Rogers Communications Inc Q3 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Rogers Communications' Third Quarter 2020 Results Conference Call. This call is being recorded. After the presentation, there will be a question-and-answer session. I would now like to hand the call over to Paul Carpino, Vice President of Investor Relations at Rogers Communications. Please proceed.

Thanks, Ariel. Good morning, and thank you for joining us today. I'm here with our President and Chief Executive Officer Joe Natale; our Chief Financial Officer, Tony Staffieri; and our Chief Technology and Information Officer, Jorge Fernandes. Before we begin, I want to remind everyone that today's discussion will include estimates and other forward-looking information from which our actual results could differ. Please review the cautionary language in today's earnings report and in our 2019 annual report regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Joe.

Thanks, Paul, and good morning, everyone. Let me start by speaking briefly about our third quarter results. Tony will provide additional detail and insight in a few minutes. Next, I will share an update on how we're continuing to adapt our business to both meet the needs of our customers and drive operating efficiency. And finally, as Canada's largest 5G provider, now covering 130 cities, I'll discuss our 5G rollout and the role our next-generation technology plays in driving long-term growth and supporting Canada's future. First, our results. Rogers delivered significant sequential improvements in Q3 across each of our businesses, with a solid performance in customer additions, revenue growth, profitability, and free cash flow. As we previously noted after Q2, our results during the economic shutdown did not reflect the underlying fundamentals of our company nor the long-term growth prospects of our wireless, cable, or media businesses. This is evident in our Q3 results, which rebounded as demand growth resurfaced, and we pivoted our operating model. Our results show we are managing the environment effectively, and our long-term strategy is sound. In Q2, the overall wireless market declined by more than 80%. In Q3, as our stores reopened and our digital sales capability ramped, we delivered strong postpaid net additions of 138,000, up 34% from the same period last year. In addition, we delivered 30,000 prepaid net additions. This growth was driven by a number of factors: pent-up consumer demand, an active back-to-school shopping period, growth in our digital sales and service capabilities, and a continued growth in our 5G-ready unlimited plans. Our Rogers Infinite unlimited plans grew by 300,000 this quarter to 2.2 million customers. This represents the largest unlimited customer base by far in Canada; customers are no longer paying overage fees, enjoy worry-free data usage, and are well positioned for 5G. Our Infinite base has higher ARPU, lower churn, far better lifetime value with a lower cost to serve, and their data consumption is more than double that of customers on legacy plans. These results are certainly in line with our expectations and create a strong foundation as we grow our ever-expanding 5G footprint and iconic 5G devices like the exciting new iPhones arriving in Canada. Despite the competitive intensity in the quarter, our team continues to do a good job of managing churn. Postpaid churn in Q3 came in at 1.1%, a full 10 basis points better than Q3 of last year. Switching to our cable business, which also improved sequentially from the anomalous lows of Q2. Revenue was flat. Adjusted EBITDA grew 2% year-over-year. And despite COVID-related delays and adjustments in the home building industry and the condo rental and Airbnb market dynamics, we delivered solid operating gains. We're very pleased to report that our DOCSIS and fiber network investments continue to gain recognition. Earlier this week, Ookla, a leader in network testing, recognized Rogers as the Internet provider with the fastest speeds in Canada and the best consistent performance nationally. Switching to media. With the return of live sports in Q3, our media business delivered year-over-year revenue growth and significant sequential improvements in EBITDA. This represents a material reversal after this business had the most significant impact during the depths of the COVID-19 lockdown. All four major sports and their viewing audiences were back in Q3. Viewing numbers were strong, and advertising showed notable improvements from Q2. Advertising across all media was up 18% from a year ago, with sports advertisements showing even stronger gains. This underscores the essential strength and resilience of live sports above all other media categories. Next, I want to highlight some recent business improvements that will play an important role in driving both efficiency and growth into the future. As I mentioned last quarter, COVID-19 fundamentally changed how we operate and greatly accelerated our business transformation plans. We fast-tracked initiatives that we had planned, including enhanced TV and Internet self-install, stronger digital capability, customer care agents working from home, just to name a few, and launching these changes in record time. This is more important than ever as customer behaviors and expectations change rapidly. Our ability to be agile and adapt how we serve customers is critical, and it's a muscle that is developing at Rogers. This will pay dividends well beyond the period of the pandemic. In many cases, across industries, the move to online shopping is three years ahead of forecast. Choice matters, and multiple sales and service channels matter. Building on our digital gains in the early days of the pandemic, our digital volumes continue to increase even as our stores reopened. Digital sales adoption is up materially year-over-year, and we're seeing a healthy mix between digital and bricks-and-mortar retail. This channel mix and the resulting improvement in channel economics allow us to be nimble, meet customer needs, and drive margin improvement. At the same time, digital service and digital support have increased substantially, resulting in fewer service costs. Last month, we moved to digital self-serve only for simple transactions, such as making bill payments and changing contact information. Today, nearly all our top five service transactions are completed digitally. Our virtual assistant conversations jumped over 200% since last year and nearly 20% sequentially. We've now handled over 5.4 million conversations since the Rogers virtual assistant launched 18 months ago. With ongoing improvements through AI technology, we expect to continue to deflect more costs, lowering expenses, and importantly, saving our customers even more time. In cable, we continue to see excellent ongoing advancements with the self-installed capabilities of our Ignite services. Our Express self-install option delivered via courier makes up a growing percentage of our Ignite installs, eliminating a truck roll entirely. Together with our enhanced self-installs, where our technicians drop off equipment and provide support for our customers through our virtual assistance app, these contactless installs represented 95% of our cable installations in Q3. When our customers do call us, our technical support agents also use our virtual assistance app. With the app, they now solve the majority of issues right away without needing to book a service appointment. We remain on track to save our customers an estimated 400,000 hours of their time and save us approximately 100,000 service truck rolls this year. This is an example of how our digital capability drives an enhanced customer experience, as well as increasing the efficiency of our service processes. In addition to efficiency and cost management opportunities, investing for growth remains a top priority. Investing in networks is a critical part of our long-term and future success. In fact, it's an immediate imperative as we move to a 5G future. Today, Rogers' customers enjoy the best wireless network experience in the country. Umlaut, a global leader in network testing and benchmarking that ranks the performance of typical consumer use cases and tests, such as network reliability, download and upload speed, call setup time, and video streaming stability and quality, has awarded Rogers the best wireless network in Canada for the last two years. To get to this point has required $30 billion of investments in our wireless network over the past 35 years. This is a scale business, and the importance of scale is more crucial now than ever as we begin the biggest generational cycle in technology and network capability. 5G will transform industries, fuel innovation across sectors, and drive economic growth in our tech-driven recovery. It will reduce the cost of data and fundamentally change how Canadians and businesses connect to the world. 5G technology is engineered to support a thousandfold traffic increase over the next decade, while the full network's energy usage is expected to be half the current levels. 5G is not just about innovation but also supports a better environmental outcome. Rogers operates Canada's first and largest 5G network powered by our long-time network partner, Ericsson. We started the rollout in Downtown Toronto, Ottawa, Montreal, and Vancouver back in January. And we have since expanded to 130 cities and towns including the first city in Atlantic Canada. Just last week, coinciding with the announcement of Apple's 5G iPhones, we announced that we doubled the reach of the Rogers 5G network. Today, our 5G network is ten times bigger than our peers. 5G requires the right infrastructure, the right partners, and investments to be ready to fully capitalize on its potential. We are well prepared in this regard. In addition to our network partner, Ericsson, our strategic partnerships to research, incubate and commercialize 5G solutions extend to campuses across Canada, including the University of British Columbia, the University of Waterloo, and Communitech. These partnerships and investments in digital infrastructure are critical to help Canada not just recover but rebound from COVID-19. From tech start-ups to small and medium-sized businesses to large enterprises, they all need strong networks to unlock growth and productivity. And of course, none of this great work and none of these accomplishments during this quarter could have happened without the dedication of our team members. I want to thank our entire team for their incredible upward and commitment they have demonstrated since the start of the pandemic. During the most complex business environment we have seen in our lifetime, our team has been there for our customers and for our communities. This also has been reflected in our recent annual employee engagement survey. We achieved a score of 87% total engagement. I could not be prouder of the continuous improvement culture that has been built at Rogers. And this will serve us well as we invest in more service and technology innovation and roll out the team of wireless broadband capabilities. And with that, I'll turn it over to Tony to provide some more details on Q3. Over to you, Tony.

Thank you, Joe, and good morning, everyone. Q3 results reflected solid improvements in each of our businesses as the country slowly emerged from the COVID lockdown of the second quarter. Consumers came back to our stores or through our digital channels in healthy numbers to meet their connectivity needs. Q3 also delivered strong free cash flow and solid margin improvement in both wireless and cable as we roll out our efficiency playbook. In wireless, service revenue declined 9% year-on-year but improved 4 points sequentially, despite roaming revenue still being down over 70% or $90 million from one year ago. Additionally, we saw a decrease year-over-year of more than $50 million in overage fees as customers continue to shift to Rogers Infinite Unlimited data plans. We are not quite through the full overage transition. On a year-over-year comparison, roaming revenue, combined with the overage contributed 8 points of our year-over-year revenue decline. Furthermore, transactional fees such as late payment charges and restoral fees continued to be down in Q3 by another $20 million, representing another one point of our decline. So in summary, excluding roaming and a slight decline in one-time fees, our underlying service revenue run rate is now flat year-on-year. Wireless service revenue margins measured as wireless EBITDA over wireless service revenue grew nicely, up 300 basis points to 66% compared to the same time last year, reflecting solid operating efficiency improvements. As we transition to full device financing, this measurement helps us understand the quality of our service revenue profile. As you heard Joe speak earlier, our efficiency initiatives, along with the largest base on unlimited plans underpin this margin expansion. Both post-paid gross and net loading were very strong in Q3. Post-paid net additions of 130,000 were up 34% year-over-year and gross loading was up 3%. Unlimited plans were up 300,000 sequentially from Q2 reflecting Canadians' embrace of the value of unlimited plans. No one in Canada has more customers on unlimited plans than Rogers does, and no one has a bigger 5G network. This positions us very well as the marketplace moves into a 5G world. Following the significant COVID-driven slowdown in Q2, where the market was down over 80%, we estimate that the overall market will be down about 5% in Q3 compared to last year. This level of recovery clearly highlights the priority consumers place on wireless services, as well as how effectively our operations are able to respond. Blended ARPU was down 9% on a year-over-year basis but went up $2 or 4% sequentially to $51.12. The year-over-year decline was largely due to reductions in roaming and overage revenues, as I previously mentioned, while sequentially, we benefited from related fees, fewer concessions, and bigger data plans. With our leading position in unlimited plans, we continue to focus on driving the best long-term ARPU growth as we move into 5G. We saw significant competition during the quarter, most notably from flanker brands, and we matched pricing promotions as needed. I think it's important to highlight the short-term nature of promotions in our industry corresponds with active consumer shopping and is reflective of healthy competition in the market. As you saw in Q2 and Q1 of this year, promotional activity was low as the market eventually shut down and was very quiet. With the significant business activity, we were pleased to see that handset costs are no longer a drag on our P&L. Owing to increased MSRPs, more OEM funding, and stronger discipline in handset pricing, we now see accretive margins for handset sales. Overall, the shift to EIP had a positive effect on the Canadian industry economics. Last year in Q3, equipment margins were negative 2.7%, and today, they are 1.6%. The reversal in margins is even more stark if you look to equipment margins before the lockdown at the beginning of Q3 last year. Despite the increased competitive intensity and expected disconnects from some customers dealing with the economic fallout from COVID, churn was lower at 1.1% compared to 1.2% last year. The improvement reflects the benefit of our growing unlimited plans, which continue to improve the customer experience through no more overages, simple billing, and great value offered by these plans. Wireless adjusted EBITDA was down 4% versus last year but up 19% sequentially from Q2. Unlike Q2, where we booked a $90 million incremental provision for potential bad debt exposure, no additional provision was needed this quarter. The ongoing impact from COVID is still unclear. However, the performance to date within our bad debt allowance is currently running better than anticipated. And the $90 million provision previously established continues to provide sufficient coverage as the economy continues to work its way through the COVID environment. Moving to cable, service revenue is flat year-over-year and up 3 points sequentially, despite the slowdown in the rental and home development markets. As we highlighted last quarter, no price increases were implemented in Q3 as we chose to defer increases earlier this year during the pandemic. Home pass and customer relationships both grew year-over-year and sequentially. While Internet and Ignite TV net additions were down, they both recovered from Q2, with internet net additions up threefold to 16,000 and Ignite TV net additions doubling to 38,000. On the financial side, the cable operations performed well on a year-over-year and sequential basis. EBITDA grew 2% year-over-year and 12% sequentially, and EBITDA margins in Q3 grew to 51.4%, the highest in our history. This improvement was driven by capturing efficiency initiatives throughout our cable business, lower churn, and the elimination of the concessions provided to customers during the especially challenging period in Q2. Additionally, no incremental provisions for bad debt were required. We continue to be very efficient with our capital spending. Self-install now represents 95% of all installations, and hardware costs continue to decrease. CapEx intensity for cable is 22%, achieving the target we were initially anticipating to achieve by the end of 2021. As a result, margins for cable were at an all-time high of 29%. In our media business, we delivered notable improvements in Q3, with a return to revenue growth and profitability. Revenue was up 1% year-over-year and was up 65% sequentially as live sports returned and advertising started to recover. The pace and size of this improvement demonstrate the attractiveness of sports properties to advertisers and the significant appetite consumers have for our sports broadcasting properties. This improvement was also achieved despite no continuing revenue from Blue Jays home games. While adjusted EBITDA in media was down 32% year-over-year, we saw a very healthy recovery on a sequential basis. Second quarter EBITDA went from a negative $35 million in Q2 to positive $89 million in Q3, reflecting the improvement in advertising revenue. On a consolidated basis, total service revenue was down 5%, and adjusted EBITDA was down 4%. If you exclude the impacts of roaming and overage, we would have been flat in revenue and adjusted EBITDA. Or said in another way, in Q2, we had estimated total COVID-related impacts in the quarter of $725 million in revenue and $300 million on adjusted EBITDA. In Q3, the estimated impacts were $195 million in revenue and $80 million in adjusted EBITDA. While these are still notable numbers and there remains significant uncertainty in the coming months and quarters due to the potential impact of a second wave of COVID, our teams are managing the environment very effectively. We invested $504 million in CapEx for the quarter, which was a year-over-year decrease of 23% and reflected a consolidated CI ratio of 14%. The decrease in capital expenditures was driven by the deferral of projects, including greenfield projects, due to the pandemic, as well as improvements in cable CapEx efficiency associated with self-install internet and Ignite TV. I think it's important to note that even as our consolidated CapEx spend is down, we're not holding back on key strategic investments. Our CI ratios in our cable and wireless businesses affirm our investment leadership in these assets. Today, our entire cable footprint already enjoys 1 gig internet speed, and the Ignite TV platform is up over 115%, and we have the largest 5G network in the country with 130 communities already enjoying 5G. The 5G pace is impressive, given our rollout started in mid-January. With the improvements in adjusted EBITDA and lower CapEx, we generated free cash flow of $868 million this quarter, a 13% increase year-on-year. Our cash tax rate as a percentage of adjusted EBITDA was 4.6% in the quarter and should remain in that same range for the rest of 2020. The company's liquidity remains very healthy at $5.5 billion available. Additionally, our balance sheet is well-structured with long-term maturities and lower interest rates on our outstanding debt. Our weighted average interest rate at quarter end was 4.16% with an average term to maturity of 13.2 years. In terms of an outlook, we won't provide specific guidance. But similar to last quarter, let me share some color as to what we see at this point. In general, we anticipate additional sequential financial and operating improvements in Q4. In wireless, the current loading environment remains healthy, with competition driven by consumers upgrading phones and increasing data plans. Whether the industry will repeat the same level of subscriber growth in the traditionally busy Q4 holiday season is too difficult to predict at this point. But nevertheless, the industry has recovered well from the depths of Q2. We believe ARPU in Q4 will improve slightly on a sequential dollar basis compared to Q3 but will remain under pressure year-over-year as we do not anticipate roaming to wrap up in the near term. However, with a more active market looking to upgrade highlighted by our sequential increase of $300,000 in unlimited plans, we continue to have the right focus on ARPU drivers as the underlying fundamentals of these plans remain positive. In terms of overage revenues, we anticipate Q4 will be down $30 million on a year-over-year basis given the near-term transition to our unlimited plans. As we continue to work through the near-term overage declines, we do anticipate multiple financial and operational benefits to be reflected in our results as this transition is completed. As we have highlighted in the past, these plans have improved ARPU, lower churn, and higher customer satisfaction for the consumer and also drive simplicity dividends for us in the form of fewer calls to call centers, e-billing, and other areas. In our cable business, we expect sequential improvement in revenue, EBITDA margins, and loading should continue with a modest sequential improvement in Q4 as housing starts seem to be improving. Capital intensity in both wireless and cable business should continue at around the current Q3 levels. We have seen significant increases this year as we continue to benefit from the scale and historical relationships we enjoy with our current vendors and realize ongoing efficiency opportunities in the capital projects we are implementing. As our 5G progress to date shows, we remain as committed as always to invest for growth. In our sports and media business, we will see some sequential declines in revenue and adjusted EBITDA as some of the key sports transition to late fall and early winter seasons. Our losses for the year are expected to be much less than we anticipated earlier this year. And excluding the Blue Jays, our media business will be net positive on adjusted EBITDA. In terms of cash flow, we anticipate that the fourth quarter should remain at approximately the same dollar range as Q3, based on improved adjusted EBITDA and the continuation of efficient capital spending. We're very proud of how the Rogers team is navigating the current environment. While there continues to be significant uncertainty in terms of how the ongoing impacts of COVID will influence the Canadian economy through the rest of the year, our Q3 results show we are effectively managing growth opportunities, profitability improvements, operating efficiency, cash flow generation, and disciplined capital investment during this period.

Our first question comes from Drew McReynolds of RBC.

Two for me. First, on the wireless side, on the competitive intensity front. Joe, you alluded to the wireless market being down about 5%, or maybe, Tony, you did. And I believe that was up 4% pre-COVID. I think there's concern out there, in a market that's contracting or expanding less going forward that promotional activity gets too aggressive. So I would love to get updated thoughts here on how you see in this lower growth market balancing acquisition with retention and any changes here in growth versus profitability on the wireless side? And the second question, somewhat related. Clearly, Rogers is leading on unlimited 5G coverage. I believe you have the largest iPhone base among your peers. Seems like you're well positioned here. 5G capability, particularly iPhone coming to the Canadian market this quarter. Can you talk to your broad expectations on that setup, but particularly the migration that you're seeing or you expect to see to the premium tiers as consumers gravitate towards that bigger 5G capability?

Drew, it's Joe. In response to your first question, we noticed significant price competition in Q3. Our market perspective saw a decline of about 10% to 15%, aligning with Q2's lower performance. However, in Q3, we experienced a recovery. We're still awaiting reports from others, but we estimate the market was down by around 5 percentage points compared to last year, or about the same as last year. When the market reopened, we observed a competitive atmosphere where we were not the aggressors, particularly in the flanker brand segment. The active market generated opportunities for overall growth. We always aim to balance volume and profitability, ensuring we're present for customer transactions. We strategically opened stores and enhanced our digital capabilities as the market improved. Additionally, we have tools to foster growth, such as our unlimited plans, which are yielding over $20 in increased average revenue per user compared to our legacy customer base. We're also driving customers towards higher-tier price plans, which helps with profitability. We're not overly concerned about maintaining that balance. Regarding the handset discipline mentioned by Tony earlier, we're currently seeing positive equipment margins, likely the first time in the industry's history. The dynamics are changing, but our focus remains on balancing growth and profitability. To your second question, we're excited about our future positioning. We've built the largest 5G network in the country, with 5G in mind during our upgrade to 4G LTE advanced. Partnering with Ericsson was strategic for a smooth transition from LTE advanced to 5G, which rapidly expanded to over 130 cities since January. Our growth in unlimited plans has reached 2.2 million customers, establishing the largest unlimited customer base in Canada, with 5G exclusively available on these plans. We're also eager about the new iPhone, which received strong pre-orders, as over half of our customer base uses an iPhone, making it crucial to our operations. This positions us well for 5G as we transition from a data scarcity market to one abundant with data. This shift is underway, enabled by 5G, and we've prepared accordingly by launching unlimited plans a year ago and managing challenges related to data overages last year.

Our next question comes from Vince Valentini of TD.

A bit of a different variation on Drew's question. You mentioned the equipment margins being positive. And obviously, you're starting to have a positive impact, and that's great. Can you talk about the impact to ARPU from the lower equipment subsidies, Tony? Is that something that's starting to show up in your numbers? And maybe a bit of the reason bounced back to over 51% in ARPU versus 49% in the second quarter? And then just to follow up, you haven't mentioned Cogeco, so also just throw it in there. If there's anything you can say as an update. There's a lot of market speculation that you're considering selling all of your CCA and CGO shares, if they continue to refuse to sell to you. So if you can say anything publicly about that, I think it would help a lot of people.

Why don't I answer the second question first, Tony, and then throw it to you. Vince, thanks for the questions. Let me say this on Cogeco. Altice and Rogers have put forward what we believe to be a very compelling offer, one that materially benefits all shareholders and all stakeholders. The offer expires on November 18. I don't think it's fair to provide any other comments on the dynamics of the situation, the dynamics of the offer. If it's not accepted, we would do what you would expect us to do. We review our capital allocation priorities with our Board, as part of our normal course of planning and strategic priority setting. And we come back to the investment community on what our thoughts and findings are on capital allocation. I think that's pretty much all I'm going to say about Cogeco today and really want to focus the energy and attention on the hard work of the quarter and what the team has delivered. But thank you for asking the question. I'm sure people have been wondering about that. Vince?

The sequential improvement in ARPU from Q2 to Q3 was mainly due to advancements in the three categories previously mentioned. Overage revenue decreased slightly in relation to service revenue. Roaming revenue, although still down year-over-year, showed a slight recovery. It dropped 70% year-over-year compared to a 95% decline in Q2. Additionally, other charges, such as restoral fees and late payment charges, contributed to the sequential impact. Improved equipment margins and reduced subsidies over time will positively influence ARPU through the accounting allocation between service and equipment revenue, although the impact is still minor to date. Since the significant launch in Q3 of last year, the volumes in Q1 and Q2 have been relatively low year-over-year, which hasn't caused significant movement in ARPU. However, if volumes maintain a healthy pace, we can expect equipment margins to positively affect service revenue ARPU, particularly by Q1.

Our next question comes from Tim Casey of BMO.

Couple for me. One, could you just talk about the sustainability as you see it on the wireless side? Obviously, so many moving parts in terms of the shutdown and reopen. But also less immigration, less foreign students. And still, you posted a very strong number. I'm just wondering how sustainable you think that trend is? And could you talk a little bit about the progression through the quarter? Just wondering if September was a particularly strong month? Because the public comments you made earlier in September, I thought were a little more cautious than the numbers that came out today; I am just wondering if September finished very strong?

Thanks, Tim, for the questions. I’ll address the second question first. Starting in late June, the market began to bounce back, and people felt more at ease visiting malls and shopping. We opened stores and experienced significant pent-up demand. We continuously questioned how much of this demand was pent-up versus seasonal, which is why we were somewhat cautious earlier in the quarter during conference discussions; we weren't certain about the balance between those two factors. However, throughout the entire quarter, we observed consistent volumes and activity, week after week. Even as stores opened, our digital volume continued to grow successfully. Before the store openings, nearly all our volume was digital, with only a few stores open for health workers. It was encouraging to see both aspects progressing positively. As we moved into Q4, there remained a lot of activity in the marketplace, highlighting the importance of connectivity in everyday life, whether people are on a boat, in their car, or at home; having connectivity readily available is essential. We're witnessing the vital nature of our services overall. Regarding sustainability, it's closely tied to the economy. Currently, banks have noted declining credit card balances, and Tony discussed our favorable bad debt performance; people are managing to pay their bills. The overall health of the economy appears to be solid at this moment. The question on everyone's mind is about the ongoing situation with COVID and its implications. What I can say is that we are fully prepared for any scenario, whether it involves customers visiting our stores, shopping online, or allowing technicians into their homes. All our service modalities are functioning well. We are ready to engage through whatever channels are available. So far, we've seen a strong focus on wireless services. It's true that volumes from temporary visitors to Canada and foreign students have decreased. When they return, we typically perform well in that market, which will further enhance the overall volume potential for the Rogers team. I’ll stop here.

Our next question comes from David Barden, BOA Merrill Lynch.

It's Matt here, filling in for David. I'd like to discuss the wireless margins and hear your insights. I recognize that efficiency gains are currently driving these margins, along with the improved margins on equipment. However, I'm interested in your perspective on how sustainable these factors will be moving forward and what you anticipate the trend will look like for next year. Additionally, I want to briefly address the capital expenditure intensity for cable. It appears you've met your previous target of 22% capital intensity. Should we expect any further advancements beyond 2022, or do you see this as a steady state moving forward?

Thanks for the question, Matt. Yes, I don't want to get too far ahead of ourselves regarding 2021. However, I can say a few things about Wireless margins: we continue to implement our strategy and are pleased with the progress made in Q3. We will keep executing that in Q4, so we anticipate good prospects for continued year-over-year margin expansion. As we move into 2021, it will depend on several factors, and that’s all I’ll say about that. But these factors are enduring and fundamental. As Joe mentioned, we have pivoted many of our operating models, capturing digital in a much more fundamental way, not just at the customer level but also in back-office operations and transactions. There's a significant shift occurring this quarter that we see as lasting. For Q4, you can expect continued margin expansion in wireless. This situation is similar on the cable side, though your question focused more on capital intensity. In terms of cable capital intensity, we made a concerted effort to target the 20% to 22% range by the end of Q4 2021. Necessity helped us pivot to better operating models that allowed us to reduce CapEx spending and improve efficiency. Thus, you can expect cable capital intensity to hover around 22% for the next while. Depending on the volumes, there might be a slight increase in Q4, but as we enter next year, the ongoing push for cost efficiency should help maintain it within the broader 20% to 22% target we had aimed for. Thank you, Matt.

Our next question comes from Aravinda Galappatthige of Canaccord Genuity.

I have a couple of follow-up questions to start with. Regarding the overage numbers, Joe, thank you for sharing that information again along with the outlook. I recall that you previously mentioned a target of around 1% of service revenues. Is there a timeline for that, or have I forgotten the previous timeline? I would like to know if there is an updated timeline considering the decline you're currently experiencing. Secondly, on costs, the decline in Wireless OpEx and other OpEx by 13% is quite impressive. Joe, you discussed several drivers behind that, including the digital touchpoints, many of which seem sustainable. To follow up on your earlier comments, how can we assess the sustainability of this downturn? Should we consider those cost reductions and expect perhaps two-thirds of them to be sustainable beyond the current COVID conditions? Lastly, I have a question about the regulatory environment. It seems there may be a change of heart, particularly on the wireline side. Can you share how this might translate to overall conditions for Wireless, especially given the current pricing in the competitive landscape?

Yes. Let me start on the overage question maybe, Tony, talk a bit about where we started in June of last year and how this sort of evolved. Yes, Aravinda, you may recall, as we launched unlimited and we progressed in rolling it out, in the early days, it exceeded our expectations. You may recall that by the third quarter when we had our call in October, we were already at 1 million subscribers. And at that pace, our projections were by this period we'd probably be at about 2.8 million subscribers. And so we had an initial run rate that we talked about taking 6 to 8 quarters to run off the overage. Given the early demand we had, we shortened that to 4 to 6 quarters, so we thought we'd be over the, what I would call, over chump, if you will. And we ended, we're sitting today at about 2.2 million. And so while the demand for unlimited is robust, it's trailing compared to what our heightened expectations were at this time last year. Still healthy, but because of COVID, it slowed down a little as we talked about in Q2. And so the drag on overage is probably back to the 6 to 8 quarters that we had originally estimated. And so the expectation is probably it will be about Q2 of this year before we're fully over it, and it's no longer a drag on ARPU. To put some numbers to it, by the end of the year, we think we'll have left about $75 million of overage. And so in the overall context of our wireless revenue, you can see it as a much smaller amount. And so we'll keep you updated and be very transparent on where that's heading. The second part of your question was on cost and wireless. Sure, Joe, why don't you take that?

Yes, yes. I'll take just cost overall in terms of our end. I think most of the cost improvements as a whole, are they sustainable? COVID didn't create brand-new cost initiatives. COVID actually accelerated the ones we had in motion already. And I just went through a mental list of all of them from the benefits of self-install in cable. We were at 5% full technician install. We're probably running about 10% right now. We think that's completely steady state, where 90% of the installation will happen through either full self-install or the kind of drop-and-go approach that I discussed in my opening remarks. The digital support service will continue to ramp. Digital in our business historically has been sort of 10% of sales mix overall. It's been closer to about 40% in the last while. And it's not sort of or, it's a bit of and. We worked hard to create the sort of order online and pick up in store, order online and pick up curbside of the store. So we created all these modalities that leverage the power of our physical distribution and digital capability. And so therefore, we can swing in those directions. You add to it pro-on-the-go, which allows you to order online or call to order and have someone bring it to your home or bring it to wherever you might be. So I think the key is choice above all else. And with that choice comes not just economics in terms of the cost of fulfillment. But the channel economics are fundamentally different between third-party, store, and the channel I just described, et cetera, and they're very encouraging to see that channel mix move in our favor from that perspective. That's not going away. In terms of work for home for our care team, it's working very well. Although we might not remain at 100% work from home, I could see us in a place where it's 50-50 or something of that nature. So the vast majority of the cost improvements are things that are enduring, and will continue to pay dividends, and we'll continue to invest in all of them. I talked about the virtual assistant in my opening comments, and we'll continue to invest in that capability as well. So my view is that I'm expecting not less but more as we go forward on the front. In terms of the regulatory environment, we've never had a better relationship with our regulator and with government at both the administrative leadership levels of government or at the political level of government. I think the fact that the service we offer has become a lifeline in every respect of the word. I think it is a very useful platform from which to build greater trust and greater collaboration. Most of the conversations as late have been around how do we bridge the gap around world connectivity? How do we do more for the 10% or 15% of Canadians that aren't online? They don't have the great ability to get online because of broadband connectivity issues in rural Canada. And it's a great conversation to have from the same side of the table, looking at how do we build Canada's future through 5G fixed wireless through expansion, the footprint, and the like. Add to that, the results of the Edelman Trust score that I quoted a couple of quarters ago; our industry is up 19 points in terms of trust. And I just think it just creates the foundation for a healthier dialogue and with government focused on collaboration more than the past. Hope that's helpful, Aravinda.

Our next question comes from Simon Flannery of Morgan Stanley.

This is Diego Barajas, filling in for Simon. Just going back to wireless and the channel mix, are you at all rethinking the retail store footprint or even the office footprint, as you mentioned, working from home in a post-COVID environment? Any savings there? Second, on the Shaw Mobile launch, have you seen a material impact on competitive activity, particularly in Shaw's wireline footprint?

Thank you, Diego. On the store front, we have a significant advantage in physical distribution, which we plan to maintain and expand. We believe that combining physical distribution with online capabilities and creating customer experiences that link the two is essential. As I briefly mentioned, we are focusing on a mix of ordering online and either picking up in-store or using our on-the-go services. The store increasingly serves as a venue to showcase technology, such as 5G and our Ignite roadmap. We strongly support physical distribution and its integration with online services. Regarding office space, we will evaluate our working environment post-COVID. Many employees are comfortable working from home, but I don't think an entirely remote work model is suitable for us in the long run. It varies by role and the nature of the work; complex and transformational tasks often require face-to-face interaction. However, numerous employees who support our customers through care operations appreciate working from home, and we had about 800 agents doing so even before COVID. They will come into the office periodically for connection, training, and cultural activities. We will adopt a hybrid model where it makes sense, likely resulting in a reduced need for office space, though we are still assessing how much less we will need. Concerning Shaw Mobile, it undoubtedly increased competition in Western Canada. We managed well in this challenging environment over the past quarter, with our brand and value proposition remaining strong, and we are satisfied with the results.

Our final question comes from David McFadgen of Cormark Securities.

Two questions. So just on the cable business, you talked about your expectations for a sequential improvement in revenue, EBITDA, and EBITDA margin going into the fourth quarter. And you previously stated that the EBITDA margin was a record for Rogers. So I'm just wondering, is there a theoretical cap for the EBITDA margin for cable? Or do you just think that this can continue to improve as people do more self-installs and you kind of continue to put through price increases into the market? And then secondly, on the media business, in the past, you've talked about the fact that you thought EBITDA would be negative for media if there weren't any home games for the Jays, and there weren't any home games in the quarter, but yet you delivered a nice positive EBITDA in the quarter. So I was just wondering what changed?

Thanks, David, for both questions. I'll start with cable. As we go into Q4, I reiterate that we are looking at sequential improvements in top line. That will have a very healthy flow-through rate to EBITDA. So that will be a natural margin lift for us. We also have the cost programs that will continue to reduce costs year-on-year. And that will be the sort of the second, what I would call, margin expansion piece of it. And then the third is, don't forget the mix shift impact that is a natural driver of margin expansion as more of the revenue comes from Internet, which carries very little ongoing variable cost compared to video. That helps margin as well. And so it's all three of those factors that were in play in Q3 and will be in play in Q4. So I don't want to sort of predict the overall margins and where they might cap out at. We'll just keep driving on all three of those factors and continue to have sequential and year-on-year improvements. And then in media, the factor of that was a good outcome for us was higher advertising revenue during the sporting events. We were somewhat worried that the duplication or triplication of sporting events at the same time would dampen the amount of ad revenue we'd be able to generate. But it came in quite nicely across all the sports franchises. And so it was good upside that we hadn't totally expected, but that's what contributed to that positive upside in Q3. Thanks for the question, David.

Great. Thanks. David, thanks, everyone, for joining us on the call, and we will talk to you soon.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.