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BCE Inc (NYSE:BCE)
Q3 2020 Earnings Call
Nov 5, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the BCE Q3 2020 Results Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thane Fotopoulos -- Vice President of Investor Relations

Thank you, Donna, and good morning, everyone. As usual, participating on the call today are Mirko Bibic, BCE's President and CEO; and our CFO, Glen LeBlanc. Before we begin, I want to draw your attention to our safe harbor statement reminding listeners that the slide presentation and remarks made during the call today will include forward-looking information, and therefore, subject to risks and uncertainties. Results could differ materially.

We disclaim any obligation to update forward-looking statements, except as required by law. Please refer to the company's publicly filed documents for more details on assumptions and risks. And as always, our earnings materials are available on the Investor Relations web page of the BCE website. So with that, Mirko, over to you.

Mirko Bibic -- President and Chief Executive Officer

Thank you, Thane, and good morning, everyone. Our focus in Q3 was all about building momentum back into the business. And although the effects of COVID are still obviously present, I'm very pleased with our progress to date as we experienced a notable improvement in our operating performance this quarter due to the success of our broadband strategy, the reopening of retail stores, the step-up in economic activity, the return of live sports programming and overall disciplined execution in a competitive market. This contributed to stronger financial results across all Bell operating segments in Q3 compared to the previous quarter.

We continued to grow broadband market share. We delivered 210,000 total net wireless retail internet and IPTV customer additions in Q3. And consistent with our focus on profitable wireless subscriber growth, we added 128,000 new net postpaid and prepaid customers this quarter, comprised entirely of mobile, smartphone subscriptions. And we delivered very strong wireline subscriber results with an industry-leading combined 82,000 retail internet and IPTV net adds. We also generated over $1 billion of free cash flow this quarter, bringing year-to-date cash generation to more than $3.25 billion, 14% higher than last year. We expect free cash flow to moderate in Q4 as we further step up capital spending, and as accounts receivable and inventory levels grow with an increase in sales activity.

This contributed to maintaining a very healthy liquidity position of $5.2 billion at the end of Q3, which does not include the approximate $940 million in net cash proceeds received from the recently concluded sale of Bell data centers to Equinix. I'll turn over to slide four of our presentation. slide four provides a quick update on the continued progress we're making on advancing our strategic imperatives. In Q3, we equipped 140,000 new locations with direct fiber, bringing the coverage level to 56% of our total high-speed broadband footprint. This is enabling more and more Canadians to access the fastest internet speeds in the market today of 1.5 gigabits per second and to benefit from the related customer experience enhancement that fiber brings.

We remain very enthusiastic about fiber and the resulting significant financial and subscriber growth and the customer experience benefits the strategy delivers. The broadband footprint advantage that we are building, with the fastest fiber internet and Wireless Home Internet speeds in the market today, positions us extremely well in both our consumer and business segments over the long-term to grow internet revenue, which in Q3, grew a strong 10%. We also announced a further acceleration in our Wireless Home Internet build out that will approach 50% of our target footprint by the end of the year, with the addition of another 80,000 homes in rural Canada.

We also now expect to cover more than 350,000 rural homes, up from 300,000 previously, with enhanced 50 megabit download and 10 megabit upload speeds by year-end. These latest announcements build on several other initiatives this year, including the special project that brought Wireless Home Internet to 137,000 more rural locations than expected in response to increased demand during the COVID crisis. Our announcement that we would double internet download speeds from 25 to 50 megs. The rollout to 200,000 rural households in Atlantic Canada, which we recently announced, which will be built out over two years.

And our plan to begin deployment in Manitoba next year. These investments are establishing the foundation for our continued success, while immediately stepping up for Canadians everywhere across our operating territories in the face of COVID. I'll now turn to wireless. Just last month, Canada's networks were recognized by Opensignal as being the fastest in the world. In fact, the average 4G LTE download speeds were not only faster than the network speed of the top carriers in the U.S., but also significantly outpaced the second fastest country in the world, South Korea, on their fully fledged 5G network.

To put these results into perspective, the global average for download speed experienced across all operators analyzed was just above 22 megabits per second, while the same speeds for Canada's big three national wireless operators were more than two to three times faster than the global average. This is the clear outcome of supportive facilities-based government and regulatory policies. Bell's 5G network continues to rapidly expand and is Canada's fastest. We provide download speeds up to 1.7 gigabits per second. And our footprint will continue to grow into 2021 and beyond as true stand-alone 5G networks are deployed using mid-band 3,500 megahertz spectrum. It's still early days, and the full benefits of 5G technology won't be realized until more spectrum and new applications become available, but data usage among early 5G device users is twice as high as non-5G subscribers.

With monthly recurring revenue that is nearly 20% higher. On customer experience, which is also one of our key strategic imperatives, we're making significant progress with fewer CCTS complaints by Bell customers, improve digital functionality and self-serve capabilities. Our most recent initiative is Move Valet. This is a new concierge service for customers in Quebec and Ontario, who are moving homes to transfer their Bell services seamlessly to their new residence. It's just another example of an initiative that puts customers front and center. We also remain keenly focused on making the online and app-based sales experience easier for consumers.

Directly as a result of our investments to improve digital functionality, 56% of all customer service transactions were executed online in Q3, up from 50% just last quarter. Another initiative we're working on to deliver ever better customer experience is full self-install, which we launched in October for homes connected with direct fiber. The important point here is that as we deploy more fiber in our network, and as more homes are connected with fiber, we have the ability to offer full self-install to a larger customer base, we'll only have to connect the modem to a fiber jack and power supply.

This will drive a step function improvement in customer satisfaction and deliver cost savings. So we're really pleased with the companywide focus on championing the customer experience. I'm going to turn now to slide five to give you a quick overview of some key operating metrics. Start first with wireless. Trends showed good sequential improvement in Q3 with stronger customer activity, including ongoing steady traction for digital channels, continued low churn and an ABPU decline that is moderating. Store traffic improved noticeably with the reopening of all our stores and sales activity steadily picked up each passing week as the level of competitive intensity and number of promotional offers increased.

We added 133,000 new smartphone customers this quarter. Unlike some others in the market, basically, our net adds this quarter did not include any mobile connected devices such as tablets. Here's the bottom line. We're focused on driving service revenue growth through accretive smartphone transactions. And despite a more muted back-to-school period because of COVID, postpaid mobile smartphone ads in Q3 were very good and largely similar to last year. Also supporting our 88,000 total postpaid net adds this quarter was lower customer churn, which improved eight basis points over last year to 1.04%. And in prepaid, we added 41,000 new customers, another very good quarter, which we believe led the industry once again.

Blended ABPU decreased 6%. This result is a notable improvement over Q2, even as lower roaming volumes and data overage contraction from increased customer adoption of unlimited plans remain headwinds. In fact, these two factors accounted for approximately 80% of the ABPU declined this quarter. Now let me move to Bell Wireline. The need for fast and reliable internet connectivity, particularly in the current COVID environment, together with lower customer churn drove strong broadband results. We delivered 63,000 internet net adds, that's 8% higher than last year. We believe this was industry-leading in Q3. We also added another 81,000 FTTH subscribers this quarter, bringing the total number of direct fiber customers to more than 1.6 million, and that's up 17% over last year. In TV, we added 19,000 net new IPTV subscribers, supported by our new app-based Virgin TV service and significant customer churn improvement.

All in all, a pretty solid result given a mature Canadian TV market and some ongoing pandemic-related constraints. We also continued to see strong progress with satellite TV and home phone customer losses, which improved 29% and 24%, respectively, as Canadians continue to stay and work from home during the pandemic. And certainly, any time the rates of decline slow for these high-margin services, that's important to us from a cash flow perspective. So despite ongoing COVID impacts on customer activity, it really was a strong quarter from an RGU perspective, with positive total retail net adds in our wireline footprint of 16,000, that's an increase of 22,000 over last year. In fact, it's only the second quarter in the past five years, where we've achieved positive wireline retail net adds including NAS and satellite TV.

I'll turn now to Bell Media. TV advertising demand picked up in several key categories, especially with the return of live sports and increased spending by advertisers. Radio and out-of-home advertising have been slower to rebound. And on radio listenership, it's declined during the pandemic and some key out-of-home advertising faces as well such as restaurants, airports, those have been severely impacted by lockdown measures, but we're seeing momentum return to outdoor categories such as street furniture and billboards. On the subscriber front, TSN and RDS have remained largely stable, particularly with live sports coming back in Q3, as have subscribers across all Bell Media TV properties since the COVID situation began. TSN remains number one ranked sports channel for the latest broadcast year that just ended on August 31.

And year-to-date, RDS viewership has outpaced our largest French language competitor by 32%. On Crave, it continued to deliver, with strong direct-to-consumer growth, 3% year-over-year increase in total subscribers for Crave. Overall, these subscriber results speak to the quality and depth of our programming, which is, frankly, second to none in the marketplace. And a couple of other items in the quarter that I wanted to mention, regarding media, to coincide with the fall season of new TV programming, Bell Media launched a new all-in-one digital video streaming platforms for CTV content, essentially CTV AVOD service. So now viewers can access all live and on-demand CTV content at no additional cost directly from ctv.ca and the CTV app on mobile and smart TVs and other connected devices. So it's a single hub.

It offers advertisers a compelling way to reach our digital audiences and an easy way for viewers to watch our content. It's 100% ad supported, and it was built using the same technology that powers Crave. And at the end of August, Bell Media rebranded our newly acquired French language conventional TV Network V, the new brand is Noovo. Our goal is to make Noovo a broader and fully integrated conventional TV destination with multiple points of contact for video content. We're already seeing results from that strategy with significant gains in prime time viewership and ad sales this fall season, and that's expected to continue this broadcast year. So I'm going to turn it over to Glen in just a moment, but before I do, I want to emphasize the following: Q3 was all about building momentum back into the business and delivering the consistent results we said we would deliver.

Despite COVID, we continue to push forward with the deployment of high-speed broadband fiber, Wireless Home Internet in Canada's underserved rural communities and mobile 5G technology. We're keeping our eyes fixed firmly on the long term. At the same time, we're maintaining operational excellence in the short-term to steer us through the pandemic recovery period and to generate even greater momentum with each successive quarter. We're competitively well positioned to succeed with significant liquidity and the financial flexibility to drive both our national investment strategy and BCE's common share dividend, which we just announced this morning for Q4.

And on that, let me turn it over to Glen.

Glen LeBlanc -- Chief Financial Officer

Thank you, Mirko, and good morning, everyone. With the easing of COVID restrictions beginning in the latter stages of Q2, consumer and commercial activity gradually picked up, gaining steady momentum throughout the summer. Despite the continued effects of COVID, all Bell operating segments delivered better performance trajectories with improved year-over-year revenue and EBITDA declines in Q3 that contributed to strong ongoing free cash flow generation. Consolidated revenue was down 2.6% year-over-year, which translated into a 4.4% decline in adjusted EBITDA. We estimate that the total incremental COVID-related costs in the quarter to have been approximately $40 million, down from $85 million last quarter.

Excluding these direct COVID-related costs, our consolidated EBITDA margin was stable year-over-year. Net earnings for Q3 were down 19.7%. This was a result of lower year-over-year EBITDA and a noncash net mark-to-market equity derivative loss resulting from the decrease in BCE share price this quarter compared to a gain last year. We invested over $1 billion in capex in Q3. This represents a notable step-up in spending from last quarter, reflecting both the seasonal increase in construction activity during the summer months and the resumption of usual business operations following a slower pace of spending during the initial stages of COVID when certain projects could not be executed. We expect capital expenditures to ramp up further in Q4.

Despite softer year-over-year earnings, we generated over $1 billion of free cash flow this quarter, even with lower EBITDA flow-through and higher cash taxes, which were expected. Let's turn over to slide eight on wireless financials. Q3 marked the return to positive revenue growth for Bell Wireless as the year-over-year decline in service revenue improved sequentially and product sales rebounded with a pickup in retail sales activity. Service revenue was down 4.3% year-over-year. The result of COVID-related impacts primarily from an approximate 70% decline in roaming due to global travel jurisdictions as well as lower data overage, driven mainly by customer rate plan optimization and ongoing adoption of unlimited plans.

On a year-over-year basis, lower roaming volumes and data overage accounted for more than the entire decline in service revenues this quarter, and are expected to remain headwinds for the foreseeable future. Product revenue was up 11.9% year-over-year, benefiting from a mix shift away from tablets to higher-value devices, as well as stronger year-over-year consumer electronic sales at the source driven by the increased online shopping during the pandemic. Consistent with the year-over-year loss of high-margin roaming and overage revenue, EBITDA was down 4.4% in Q3, a significant improvement from the 9% decline we reported last quarter. Let's flip over to slide nine on wireline financials.

Total revenue was down 0.8% versus last year, a slight improvement over the previous quarter, which speaks to the resiliency of our wireline operations and the strong demand for our leading connectivity service in the current COVID environment. Residential wireline growth in Q3 was positive. This result was driven by a strong 10% year-over-year increase in internet revenue, combined with an improved rate of voice decline as fewer customers disconnect home phone services during the pandemic. In business wireline, while results this quarter reflected slower customer spending on business service solutions and data equipment, which declined 5% and 10%, respectively, in the quarter.

Overall performance continued to hold up well despite COVID. And although small business in certain industries have been hit really hard, closures and bankruptcies have been better so far than we feared. Wireline EBITDA decreased 1.6%. This represents a notable sequential quarterly improvement as operating costs were stable year-over-year, despite the COVID-related cost impact I referenced earlier, which included a modest increase in our bad debt expense provision to reflect the increased risk environment, particularly in the SME segment. Let's flip over to slide 10 on media financials. A much better quarter for Bell Media, as advertising demands improved across all media platforms with the resumption of live sports programming and gradually -- the gradual reopening of the economy. This resulted in a smaller year-over-year decline -- a revenue decline of 16% compared to 31% last quarter.

Advertising revenue decreased 22% in Q3, a significant recovery from the 51% decline we saw in Q2 with the biggest improvements coming in TV, most notably sports, entertainment and news. Operating costs were down 14% over last year, driven in large part by the lower cost of revenue because of TV production shutdowns and delays as well as the elimination of discretionary spending. This contributed to a sequential improvement in EBITDA, which declined 21% year-over-year. Adjusted EPS on slide 11 and provides our usual walk down of the key components of adjusted EPS, which was $0.79 per share in Q3, down $0.12 versus last year. Lower EBITDA drove 3/4 of this decline, while the remaining amount could be attributed to a combined impact of higher depreciation expense due to the growth of our capital asset base and lower year-over-year tax adjustments.

Over on slide 12 on free cash flow. As I mentioned earlier, we generated over $1 billion of free cash flow in the quarter, down 11.5% over last year. As Mirko said, this brought year-to-date cash generation to more than $3.25 billion or 14% higher than last year. A very strong result that was achieved despite a significant COVID-driven decline in EBITDA and without cutting back on critical capital investments. This quarter's results also reflected an expected increase in cash taxes due to the deferral of corporate income tax installment payments from the first half of the year into the second half as well as higher interest paid due mainly to the timing of debt service payments on our MTN debentures.

Working capital improvement we enjoyed in Q3 can be attributed to the timing of supplier payments, but will largely reverse out next quarter. This, together with the buildup in new wireless handset inventory ahead of the busy holiday selling period. Growth in accounts receivable as sales activity picks up further and accelerated capital spending will result in free cash flow drag in the coming quarter. Over on slide 13, maintaining our financial strength and flexibility is our key priority. BCE's liquidity position remains very strong at $5.2 billion in available cash at the end of September. Additionally, our balance sheet is well-structured with long-term maturities and low interest rates on our outstanding debt. Our debt leverage ratio also remains manageable at 2.9 times adjusted EBITDA with no expected improvements in the foreseeable future, given the number of wireless spectrum auctions on the horizon.

We also recently strengthened our liquidity position by raising an additional $750 million of seven-year funds at an effective yield of only 1.65%. Proceeds of this MTN issue were used to early redeem higher cost public debenture debt. More importantly, we have no near-term financing requirements as our next material public debt maturity does not occur until Q4 of '22. Lastly, Bell Canada's defined benefit pension plan continues to remain fully funded despite the unfavorable impact of lower discount rates. This speaks volumes to the success of the actions we have taken over the many years to secure the financial position of all of our plans.

That does it for my formal remarks on the quarter, I would like to turn it back over to Thane and the operator to begin questions.

Thane Fotopoulos -- Vice President of Investor Relations

Great. Thanks, Glen. [Operator Instructions] Donna, we are ready to begin with our first question.

Questions and Answers:

Operator

[Operator Instructions] And the first question is from Jeff Fan from Scotiabank. Please go ahead.

Jeff Fan -- Scotiabank -- Analyst

Hi. Good morning, everyone. I'll start with wireless. Wondering if you guys can help characterize the wireless competitive environment that you saw during the back-to-school period and maybe a little bit of a prediction or outlook going into the holidays and into '21? I guess the reason for the question is we've seen a lot more win-back promos, lower rate plans, wondering if that's just because of the reopening that we saw with the small accrual subscribers? Is it Shaw Mobile in the West triggering some reactions, the competitors trying to make up lost ground? I'm just wondering if you can share some thoughts there. Thanks.

Mirko Bibic -- President and Chief Executive Officer

Thanks, Jeff. It's Mirko here. Yeah, on kind of pricing and promotions, kind of spirit of your question, I'm not entirely surprised. But what we saw in Q3, especially after the closed, absolute lockdown in Q2, I'd say, from our perspective, we didn't tend to lead promotional activity and I think that's pretty obvious. I mean, you go back to even June when we launched our 5G network and our attempt to implement kind of an additional charge for 5G connectivity that reflects the real value we're delivering with a premium 5G network. I mean, that's evolving, but we did try that.

You can even see some of that early price -- some price adjustments we made in early October, again, trying to better reflect the value we're delivering overall with unlimited plans on premium networks. There's a lot of other examples. But ultimately, it is an incredibly competitive market. And I'd say from the Bell perspective, here's the approach we take and here's what kind of customers and shareholders are gonna get from us: number one, we'll always be competitive; two, I mean, I emphasized this in my opening comments, we are focused on high-quality smartphone loadings 'cause that's what drives service revenue growth. And you can see the very positive results of that strategy in our Q3 numbers.

What we're doing is we're deemphasizing tablets. We're gonna let others chase that segment. We'll obviously play in the tablet segment when it's accretive, but otherwise, our focus is squarely on high-quality loadings. And then back to your kind of question on some of the promotional intensity. We've got to take a step back a little bit and then with the move to installment plans, like what was the vision? We were -- part of the vision is to deliver ultimate transparency for the customer. You pay for your rate plan, you pay for your handset. There's a variety of handsets. You pick the one that delivers the features you want at the price that you want to pay. So when you have that total transparency in that sense and you're offering all kinds of handsets, just kind of don't understand why we would continue as an industry to continue engaging in deep discounting of handsets like we used to.

We put a lot of effort into building the IT systems around installments. We all put a lot of effort into changing the way we sell. Not naive. I've said all along since installments were launched that there would be periods of time of a year where there would continue to be intense promotional activity. But I'm personally a little bit disappointed in the pace of subsidy reduction. I think we can do a whole lot better. But hey, I mean, there was the total lockdown in Q2. You asked about Black Friday and the holiday season, that remains to be seen.

We're in the midst of a second wave, Jeff, but on the other hand, you've got the iPhone that's just launched. Our digital functionalities are so much better than they were. So we'll be ready. However Black Friday turns out, and however the holiday season turns out in terms of sales activity, we're ready to capitalize.

Jeff Fan -- Scotiabank -- Analyst

Just a quick follow-up on the -- on your comment about high-quality loading. It's nice to see you disclosed 130,000, looks like phone ads or smartphone ads. Is this a number that you expect to systematically report in your reporting to kind of exclude the tablets? And then just a quick clarification. Your Wireless Home Internet ads, are those in your wireless ads or are those in your wireline internet ads?

Mirko Bibic -- President and Chief Executive Officer

Okay. So on the last one, the Wireless Home Internet are in the internet numbers. Glen, over to you on the tablets versus smartphone loadings.

Glen LeBlanc -- Chief Financial Officer

Good morning, Jeff. Yeah, look, it's a logical approach, especially as we shift increasingly to 5G and our focus, as Mirko said, is on high-value subscriber loadings. I think it makes a lot of sense to look at this reporting. And I know one of our competitors has switched to this reporting, and I'm seriously considering giving this -- making the reporting change for next year. So stay tuned, but it makes a lot of sense. It's a logical approach, Jeff.

Jeff Fan -- Scotiabank -- Analyst

Okay. Thanks a lot.

Operator

Thank you. The next question is from Drew McReynolds from RBC. Please go ahead.

Drew McReynolds -- RBC -- Analyst

Yeah, thanks. Thanks very much. Good morning. Mirko, you're clearly seeing the success of an expanded fiber-to-the-home footprint, and you're keeping your foot on the gas here this year and really seeing some pretty good momentum. And that's whether it's RGUs or the 10% increase in internet revenues. When you -- I know you're not gonna give guidance for 2021 or beyond, but thematically, just your updated thoughts on accelerating that fiber-to-the-home deployment as everyone's pretty eyes wide open at the momentum that the, I think, telcos are gaining and the cable cos with it? And just secondly, quickly on Bell Media.

I would like to get your updated thoughts on what was tabled or will be tabled as proposed amendments to the Broadcasting Act and just your initial thoughts on the impact there for Bell Media? Thank you.

Mirko Bibic -- President and Chief Executive Officer

Thanks, Drew. Okay. First, on the -- on broadband. So -- to reiterate what I also said in my -- at the end of my opening comments. And we're -- got our eyes fixed firmly on the long-term future, and the long-term future is underpinned by our six strategic imperatives. One of the key ones is building the best networks. I mean, we don't veer from the strategy. And we can see, as you pointed out, Drew, that it's having a positive impact on our financials for the wireline segment and clearly on our operating metrics. So it's significant. And I want as much fiber as possible in urban and suburban markets. And frankly, I wanna connect as many underserved homes in rural areas as we possibly can, as fast as possible.

And when you -- I'm not gonna give forward-looking guidance, as you said. But when you look ahead, and right now, and I hope it continues, we have a favorable regulatory environment with positive signals having been recently been sent by the federal government that facilities-based competition matters and investment in facilities matters. So when you put that all together, I think, it's clearly a case to be made for accelerating the pace of rollout. I certainly want to do it. It's why in 2020 when COVID first hit us at the beginning of the year, we said we are not scaling back on these strategic investments, we have to continue going. So not gonna give guidance for 2021, but it's gonna continue to be a very important point of emphasis for us. And on the regulatory side, with the announcement on Tuesday, I'd say this.

I have to kind of tip of the hat to Minister Guilbeault for putting forward the amendments that they did on Tuesday, I think it was. And two really important points there. And -- they're points of principle, but they're really important. One is we do -- the recognition that there needs to be a level playing field in Canadian broadcasting as between our domestic players, large and small, and the internet -- global internet giants. Very, very important principle, we've been asking for the recognition of regulatory symmetry and level playing field for a long time. So that's really important. The second one that I wanna highlight is the recognition of the importance of local news, that's going to be built into the Broadcasting Act, also very important.

So those are two real positive steps. Again, tip of the hat to the government for that. However, what's really going to matter is how all this -- how these important principles are going to be implemented 'cause that's where the rubber hits the road, and that remains to be seen. Like what will the policy directions from the government look like to the CRTC, and how will the CRTC generally apply these principles, it's gonna matter. And another thing that's really going to matter is we don't have time. Like we've got to move fast in implementing those principles.

I mean, if we're still here debating how the principles are going to be implemented in two years, it'll -- that will be a shame. But good start. And a couple of other things that I'd like to see that were not reflected on Tuesday is we need to get going on sales tax imposition on the streaming services that are not Canadian. We just need to get going on that. I can't understand why we're still talking about this. And the second point is piracy. I think there needs to be a recognition that we need to stop piracy, I can't believe that in late in 2020, that would continue to be a controversial issue. But look, we're still working on it. I'll stop there.

Drew McReynolds -- RBC -- Analyst

Okay. Thank you, Mirko.

Operator

Thank you. The next question is from Vince Valentini from TD Securities. Please go ahead.

Vince Valentini -- TD Securities -- Analyst

Thank you very much. If I could try a clarification and then a question. To clarify that you said 20% higher monthly recurring revenue for your 5G customers, not many carriers are reporting that they're getting much of a price lift. Can you just clarify, is that -- does that mean an existing customer moves from 4G to 5G and suddenly starts paying you 20% more? Or is there a little self-selection in there that the people moving to 5G, on average, were paying more than the average base on 4G, so it's really just higher-value, higher-usage customers? Moving to 5G initially is what drives that math? And the question, I'll leave it with you for after the clarification.

Internet revenue up 10%, very impressive, but your subscribers are up 4% year-over-year. So it implies something going on with either the mix of your internet base or net pricing gains, perhaps, can you try to break that down a little bit for us? Is it something to do with the movement to fiber-to-the-home or fixed wireless access? Or is it actually just pricing increases net over the past year? Thanks.

Mirko Bibic -- President and Chief Executive Officer

Vince, on the first one on 5G and wireless, it's an MRC issue. Monthly recurring charges are driving that growth that you're seeing with the 5G customer base. And on internet, it's a function of a number of things. Kind of the COVID effect in terms of promotional intensity. Really pricing reflecting the value that we are delivering to customers with fiber networks. It's customers choosing higher plans with higher speeds, given the -- working from home and staying at home more, that's why you're seeing that impact on the wireline side, Vince.

Vince Valentini -- TD Securities -- Analyst

Thank you.

Operator

Thank you. The next question is from David Barden from Bank of America. Please go ahead.

David Barden -- Bank of America -- Analyst

Hey, guys. Thanks for taking the question. I guess, my question is relating to the ABPU situation. Could you elaborate a little bit on how much or what percentage are you through the overage headwind on the business? And then at the same time, from an overage standpoint, you said it was down 70% year-over-year, at what rate is that improving? And when do you think that these two kind of headwinds start to abate? Thanks.

Mirko Bibic -- President and Chief Executive Officer

I'll start and then, Glen, you can pick up. I'll start just first with a comment on the overage decline. The decline improved in Q3 compared to Q2. And -- again, I'm a bit of a broken record on this one since unlimited plans were launched, our focus is to continue to do what I consider to be a very good job managing that decline. We don't try to force migrate customers. As you know, we obviously have unlimited plans and they're being chosen by customers, but it's the customer's choice. Frankly, it's not optimal financially to force migrate customers.

So we're not going to do it. It's all about good subscriber base management, and that's going to continue. So yes, overage decline continues to be a headwind, and we continue to manage it, and that rate of decline actually improved in Q3 over Q2. I'll stop there. And then, Glen, you can fill in the blanks.

Glen LeBlanc -- Chief Financial Officer

Thanks, Mirko. Yeah, I'll add a little more color. As Mirko said, we did have a 3% improvement in sequential quarters, albeit we continue to be down year-over-year. But if you look at the fact of the decline year-over-year, 80% of the decline year-over-year is driven by the roaming and data overage revenue that we've spoken about. The other 20% is mainly driven by higher prepaid mix.

If I peel the onion a little further, as I mentioned in my previous remarks, roaming revenue is still down virtually 70% with... And to put that in absolute terms, we were down about $60 million in Q2, and were down $58 million in Q3. So virtually no change. And Mirko just said it, and I've said it a few times, unfortunately, we believe that global travel restrictions are likely to remain in place for some time. And I don't see a complete rebound in global or domestic roaming to occur in the coming quarters. So, I think, for the foreseeable future, this remains a challenge. Thank you, David.

David Barden -- Bank of America -- Analyst

Thanks, guys.

Operator

Thank you. The next question is from Richard Choe from JPMorgan. Please go ahead.

Richard Choe -- JPMorgan -- Analyst

Hi. Just wanted to get an update on your transition to unlimited. And what do you expect going into the holiday season with the transition there? Are you still looking for a measured pace? Or is this an opportunity to kind of maybe do a higher uptake rig on the unlimited plans?

Mirko Bibic -- President and Chief Executive Officer

Yup. Like I -- I think in response to David, we're continuing to manage the overage decline and the pace of that decline, and we're not going to force migrate customers, but unlimited plans are here to stay. They are delivering significant value to customers and customers are going to be choosing those plans, so that's going to continue, but we're going to manage that decline, and -- just like we have since the beginning since mid-summer 2019.

Richard Choe -- JPMorgan -- Analyst

And as a follow-up, in terms of promotions for the fourth quarter, should we expect margins to be down year-over-year in wireless? Or is that something that you don't plan on being too aggressive about?

Mirko Bibic -- President and Chief Executive Officer

We're gonna be competitive at all times. And we'll see how intense promotional activity is going to be for Black Friday and the holiday season. But like I also mentioned in response to my question to Jeff, we're gonna be competitive. We're gonna focus on high-quality smartphone loadings. I think we all need to do a better job in the industry at -- a check on subsidies, particularly as we've disaggregated the handset cost from the rate plan.

Richard Choe -- JPMorgan -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

Good morning. Thanks for taking my question. The first, on the enterprise side, and I guess, B2B generally. Thanks for the color on how Q3 is trending. Any sign of improvement as we kind of step into Q4 and look beyond that? Or do you kind of expect it to be sort of maybe a period of flatness or maybe even further decline before recovery in 2021? And then as a follow-up, with respect to the comments on free cash flow for Q4 and for the full year, I was wondering if you can just talk to the tailwinds that you expect to receive from lower handset costs when you look at it from a full year basis? I'll leave it at that. Thank you.

Mirko Bibic -- President and Chief Executive Officer

Okay. So I'll answer the first one. Glen, you'll take the second one. So on looking ahead to Q4, just generally or whether it's in the enterprise segment, I'll start with a couple of comments. I think I'm expecting continued momentum in Q4, but whether we see the same pace of sequential improvement Q4 compared to Q3 as we did Q3 compared to Q2 remains to be seen 'cause we are -- I mean, just the environment we're in, right? We're clearly in the midst of a second wave across the country, and the winter months are soon upon us. So it's hard to predict what the future holds.

And I made -- already made a couple of comments about Black Friday and the holiday season. It's hard to know what's going to happen, particularly compared to prior years. But be that as it may, I think our competitiveness isn't in question. We have the best networks, we have the best products and services, and we have consistent execution. So the pace of improvements in Q4 is gonna be a function of the COVID impacts on the economy generally, and those impacts will be industrywide. Now on the -- you mentioned enterprise and the enterprise segment. That continues to be -- I mean, my commentary on that is very similar to my Q2 commentary. In Q2, we had a bump in connectivity in the enterprise segment.

I mean, that's slow, but it's been consistent, like connectivity has been consistent. Some projects, professional services, managed services projects have been delayed. That's what I also said in Q2, but I'm really pleased with the performance in wireline generally, and that includes being pleased with the -- with our performance in the enterprise segment. And we do serve the largest Canadian corporation, the largest -- the most stable Canadian corporation. So that's also -- our stability is also a function of the stability of our enterprise customer base. Glen?

Glen LeBlanc -- Chief Financial Officer

Thanks, Mirko. Yeah, free cash flow and the comments I made earlier on the headwinds that we're facing with free cash flow in the coming quarter. We expect it to be an aggressive quarter on sales. So obviously, that's going to impact AR. Now just a reminder, our free cash flow includes everything. What I mean by that is it includes working capital. So as we ramp up on purchases of inventory, it is going to have a negative effect on free cash flow. As we see sales accelerate and therefore, an increase in AR, it's going to have an impact.

I also mentioned that I expect a ramp-up in capital expenditure as we are very, very focused on our network builds, our network deployment. So I see that as being a drag on cash flow. Income tax payments, we enjoyed a deferral on many of the tax payments that the government offered relief -- a deferral relief, and those are all starting to boomerang as we look in the second half of the year to be catching up on those. As far as handsets go, you mentioned lower handsets.

With the new devices launching, the cost of a handset is actually higher. So from a free cash flow drag, as I said, it's many, many items. It's the cost of the handset, it's the sales activity, increase in inventory, capex, and tax. But all of it, very, very manageable, and I see no worries. Focus remains on liquidity, as I said.

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

Thank you.

Operator

Thank you. The next question is from Simon Flannery from Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Glen, thank you. Just following up on the balance sheet, if I could. You've talked about refinancing, taking lower rates, terming out your maturities. How are you now thinking about your overall leverage targets over the medium term? You've obviously just monetized your data centers, but the spectrum auctions coming up next year, you -- I think in the past, you've talked 2 to 2.5 times. You're a little bit above that right now. What's the right way to think about longer-term goals in this environment?

Glen LeBlanc -- Chief Financial Officer

Good morning, Simon. As I said in my opening remarks that I did not -- I do not see a material change in our leverage for the foreseeable future. We do have multiple spectrum auctions in front of us, absolutely paramount that we participate. And as you know, we'll participate. Incredibly important spectrum becoming available. We did just divested the data center. And that certainly gives us additional cash to invest in the business, including investment in spectrum. I do not see a material change. The public policy of 2.5 times, we're above that, have been for some time.

Very hard to see an aggressive repayment of debt in the interest rate environment that's at an all-time low. So I think a prudent, responsible approach to our balance sheet is to stay generally in the leveraged vicinity we are now, with respecting the current credit rating that we have. So in other words, not taking actions that jeopardize that. But I'm not in a rush to reduce it either. I think the most important thing for us is to have the liquidity and the balance sheet strength to ensure that these spectrum auctions are very successful for BCE.

Simon Flannery -- Morgan Stanley -- Analyst

Great. And just a quick follow-up on the iPhone cycle. We've seen some U.S. carriers talk about a good start to the iPhone sales process. And there's some talk about maybe a super cycle that people have been holding on to their handsets for longer than normal. How are you thinking, irrespective of the competitive environment, but just is there a pent-up demand to get a new phone here and we might see a bigger than normal cycle over the next six months?

Mirko Bibic -- President and Chief Executive Officer

Oh, it's hard to tell. I mean, I -- so far, so good on 5G and on iPhone. And I think Black Friday, the holiday season will be more indicative, and we'll see what that brings. And then as we look into next year and when we get the 3500 megahertz spectrum and we're into true 5G, I mean, I think there's going to be a pickup in activity at that point in time, and then we'll have new applications and services being delivered to consumers. But so far, so good. I mean, we're used to this.

We've been through these cycles before 2G to 3G to 4G, et cetera. But we like where we sit today, both in terms of the competitiveness of our networks, how 5G is doing so far, and iPhone sales have been just fine.

Simon Flannery -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. There are no further questions at this time. Back over to you, Mr. Fotopoulos.

Thane Fotopoulos -- Vice President of Investor Relations

Great. Thanks, Donna. So thank you again to everybody for their participation on the call this morning. As always, I'm available for follow-up questions and clarifications throughout the day. So with that, have a great day. And take care of yourselves and stay safe. Thank you.

Mirko Bibic -- President and Chief Executive Officer

Thank you.

Glen LeBlanc -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Thane Fotopoulos -- Vice President of Investor Relations

Mirko Bibic -- President and Chief Executive Officer

Glen LeBlanc -- Chief Financial Officer

Jeff Fan -- Scotiabank -- Analyst

Drew McReynolds -- RBC -- Analyst

Vince Valentini -- TD Securities -- Analyst

David Barden -- Bank of America -- Analyst

Richard Choe -- JPMorgan -- Analyst

Aravinda Galappatthige -- Canaccord Genuity -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

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