaching 50% of our homes with fiber-to-the-home, I would say this is an organization that takes seriously the investments required to be an industry leader in the networks we build. So it's one of balance, and nothing's changed as we look out.
Drew McReynolds, RBC.
Just to follow up on the business market side of things. George had talked about obviously a nice kind of tailwind there with potential kind of market share gains. Wondering if you could just strip it down a little bit. You've talked for many years about the structural employment kind of issue, not just in Canada, but across the board. So is this kind of simply a very strong cyclical tailwind that's coming? Is it bodies? Is it new business formation? And then, just a follow up to that onto 5G and things like smart city and incremental revenue there. You obviously are the biggest business market enterprise player in Canada. Does that give you some kind of a leg up here in terms of being able to leverage that into what we all probably see down the road as a nicely going revenue pool around things like smart city? Thank you.
Yes. So on the first part of the question, it is -- our underlying -- we like to think we're executing better, obviously. And we think we are. Some of the structural things we did a couple of years ago, having small business move under where we do some of our direct consumer business I think has helped us. Then our enterprise and mid-market focus on that customer base is a little different. We've done a lot of fiber too. It sometimes gets lost in this. In fact, I don't even bring it up. A lot of fiber for business is going on as well in the marketplace. Some with even direct fiber in very rural markets, but for customers that have branches or retail that we're doing as well, which we think is a competitive advantage in the marketplace for us.But I think it's probably fair you step back on that and say, stronger economy, reasonable job growth, is clearly giving us some of that strength as well. I don't think it's something more structural than that. Then on IoT, we actually are very excited about our enterprise positioning there with our wireless business going forward. There's a number of things we're working on, a number initiatives. The Street will hear about them as they hit the marketplace.But internally for us, we would think -- we have -- you see our total wireless base today. We think we'll add at least that many of our entire base to our IoT base over the next five years, albeit on a much smaller revenue in the number of units. But lots of those applications that we're now in the midst of actually working on and starting to roll out with our BBM folks and our wireless sales folks. So we are quite excited about that space in fact. And there'll be a lot more to come to investors on that over the next year or two from us.
And if I can just slip in a follow up here just on the prepaid, obviously great traction there. Has the profitability, George, of that business evolved? I know we've talked about the cash return, the revenue growth. But on the profitability side, however you want to measure it, just with technology and how you run that business, is it different than it was five and 10 years ago?
For sure. There's no doubt it's different. First of all, the pop up capabilities are so different. It's not as manual in terms of what we were doing there. The distribution can be so much more leveraging online service as opposed to as much through what would have been a lot more administrative processes. So it is a much easier business for us to be in. The other one for us is our distribution strength that we've had for years. We could argue the reason we've been able to pick that pace up on our product in 12 months and take that type of market share is just putting it across our channels. And we now have even -- we have additional channels yet that aren't carrying Lucky and if we make the decision to put the product there, that should move us closer and closer to our peer, which is really what we're just trying to get to.As with all of our business lines, we want to capture for us the market share based on our scale and size. We're not quite there yet on the prepaid, but we're going to work on that over the next year.
Richard Choe, JPMorgan.
With CapEx intensity going down, how should we think about the current trends? Because video and broadband seem to be doing well on the fiber side. Do you expect any changes there? And then, maybe this might be a little bit of minutia, but as you move from the urban to more rural build, do you expect any changes there?
So the first question -- well the answer is it's almost no. But it's probably too short an answer. So I would say the fiber build continues next year. So I want to make sure everybody understands that. We're -- in addition to that fiber build, we're doing a rural build that we talked about using the wireless solution. And on the -- some of our builds for fiber are less expensive next year. For instance, Montreal, as we continue to build out is much more aerial. But that's clearly offset by an area like 905, which for those on the line who don't know what that would be, outside the core Toronto. That is a lot of buried, and so that's very expensive fiber.So on balance, there's not really a big pickup there, but the pace just continues. I think because we passed the 50% -- or will pass the 50% threshold market, we just know -- we're seeing the results so you just -- there's no reason to accelerate. Just continue the pace we're on. And then, take maybe some of that additional capital and put it into this wireless opportunity where, as we talked about half an hour ago, we really have literally no market share in those markets.Is that helpful?
Yes. And then, in terms of the NAS losses on residential, they continue to be pretty high. Is that because of MTS, or is there something else going on there?
No, there's really not. I have to admit, it does bounce up and down. I think probably investors have noticed that as well. It's clearly just with unlimited voice products now it's so many different categories of wireless. Substitution just continues. And I think it's going to continue as we know across the board. And so it is -- we do -- I have to admit some quarters it improves year-over-year, some quarters it declines or the rate actually accelerates year-over-year. We can't really put a finger on some distinct difference. But frankly, our focus clearly is on the other product portfolios now if you get enough revenue growth to offset that, what we all know is a continuing trend.
Vince Valentini, TD Securities.
Just a clarification from Glen, and then a bigger question for George. Glen, with the $0.08 tax benefits in Q3, did that push you towards the higher end of your EPS guidance range for the year, or do you maybe get some reversal of those tax benefits in Q4? And George, a bigger piece of the view, we can't live in Toronto and not know of friends or family who aren't seeing incredibly rich promotions from either Bell or Rogers on activation or retention as you guys roll out fiber-to-the-home and fight it out. Is this normal in your mind compared to Quebec City and some of the Atlantic markets where you've launched fiber to the home earlier, this kind of initial promotional battle? And does it ease over time, or do you think there is something a little bit undisciplined going on in the Toronto market right now? Thanks.
I'll jump in first for the easier question for me, Vince. We provide a pretty tight range on EPS, 345 to 355, so I'm not going to try to narrow that range on guidance. I reconfirmed all of our guidance ranges today.So then over to George on the other question.
Sure. So no, I guess what I would say to you, step back -- for all of our investors. Our fiber strategy has been and still remains that ultimately we would like to see our market share change from when we were under 50% -- I think we're roughly 40% of the internet market. And over time with this type of fiber and the leading technology, with prudent execution we should be able to obviously get ourselves into a market share where we're getting one out of two of the net adds. Or now with the interesting metric, I said on the call, at least 50% of the incremental revenue, which is ultimately the real test that you want to see.In our markets where we've had fiber in for a while, we see those metrics coming. People who happen to -- analysts that are in Toronto are seeing Toronto as a competitive market. Absolutely it is. And from our perspective, we're just so pleased with our service revenue growth this quarter over previous quarters. And we see that relative to some of our peers, so we know what we're doing is working in the marketplace.And so it's a long game. It's not a quarter game for us in terms of that market share. We know that as people move from home to home, if you're selecting an internet provider, there is no better internet at 1.5 available, quite frankly, in the world. So we just have to execute that strategy in a disciplined way. And bundling the products of TV in it are very important to us. The strategy around Alt, which is no set top box TV, and also our set-top box IPTV is a core strategy of what we're doing because that brings us obviously an average ARPU. On balance, it's more than $100. And as people know, with Bell Media we pay a lot of our content to our own company, so that's really the strategy around -- that we're executing on.Remember though, for investors, Alt TV is two streams maximum, and that's the difference between the set top box and non-set top box market.
Just one final piece, Vince. Maybe I wasn't clear in my opening remarks, so I'll apologize. The $0.08 that I alluded to, that was always in our 2018 financial guidance range that we provided with timing of the currency.
Tim Casey, BMO.
George, just could you comment on execution going forward in light of the regulatory review of sales practices? There was some discussion of the potential for a code of conduct. Do you think anything is going to come out of that, that will retard your ability to execute on the bundle and those type of things in Toronto and otherwise? Thanks.
No, I don't think there'll be any impact on our execution from a distribution perspective. We have so many channels of distribution and sell hundreds and hundreds of thousands of products in the marketplace. And so we've been very clear even at the CRTC, if on the sales side something wasn't executed the way it should have been, that's not acceptable and has to be addressed. And we do that everyday in the organization.As to what we do in the marketplace, we'll see how the CRTC responds. There are some suggestions we made that may be helpful for everyone. Other -- some of our peers did as well, and I'm sure they were awesome suggestions. And whatever way they come at us, we'll obviously execute within those.And at the same time, I don't think it will have an impact on demand in the Canadian marketplace. This is a highly competitive market, as has been brought up by a few analysts. And Canadians are seeing the benefit of the best -- as we all know, the best broadband technology available in the world and some of the most creative products. So that's what we've got to make sure Canadians view us as, and that's how we keep executing.
Valerie, in the interest of time, this will be our last question.
Sanford Lee, Macquarie.
Hey, I just wanted to follow up on the fixed wireless opportunity. I know it's early days. But what are your thoughts with respect to additional fixed wireless broadband ops outside of your income in wireline footprint?
No. Our strategies -- our strategy is to leverage our wireline infrastructure. It's a wireline product for us. Because we have the backhaul and all of that footprint, that model doesn't work for us if we're not the ones who are providing the backhaul and the fiber to the cell sites. And that's where our build is. What's very unique for us is our entire 5G build requirements in our wireless footprint and our fixed footprint -- in our fixed build that we're planning, is all within our wireline footprint. And that's the synergies out of our fiber, and that's why you're seeing the [ C to I ] in wireless where it is. So no, it's going to be in our footprint.
Great. And I guess that changes a few -- s***, your treatment on wireline would tell us. Sorry. Last one then is impediments to 5G rollouts. It looks like obviously you guys are well covered when it comes to 5G CapEx. But where are we when it comes to things like small cell site location?
Well, I think first of all one of the things for us which is very different than some other countries around the world. Because of the carrier aggregation we've done and the fiber backhaul we've already done, I think most people on the call know our speeds, 700 -- theoretically some getting up to 1 gig in theory on wireless. So we're well in front of a lot of some of the early 5G benefits that will come. 5G to mobile, as we said, is still a while away, and that will be a migration for us. And customers ultimately will see some technology.The cell sites, we are in the midst of building thousands of small cell sites right now. And I talked about that last year on the guidance call. I'll clarify that again for next year for everyone to see it. I think we'll have thousands of small cell sites done at the end of this year. And I'm happy to share that. Thane will be happy to share it offline. I don't have it at my fingertips right now. But I'll certainly bring it back in February and share it with everyone on the call.
Good. So on that, thanks, again, for your participation on the call this morning. I will be available throughout the day for any follow up and clarification. So have a good rest of the day. Thank you.
Thank you, gentlemen. The conference has now ended.