Shaw Communications Inc
TSX:SJR.B
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Shaw Communications Inc
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Thank you for standing by. Welcome to Shaw Communications' Third Quarter Fiscal 2018 Conference Call and Webcast. Today's call will be hosted by Mr. Brad Shaw, CEO of Shaw Communications. [Operator Instructions]Before we begin, management would like to remind listeners that comments made during today's call will include forward-looking information, and there are risks that actual results could differ materially. Please refer to the company's publicly filed documents for more details on assumptions and risks.Mr. Shaw, I will now turn the call over to you.
Thank you, operator, and good morning, everyone. With me today are members of our senior management team, including Jay, Trevor and Paul.This morning, we released our third quarter fiscal 2018 operating and financial results, which demonstrate continued momentum in our Wireless business as we added over 54,000 postpaid subscribers in the quarter. Notably, we also grew blended ARPU by almost 8% compared to a year ago as Freedom customers continue to recognize the value of our Big Gig data plan and significant network enhancements.We continue to improve the Wireless experience for our customers, whether it's through an improved network our spectrum is deployed, innovative data plans, the latest smartphone devices or more distribution points of presence to expand our reach in customer awareness. Today, we are pleased to announce another national retail partner, Walmart, that will result in additional 140 locations throughout Ontario, Alberta and B.C. carrying our products and services. The combination of Walmart along with Loblaws, that we announced last quarter, and our existing corporate stores and third-party dealers results in approximately 600 total distribution locations that will be operational by early 2019. This represents a material improvement in our reach compared to our footprint at the time of the WIND acquisition.In May, we completed some initial 5G technical trials, and it's clear that this new technology will transform the industry through faster wireless speeds that will enable future technologies. Both wireline infrastructure and spectrum allocation will play a critical role in 5G deployment. Our hybrid fiber coax network has extensive fiber assets to support 5G as well as next-generation DOCSIS infrastructure, which will be capable of multigigabit speeds required for 5G services.In addition, as we build our small-cell network, we have the advantage of approximately 100,000 Shaw Go WiFi access points. Recent announcements from the government further support deployment of 5G by providing a view into the spectrum road map and auction timing as we look forward to participating throughout the consultation process.In our Wireline business, we committed to being more focused on profitability, profitable subscriber growth, and I believe we have a compelling product lineup and value proposition with a clear road map that offers innovation and exceptional customer service through our digital transformation that supports this focus.There are a number of items that impacted our results this quarter, particularly internet, including seasonal student disconnect activity that typically reverses in Q1, a shift in some bulk accounts from Consumer to Business and continued market dynamics, including attractive promotions by the competition and our pricing discipline, all of which contributed to a lower sales activity in Q3.Even after considering these factors, we're not pleased with the overall execution within our Wireline business. Over recent years, the investments in our infrastructure has our network in fantastic shape, and we have never been more excited about our product road map now and in the future. However, we need to be more effective in the way we price and package our services and improve our ability to target customers with more effective offers through better segmentation and spending our promotional dollars with a data-driven approach. This focus will significantly enhance the way in which we interact with customers and improve results going forward.Over the last several months, our management team is focused on the transition through the Voluntary Departure Program and have also designed and implemented a new comprehensive organizational structure. This optimized structure will hold our business leaders accountable for driving results and executing better than ever before.Our focus has not changed. I firmly believe that we have significant growth opportunities ahead, which includes Wireless, Business and broadband as the primary drivers for Shaw. And specifically within our Consumer business, we will continue to optimize our pricing and packaging and introduce innovative products and services underpinned by our partnership with Comcast and our strong network.I will now turn the call over to Trevor to review the Q3 financial 2018 results.
Thank you, Brad, and good morning, everyone. In Q3, we delivered revenue of $1.3 billion, which represents approximately 7% year-over-year growth, led by strong Wireless performance. Consolidated EBITDA of $547 million also increased 7%, primarily due to improvements in Wireless and lower Wireline expenses through cost efficiencies as we began our transition through the Voluntary Departure Program exits that started at the end of March.In the quarter, total Wireless revenue increased 54% to $237 million. Revenue growth is primarily due to the increase in our subscriber base, equipment sales and the ongoing success of our Big Gig data plans that helped drive a 7.5% increase in blended ARPU to $39.84 compared to a year ago. The combination of strong ARPU growth and over 200,000 additional wireless customers over the last 12 months drove service revenue up 27%. Q3 Wireless EBITDA of $62 million increased 48% over the same period in fiscal 2017. However, the results this quarter do include a onetime recovery of approximately $13 million related to the retroactive roaming rate decision, which was previously discussed and disclosed in our Q2 results.In Wireline, year-over-year Consumer revenue was essentially flat at $923 million, while Business revenue increased 6% to $141 million. Wireline EBITDA of $485 million, which includes $60 million in VD -- VDP-related cost reductions in the quarter increased 3.4% compared to Q3 fiscal '17. Capital this quarter of -- the capital spending this quarter of $293 million was roughly the same compared to the prior year with declines in Wireline offset by increased spending in our Wireless segment. While overall spending in Q3 was below consensus, we do expect capital investments to increase in Q4 as we continue to invest in both our Wireline and Wireless infrastructure. This includes 700 deployment, which is really beginning to -- which is just beginning to accelerate, and continued foundational investments and alignments with the Comcast road map for IPTV, which includes capital related to cloud DVR capabilities. We continue to expect overall CapEx will be in line with our fiscal 2008 (sic) [ 2018 ] guidance.As it relates to our Total Business Transformation, the third quarter includes an additional restructuring charge of $13 million, bringing the total provision to $430 million, of which $110 million has been paid to-date as of the end of the quarter. As employees were given the option of deferring payments over 2 calendar years for tax purposes, the actual timing of employee-related payments now extends to a 32-month period compared to actual exits, which are still predominantly in our original 18 to 24 month timing. Approximately 850 employees have departed the company between March 29 and May 31, resulting in total savings of $19 million in operating and capital cost in the quarter. The program remains on track to deliver fiscal 2018 operating savings of approximately $40 million as a result of the departure of approximately 1,200 employees by August 31.Besides the additional restructuring charge this quarter, we also incurred a $284 million impairment related to our investment in Corus. As you know, we account for this investment using the equity method, whereby the carrying value was recorded at the time of the transaction on April 1, 2016, and report our share of Corus net income and dividends each quarter. Like other investments, we evaluate the carrying value of each on a quarterly basis. And in Q3, we considered a number of recent developments with respect to Corus. Our updated carrying value reflects an impairment in the amount of $284 million, and this write-down was the main driver of reported net loss for the quarter of $91 million.As fiscal 2018 concludes, we expect continued positive momentum in Wireless, particularly during the back-to-school period, along with Wireline growth that includes recent rate adjustments that became effective June 1 and continued cost discipline throughout the organization.Considering year-to-date results and our Q4 plan, we also confirmed this morning that we remain on track to meet F '18 guidance, whereby we expect consolidated operating income before restructuring costs and amortization to grow to approximately $2.1 billion, a year-over-year projected increase of approximately 5%, capital investments of approximately $1.38 billion and free cash flow of approximately $375 million.As a reminder, our guidance includes certain assumptions related to cost reductions that will be achieved through TBT initiatives, specifically the VDP, roaming cost reductions of $13 million that was realized in the quarter, and short-term incremental costs associated with the growth in Wireless handset sales.Brad, with that, I'll turn the call back over to you for closing remarks.
Great. Thank you, Trevor. As I've said on previous calls, we have a lot to be excited about. The opportunities are right in front of us, and the entire team is focused on execution. We'll be finalizing our fiscal '19 plans over the coming months, and we look forward to speaking to everyone in October, where we'll be providing additional details regarding our strategic and operating focus for 2019.Thank you, everyone, and we'll turn it back to you, operator, for questions.
[Operator Instructions] Our first question is from Vince Valentini with TD Securities.
I've got 3 questions. I'll throw them out and let you guys chose the order you want to answer them in. First on Wireless, the ARPU, you jumped $1.41 from Q2 to Q3. That was more than we expected based on sort of what you'd telegraphed before of the ARPU for new customers signing out, but in the pretty small percentage of subs migrating from old plans to new ones. Can you give a bit of color there? Is it -- do you think this is sustainable in terms of a run rate increase sequentially? Are you seeing more migrations from the order plans to new Big Gig plans? That's question one. Number two, just your free cash flow guidance, Trevor. You've done $378 million year-to-date, so just wanted to confirm you're actually expecting negative free cash flow in Q4 to get down to the guidance of $375 million? And obviously, I heard your comment on CapEx trending up a little bit, but I would still maybe expect EBITDA to overwhelm that but maybe not. And third, internet, last year, it was a real anomaly, I guess, because of the big promotions around the BlueSky launch, when you added 20,000 internet subs. If I go back to the third quarter of 2016, you actually lost 8,000 internet subs, which makes the 3,000 subs this year look a little bit more, I guess, normal. Can you give a little more color there about exactly what's going on with seasonality and this bulk contract and give people some comfort here that negative internet sub adds is not what you'd expect going forward? Those are my 3 questions.
Vince, it's Paul. I'll take the first one regarding Wireless ARPU. Really pleased with the quarter's results. A few key drivers we just continue to see very, very positive inflow from higher-value subscribers. I think a few kind of highlights to point out there. We're now approaching 25% of our base on a Big Gig plan. Remind you that those plans didn't launch until October of last year. So those are all $50-plus plans. So we like the inbound quality that we continue to drive, and our distribution partnership has been fantastic in their support of helping us move up that, that value chain. Secondly, we continue to see improvements in quality on the device inflow as well. So we're now more than 1/3 of our subscriber base is on an Apple device and iOS device. We believe that there's a strong correlation between those devices and the higher-end Samsung devices that we're seeing brought onboard as well, the S9 most recently. So we just love what we're seeing on the inflow of new subscribers. And the trend that we articulated last quarter around positive customer migrations up to higher-value plans continues at the same level. So I think we'll continue to see momentum consistent with the last quarter.
Yes. Vince, on the CapEx and the free cash flow guidance. In Q3, our capital spending was a little lighter than we originally planned, and that was just due to some slowdown in some deliveries and equipment. We do expect in Q4, capital to ramp up fairly significantly, specifically within the Wireless segment as we really accelerate the deployment of 700. We've kept the guidance language at approximately $375 million. No, we don't expect free cash flow to be negative in Q4, but we still do believe that free cash flow, maybe it's a bit higher than $375 million, maybe it's closer to $400 million because of that additional capital that we're spending in Q4 on Wireless but also on Wireline with some of the IPTV foundational investments.
And then it's Jay. If you want to talk about the internet RGU question. And Vince, I think, you're right. I think, our approach to launching BlueSky last year and the impacts are well understood was the tide that raised all boats, including internet. If you look at fiscal '16, if you look at fiscal '15, our internet results were not all that different. We -- Shaw broadband is a brand that always does well with Millennials. We do very well with students. It's a big part of our business. And we get to Q1 and Q3 activities, then I think it's well understood. I think as we've disclosed, there was a couple of 2,800 internet subscribers that was just moving from the way we deliver the service to fiber-based services and to different cloud-based services in universities. Our revenue is actually good on those accounts and our profitability is good there. So that's not a bad story. It's just moving from one way of delivering internet to another. For sure, there were some market dynamics, including attractive promotions from our competitors, different approaches. We certainly maintained our pricing and promotion discipline, which we're going to do as we go forward, but we need to focus on our execution to bounce these numbers back. I think, Brad was very clear that we're driving change in consumer in everything we do. We need to get better at our flexible pricing and packaging. You're going to see much more emphasis on customer segmentation, much more targeted and better bang for our buck on promotional spending and more on digital. But everything we're doing in Wireline is on strategy, and our focus is on Wireline margin. You'll see internet results bounce back to positive in next quarter, but we're going to stay the course.
Our next question is from Jeff Fan with Scotiabank.
Just on Wireless. Wondering on the subscriber side, if you can just give us some color on the contribution on your adds and improvement coming from gross adds versus churn, and particularly on churn. Given you guys have reformed some of your spectrum on 4G from 3G. Wondering what stats, if anything, you can share on churn and the network quality changes that you've seen in the last number of months and how you think that's going to trend going forward. And then the -- my second question is, I guess, a little bit more long term, given all the talks around 600 megahertz spectrum auction next year, given the U.S. deployment on 600 by T-Mobile, wondering if there's an opportunity here to deploy 700 along with 600 and whether there's enough of a timing there to allow you to take advantage of that spectrum even for, I guess, 4G, 5G, as you look out the next 1 to 2 years? I'm wondering if that's an opportunity to make a more efficient deployment as you continue to upgrade the network capacity.
Jeff, it's Paul. Yes, continue to be pleased with the contributions of both sides that has -- both in terms of contributions from momentum in the market on gross adds as well as continued improvements in retention. I think, last quarter, we characterized it as about a 50-50 split. I would put it in the same ballpark right now. We do continue to see sequential improvements in our churn rate, which we'll get more into that in coming quarters. But certainly, the Vancouver reform has helped us retain and improve the customer experience for a large percentage of our customers, and that's helped bring the churn rate down across both the pre- and postpaid basis. So that's, that's a very strong positive from our network team. And again, we continue to have good momentum in the marketplace. It's -- I think, I characterized it last quarter as not an all-out battle in the market. We're winning our fair share of gross adds. We're keeping customers at record rates for the company. Overall, that's what's driving the sort of blended contribution. And going forward, I suspect that'll continue to improve. Our new distribution partnerships will obviously bear fruit in time. I would caution everyone to be mindful that it takes a long time to stand up these partnerships for nearly doubling a number of retail stores that we have across the country. So that's likely to have a modest impact in coming quarter, but we're really encouraged by the, sort of, the key long-term support that'll bring the Wireless division.
And Jeff, just building on your capital plan. We're very pleased with our step-by-step plan, and we're continuing on that plan as we invest [indiscernible] as it flows, having completed the reform, you'll see a significant 700 spend in Q4, which is all good spend and driving into next year. You have correctly identified that there are some capital efficiencies that are decently significant in deploying potentially some 700 and 600 together, and the network teams as they've made their plans for our build have incorporated the right way to do that. That having been said, the 700 deployment that we're doing is a value-based rollout that will improve our network as well. So we've got good visibility into what's possible. And I think the teams have got a great plan to integrate it.
Our next question is from Phillip Huang with Barclays.
Question on the Walmart distribution. I think Walmart has about 260 locations. So is it fair to assume that, that 140 stores that you guys have with the partnership, are they mostly urban locations? And could we see the partnership sort of expand towards 260 in the future as you expand your network?
Phillip, it's Paul. Yes, we have worked closely with the Walmart team as we did with the Loblaws team to ensure that coverage for Freedom is consistent with the levels we'd expect for their customers relative to the store footprint. So I don't know that you'll see any material expansion beyond 140. I would kind of characterize that as the likely near-term threshold. We'll get there in a fairly quick order once we execute, and it'll likely stay at that level for a number of years.
Got it. No, that's helpful. And any plans that you can talk to regarding corporate stores -- expansion of corporate stores?
Yes. We've done a very thorough analysis of markets in which we feel that we have strong coverage for Wireless but perhaps inadequate corporate store coverage. And we think that -- we always characterize corporate stores as sort of the backbone of our Wireless distribution. They perform a fantastic array of services, and we've got a wonderful group today that I think overperform relative to their peer group. You'll see modest increases in those stores probably something in the order of 20 to 30 over the course of the next year, mostly just in filling whitespace where we believe we've got opportunity.
Got it. No, that's helpful. And then one clarification on the churn. You said roughly 50-50 contribution from improvement in gross adds as well as retention. Do you expect that mix to change going forward or just because of the expansion of distribution? And also at the same time, you're also improving your network that you expect that sort of 50-50 split there to be maintained?
Yes, it's probably a little hard to predict going forward. A couple of observations on either side of that. We're spending a tremendous amount of time and energy right now behind our retention and base management efforts, not just the work, but the network team have done a fantastic effort in terms of the reforming and improving our quality, which has just been a marked improvement over the course of the last year. But also just with the physical support and the team in terms of base management, we've kind of rebuilt that team over the last number of months, and we've hardened our capabilities there, and we've improved the infrastructure and the capability to monitor and track and support these customers through their lifetime. It's frankly much easier now as we brought on these higher-value customers to tracking through their life cycle than it was when it was a predominantly BYOD inflow. So that will be a big contributor. The wildcard in predicting the future percentages is probably around what happens with the expansion of our distribution. So there is the potential that, that could buy us more in favor of new gross adds, but I would still characterize it as in the ballpark of 50-50 over the coming next, say, year.
Got it. Final question from me on the VDP side. Just because most of that program impact the Wireline segment, I was wondering if the departure's related to the GDP -- VDP was the fact that all in sort of the Wireline's less-recent consistent performance.
Yes, Phillip, it's Jay. We -- management certainly has been focused on our Wireline margin and VDP. And in the quarter, we did a new organizational structure. As you can appreciate, VDP results were announced on February 15. And in March and April, we did our detailed planning of the employee access, mostly upfront and did exits were in our leadership roles, and we focused on leadership and some corporate areas to start with. We've redesigned our complete leadership team with clear business units, leaders and accountability, and we're all focused on operational execution. We're in a period of change, for sure. The most important thing is the most important thing. And I don't think we've ever been closer to our business, and working with all of our teams and working through our operational execution. So I certainly wouldn't characterize any of this as distraction. I've never seen the organization more focused on what we're building and creating. But to be clear, we're managing an awful lot of change, and it's probably part of the story. I mean, if you think about our internet business overall, our internet business is healthy. We were at 6.3% year-over-year revenue growth in the quarter. We're at $66 ARPU before we entered the rate increase. There's lots of good things happening in the internet business. Would we feel better if we were plus 4,000 subs for the quarter as opposed to minus 4,000? Yes, we would. But we're not going to change our path just based on that single quarter result.
The next question is from Greg MacDonald with Macquarie.
Jay, just to ask a few more questions on the internet side of the business. Can you talk about specifically what the promo activity was, would you tell us and whether that's sustained into June?
Yes. I -- we're not disappointed with our June results to-date. And I think we're on track as you would expect due to kind of a bounce back that we would expect for Q4. Brad was clear that we need to get better in our execution. We need to get better on being targeted. I would say our competitor is best-in-class at targeting and segmentation, and you saw that in the quarter. We were in maybe a slightly more premium pricing position on internet in the quarter than would have been optimal. And that was just where we were in our step-by-step plans as we work our way through our adjustment. You'll see us in a very disciplined way address that a little bit in Q4. I think, we just have to take our medicine on a quarter that wasn't as good a result from an RGU basis as we want and go from there. I don't know that I would characterize it as super aggressive competitive action that changed that. We need to get better at playing the same targeted segmented game, and that's our effort, and we're going to.
And can you say whether DOCSIS 3.1 deployment was a factor in the quarter? I mean, is that -- and maybe you could just remind us where you are on that?
DOCSIS 3.1 deployment is going great. We're deploying DOCSIS 3.1 modems in the majority of our installs. The work that's been done on our network is fantastic. Because we've segmented a portion of the network for DOCSIS 3.1, it just improves network performance. We're entering a period not unlike we did with the new LTE network where the DOCSIS 3.1 network is an open highway that we can [ load ] customers and great experiences on. So we're delighted with the approach to that. We've got -- our supply chain has done a terrific job. We've got a couple hundred thousand DOCSIS 3 modems in the warehouse ready to go and more excited about what that phase makes possible.
Okay. Jay, and just lastly, it sounds to me like what you're saying is the TBT had some impact in the quarter in terms of the churn element. Am I correctly concluding that that's the case? And it sounds to me like you have started to at least successfully address this by your commentary that you've seen a bounce back in June. I don't want to kind of put you on the spot on details on that, but...
Except that you do.
It's my job to do that.
Yes, I get it.
Am I accurately describing that?
You've got elements of it right. If you look generally at the Voluntary Departure Program and the transformation efforts, I could not be more pleased with where we are today. That having been said, it's got complexity to it, and we're trying to do a whole bunch of things at once, a sequence of very exciting future for Shaw that is a wireless and digital broadband future with a wireless in-home experience connected to a DOCSIS 3.1 XB6, IP video, cloud DVR, all of the things that we're creating in our Consumer Wireline business is super exciting. And I'm so proud of our amazing team and the work that they're doing, lots of time with all of our customer service people. And you would be proud of the work that our teams are doing. So I feel really good about all of that. That having been said, there's a lot of activity in the business, as you can now expect, as we're focused on doing the right things. In fact, churn was down significantly on a year-over-year basis and continued its downward trend on internet. The miss was entirely to our plan on gross sales. And I think there was -- could you say that some of that focus hurt our gross sales activity? You probably could. That will probably be fair. In addition to that, we've been moving a bunch of levers all at once in a time of change, and we didn't deliver the sales that we needed to deliver. That's the easier lever to manage, and we're going to do it in a very responsible way. So I have great confidence that we'll bounce back to positive in Q4, certainly, Q2-type levels. But we're going to work our way through that. That having been said, a single quarter's internet result is really not the focus of our strategy. We want to take everything back up to our strategy. Broadband remains our key growth driver. We've got the ability to increase speeds as consumer demand falls, and we're going to continue to build on the XB6 and our digital broadband home with the stack of new services on top of that. So nothing in this is going to be a change of direction, just a little bit more focused.
That's really helpful. And just to clarify, the issue that you're talking about is a sales issue and not a technician install issue? Am I correct in making that assumption?
Absolutely. We didn't make as many gross sales. We actually have significant technician install capacity today that is available to us. And if there's any concern actually on the VDP conversations and the timing of technicians, the feedback that I'm getting from our teams, including our technicians, is we've got too much working notice inflection of the system, and we got a little excess capacity on the technician side, and that's what people are telling us. So there's no restriction there at all. In fact, we can move that up nicely.
The next question is from Tim Casey with BMO.
Couple from me. Could you talk a little bit about what you're seeing on the enterprise side, both Wireless and Wireline? And are you pleased with your progress there? And with respect to Wireline, is -- the issues you talked about in internet sales, is that factored into that? Or is that kind of a separate unit? And then the other question would be relating to Corus -- your position in Corus. There's been some media speculation about potential sales there. I know you don't comment on rumors. But the narrative has been that you might be motivated to do that given your balance sheet yet. From our perspective, your balance sheet and cash flow profile doesn't seem to jive at that. I'm just wondering if you might want to comment on that or set the record.
Sure, Tim. I'll take the Corus one. And as you said, can't really comment on speculation in the media. But I always look at it from a Shaw point of view. And as for Corus dividend, we've never included that in our free cash flow growth profile or never planned to. And when I look at our balance sheet and leverage, we're in great shape to fund our business plan and fund the strategic planning going forward. So we're very comfortable. And the last thing I'll just say, as I know Doug and team very challenging over there in that business and certainly wish them the best in continuing with that management.
And then, Tim, it's Jay, to talk a little bit about our business enterprise space and SMB. I think you've got very different dynamics going on there. From Consumer, we've separated those business units, and this business unit is in great shape under the leadership of Katherine Emberly and Ron McKenzie. Our sales funnel in Business is looking terrific. There is a sales cycle here for sure, but we're putting up big numbers in terms of the entries into the sales funnel, including in May and June, and the execution of the sales team in Business is going great. So you'll see that if that begins to ramp up again as we go. I think when you're looking at the revenue, we've got a couple of things still going on. We've got continued growth in our SmartVoice revenue. We've got continued growth in SmartWiFi, and it gets offset against some repricing in some of our legacy products, some of our legacy phone products, some of our legacy fiber products. This will -- the fundamentals of our Business revenue are strong. Our smart services are contracted as an average length of 45 months. They just continue to grow as a percentage of our revenues. Things like Shaw Broadcast satellite services continue to decline as a portion of our revenue. So I think, if you look at this 6% year-over-year growth, you can look at that and maybe a bit beyond as we move forward. As we think about Wireless in Business, yes, I think Brad mentioned at one of our conferences, there's certainly an opportunity for us to bundle Wireless services with Business in the future, and there's some work being done towards that. Today, we don't offer Business, Wireless services. It's possible a business owner -- or a small business owner is buying Freedom Consumer services and using it because it provides great value. But that's upside for us, and something that you'll see probably in the not too distant future.
The next question is from David McFadgen with Cormark Securities.
I have 3 questions. So first of all, we saw the Corus dividend was cut yesterday. I was wondering if this has any implications for your dividend. Secondly, any idea when you would actually transition to all-IP solution for BlueSky? And then lastly, when do you expect to complete the 700 megahertz buildout?
Sure. David, it's Trevor. I'll -- let me talk about the Corus dividend. So Brad's comments were, going forward, we never really consider the Corus dividend as a meaningful driver of free cash flow growth over the long term for our company. And sure, the 80% dividend cut results in instead of roughly $90 million of Corus dividends coming to Shaw down to around $20 million. But we weren't including that to fund our strategic plans, growth profile or the Shaw dividend profile going forward. So it really doesn't have an impact on Shaw's dividend the way that we think about our dividend over the long term.
Great. David, it's Jay. I'll take the all-IP, and then I'll maybe let Paul talk about the 700 question afterwards. We're very pleased with what's possible for our Wireline business. I think, Trevor alluded to taking a major step in Q4, expanding up the cloud DVR infrastructure, which is what's behind some of the capital investments in Q4. And that'll be great to get that built up and up and running, and it really makes a lot of things possible. All of this that we're trying to create in our Consumer Wireline business and that the team is committed to creating, it's not really just about IP video, right, it's about creating this wireless and digital broadband company. It's about a gateway in the home, which is the XB6 DOCSIS 3.1 modem. It's about everything else in the home being connected wirelessly without wires in the home. That requires IP video. That requires cloud DVR. That requires us to make some evolution in our in-home WiFi, requires us probably to launch some of the xFi services that you've seen from Comcast. All of those things come together really nicely as you get through the fulsome of time in F '19. As you can appreciate, all the VDP and all of our efforts is in support of creating that in-service delivery model. So we're going step-by-step to make sure that we get it right with the change the model in order to make sure the inflation model works, the support model works, and we're working with all of our teams creating that road map. So I don't see that as a waste. I see it as a fundamental step-by-step plan where we create a new definition of winning. And I think you'll see all that come together into a new way for the house to connect with Shaw.
David, it's Paul, on the 700 timing. We'll be making a meaningful start on that rollout this summer. And we expect that the work will be complete within 12 to 18 months.
And then, can I just squeeze in one more. You said 1/3 of your subs on Apple devices. Can you tell us what the average ARPU of all those Apple devices is?
It would be characteristically slightly higher than the average, and that's probably as far as I'd go on that today.
Our next question is from Adam Ilkowitz with Citi.
A couple questions, starting on the Wireless side. Can you talk about the prepaid business and if you're shifting some of your, obviously, scarce promotional dollars towards the postpaid side? And are you seeing more of a competitive environment in prepaid? Or is that just more of a strategic shift? And secondly, when you look at the 600 stores that you will have in your footprint, how does that compare to the incumbents and obviously productivity in direct versus indirect is probably different. Are you comfortable with the mix on that and the productivity you're going to get on the store channels you'll have?
Great. Adam, it's Paul. I think, it's worth an observation here on prepaid versus postpaid. And this is an area where investors may want to view us slightly differently than perhaps other carriers. We -- really Shaw [ investors ] believe that our growth can include kind of all Canadians, regardless of their economic status. So while you'll continue to see our primary focus be on the growth of these higher-value, lower-return postpaid subscribers, as we've been so effectively doing over the last number of quarters, we're going to continue to take steps to ensure that customers that have got credit challenges still feel welcome at Freedom. And the key in that strategy is to make sure that our investments in subsidy and financing and commissioning are aligned to customer value. We think there's [indiscernible] to make that work, particularly using BYOD without really changing our risk or our growth profile. So we like prepaid. I would prefer to see us continue always be positive on prepaid growth, which is a bit of a departure from where some of our competitors are. We think it's an important part of the mix, and it's an important area for customers to graduate from. So we -- prospectively, I -- you'll see a mandate from us that likes to see us positive on both fronts as often as we can be. There's some seasonality that affects that detrimentally typically in 1 quarter. But if we could dream, we certainly would like to be positive on all fronts going forward. On your second question on the growth of the stores, you're right to identify that there's a productivity delta between our corporate stores and some of our better dealer stores and third-party retail, largely because of their focus. If you were in a -- identify first with Loblaws since we launched there in 15 stores now. You can buy any product there. The entire range of the Big 3, the -- from the premium brands right to the fibers and the flankers. So we're running perhaps 10 SKUs in those scenarios, and we're holding our end very, very well there. But from a practical standpoint, you would expect us to get a kind of a rate insurer or better slightly in that retail footprint as opposed to 100% of it goes to our corporate stores. So we love the confidence that we have from the management teams in those 2 retailers. We love what our initial trial has taught us from the Loblaws experience, and we work closely with that management team to learn from it. I won't try and contrast our retail footprint to that of the incumbents, other than to say, if you look at our results over the last couple of quarters, they have been driven by the fantastic work done by distribution. So I get asked a lot about, I think, our pursued distribution gap. I would characterize that differently, and say, we have opportunity to fill some whitespace, but we have really been impressed with the work that our distribution have come to -- come along with us on the journey up to our higher-value customers to improve the experience in store and to serve our customers better, and those numbers are showing in our quarterly results. So we're very pleased with our distribution at this point, and we'll continue to grow it thoughtfully over the next number of quarters.
And then maybe just for Trevor, on the free cash flow. I saw the cash taxes were obviously quite low this quarter, and deferred taxes are actually a positive on the cash flow statement. Is there any seasonality or timing to that? And then looking forward into the spectrum, as you think about your balance sheet, the leverage is quite low right now. What kind of leverage are you willing to go to for normal course and speed business, full spectrum? Is it up to 2.5x? Or is there any type of way to think about what you're willing to take the balance sheet up to?
Our leverage targets haven't really changed from what we've -- we sort of have as -- well, we stated in the past of 2 to 2.5x. We're certainly more comfortable at 2. We think it gives us the flexibility to run the business. But taking on some additional debt to fund the spectrum is something that we're very, very comfortable as a management team with. Nothing really out of the ordinary on cash taxes in terms of seasonality. We'll true that up though with year-end and give you the appropriate rates going forward when we talk about F '19 guidance.
Our next question is from David Barden with Bank of America Merrill Lynch.
Just 2, if I could. The first would be, could you elaborate a little bit on the price hike you guys instituted on the Wireline side starting June 1? I went to the FAQ page on the website, but it says it's going to notify me my monthly bill, I don't -- I'm not going to get that soon, so I'd love to a little bit more color on that? And how you kind of square what you're doing on the pricing side with kind of what you hope will be improved broadband connections in the next quarter? And then the second question was, just on the Walmart kind of distribution expansion. Could you compare and contrast the economics of selling through the corporate store versus a third-party store, like a Walmart facility, and as we see a greater percentage of the distribution going in that direction, how does that impact margins?
Great. We'll start, David, with the -- with your questions about the rate increase. We did our annual rate adjustment on the Consumer Wireline side of the business effective June 1 with the majority of our customers being billed in advance, and even with our consumption billing customers, you get notified well in advance of that. So most of that has -- or all of that has found its way through the system. About 3.1 million customers and consumer are eligible for the rate increase, and about 1.1 million of those customers are in ValuePlans or in some form of late guarantee, so meaning they're not impacted. The general terms video is an increase of $2. Internet is kind of in the $4 or $5 range. Couple of adjustments in -- on phone. Think of that in terms of revenue impact for the business is being around $20 million, maybe $21 million in Q4. So $7 million -- $6.5 million, $7 million.
Yes. And I think we gave that color in the last call. But I think it was around $21 million to $23 million is what we're expecting in Q4 in terms of the financial impact of the rate adjustments.
Yes, and that implementation has gone well and/or everything appears to be on track. And if you look at an annual rate adjustment, I mean, certainly we see increases in our network fees and other things that are happening in the business, and this is sort of a normal course.
David, Paul, on the question regarding Walmart economics versus corporate stores. I think there's a fairly simple way to view this. Our cost of acquisition expectations for volume going through Walmart are consistent with our run rate across the board. So we -- they are certainly going to be on a door-to-door basis, less efficient than our corporate stores, who of course do so many other things for us in terms of servicing our customers. But if you're working at your model, I'd suggest that you not expect it to have a material change one way or other in terms of our average cost to acquire a customer.
Mr. Shaw, there are no more questions registered at this time.
Thank you, operator. Thanks, everyone.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a...