Welcome everybody to the annual TD Cowen Canadian Telecom and Media Conference. I was reminded this morning, this was our 26th year of hosting it, which I've only been here at TD for 22 years, so predates even me. But something we like to do every year to bring together thought leaders and senior executives in the space. I think this year's event is extremely timely, and lots of activity going on in the sector on multiple fronts, especially in terms of pricing and some challenges. We will certainly talk a lot more about wireless in some later sessions. Thrilled to start the day off with Cogeco and their new CEO, Frédéric Perron.
So we will talk a little bit more about challenges they may face in pricing, but that's probably a little bit more on the broadband side, especially in the U.S. But I don't think anybody in the sector is immune these days, and you can see it in the share prices. Maybe things are not as bad as what some of these valuations would suggest, would be my conclusion. But what can turn things around is going to be a key theme for the day to see if there's some light at the end of the tunnel. So with that, let's kick it off with Cogeco. Fred, thanks very much for being here.
Good morning. Thank you.
I believe most of you, this will be the first time you're hearing from Fred in a forum like this. So why don't I just start off by letting you tell us a little bit about your background pre-Cogeco, if you want, or for sure, what you've been doing at Cogeco prior to this CEO role?
Sure, and good morning, everyone. Thank you for being here today. Good to meet you. My background, Vince, is almost 30 years working in 5 different countries. So I've worked, of course, in Canada, but also in the U.S., in New York, in the U.K., in the Czech Republic, and in Poland. More than half of that was in telecom. So I've run both wireless and wireline businesses, in some cases, in some really difficult markets. Markets where you have a lot of players, where the ARPUs, in some cases, are very low, and you need to learn to work with a low-cost structure that supports the lower ARPUs.
I've worked also mostly in situations that I would describe as transformation situations, situations where you have to take decisive action, to accelerate the performance of, of a company. Now, here, at Cogeco, it's almost four years now, that I was running our Canadian business. We made progress in a few different fronts, at Cogeco in Canada. So the first one is sales and marketing, as you can see by our strong PSU results over the past five consecutive quarters. The second area would be what I would call value creation analytics, where we got a lot more targeted in terms of pricing by customer segment and sub-region.
And the third one is the acquisition of oxio, which is turning out to be quite a nice acquisition in the digital space for us, and I'm sure we'll talk about that, later. But overall, a mix of experiences in Canada and also in some other difficult markets.
Excellent. I think you gave a hint as to a couple of the strategic priorities you have, but maybe you can flesh that out in a bit more detail. I know that it's only been about 70 days since you've been on the job, but any sort of big changes in strategy or key areas of focus for you?
Sure. So yeah, it has been about 70 days that I'm in the role, and I'm following a pretty structured 90-day plan. So it's still a little early, but I can share a few themes. So for sure, shareholder value creation will be at the heart of what we do, both around capital allocation decisions as well as organic decisions. So on capital allocation, we used to grow through acquisitions in the United States, but with the multiples being what they are right now and our desire to lower our leverage a little bit, big acquisitions in the States are not in the cards, at present time. We may do small tuck-ins if they make sense in Canada or the U.S., but no big acquisition.
We may even be open to pruning certain assets if it makes sense from an operational, strategic, and financial, of course, perspective. In terms of organic priorities, there are five of them. The first one is wireless. So we've launched in Connecticut, and we're getting ready to launch in other states as well. We're working on Canada also, and I'm sure that's gonna be another one of your questions, so I can elaborate further at that point. So wireless, number one; network expansion, number two, but I would say disciplined subsidized network expansion. Number three, synergies. We do see an opportunity for synergies across our U.S. and Canadian businesses. For example, leveraging harmonized platforms and systems and accelerating the sharing of best practices across the two countries.
The last two priorities are digital and advanced analytics, and usually, Vince, when I mention those two, people say, "Yeah, yeah, every company talks about that." But the reality is that we've been a little bit behind as a company on those two topics, and we do see a significant opportunity to increase digital sales, to increase digital service interactions, and to use advanced analytics to drive accelerated revenue performance. And an example I would use is retention discounts, for example, where there's big money here, and using advanced analytics could help our revenue performance.
Excellent. A good overview. Lots to unpack there. Let me hit on one you mentioned was potentially pruning U.S. asset base. I know you can't talk about what you might do. You probably don't even know what you can do at this point. It's probably early stage. My question is broader: if you and your team identify something that you think is right for the business and right for shareholders, do you feel confident you have the full support of the Audet family and the board to do what's right?
Yes, I do. And in fact, not only for the question of asset pruning, but anything strategic that we're discussing today, some of the themes I've touched on already, these are all topics that we're aligned on, both with the board and the controlling shareholder. So it's not like I'm going on a limb here in what I'm sharing.
Does that stem from a recognition of where the share price and the valuation is, that it's ... is that a concern internally when you guys talk about it, that your cost of capital effectively is going up 'cause your share price and multiple is down, and maybe something should be done to stimulate better response from the investment community? Is that a stated sort of strategy?
Yeah, look, we all want the multiples to be higher. We all want the stock price to be higher, and I think some of the priorities that I've shared with you and will continue to share with you over the next 27 minutes or so, I think can make a big difference in that direction.
Great. That is comforting to hear, from my perspective. As you know, I've covered this company for a long time. I'm not sure I've always felt that those interests have been aligned, but, hearing from you, and from Patrice, your CFO, in the past six months, it certainly seems to me that that's a genuine aspiration. So look forward to results on those fronts. Another key one, somewhat related to that, is the wireless. Yes, let's go back to that, as you said we would. I think there's a fair amount of concern among investors as to two things. One, that you don't have wireless in your bundle in Canada, and your major competitors do.
Yep.
I think everybody, including yourselves, realize that it'd be better to have it. And then too, how can you achieve it with the sometimes daunting upfront costs of spectrum and CapEx and for towers and your own autonomous network? Can you level set us somewhere we know where the prior CEO sort of said about it? What are your thoughts on, you know, how much risk you're willing to take to, you know, build CapEx versus partner?
Yeah, and I assume you're asking purely about Canadian wireless. I can also touch later on our U.S. wireless launch. But as it relates to Canada, look, first of all, we've been competing fairly well without having wireless for the past few years, but yes, we do wanna launch wireless. We wanna launch it in a capital light way. And what I can share as experiences I've had in European markets, for example, as the incumbent MNO top-line growth starts to slow, many realize that getting wholesale revenue from players like ourselves can actually be very good business. I've seen it in Europe many times, and we're seeing it in the States now, where it is turning out to be a good...
Wholesale revenue is starting to be a good source of revenue growth for the incumbents when revenue growth is hard to come by. So that's an experience I wanted to share that might help us over time. The other piece that may help us is we have some fairly attractive spectrum that could bring something to the table for a possible partner. So you put all that together, we're pursuing both the regulated and not regulated route for our entry into capital light wireless, and we'll be providing further updates as soon as we can.
Just to emphasize what you're saying there, there's been some talk on the recent wireless company calls about ARPU. Is it really the right metric for them anymore, and can they ever get ARPU growth back to positive? But just to double down on what you just said, if you provide a wireless carrier wholesale revenue, that counts as service revenue. It will not count as a subscriber. It actually artificially boosts their ARPU, right? So it helps your... You partnering with them can actually help them get their ARPU turned in the right direction. Do I have that right?
Yeah, I can't speak to the details of the accounting, but just revenue overall. Again, I've seen both in the U.S. and in Europe, that as the market matures, wholesale revenue becomes real good business for the incumbents, and that's what we would provide.
Excellent. Am I overstepping to read between the lines of what you're saying, that it's more likely that Cogeco's wireless operation in Canada will start as just a regulated, MVNO, taking advantage of the CRTC rules and then perhaps evolve into partnership later after you prove to people that you're serious about doing it on your own, even if they won't partner with you?
I wouldn't assume that. I would say that we're pursuing both routes at the moment, both regulated and commercial discussions, and we'll pick the one that makes the most sense. Again, you know, realizing that we have significant wholesale revenue to bring to the table, if we need to use regulated, we will, but it's too early to conclude on that.
Okay, fair enough. Let's switch gears to another one of the priorities you mentioned was network expansion and disciplined, subsidized expansion you emphasized. So maybe just remind us where we're at in Canada, which, you know, throw in my two cents worth, I don't think you get proper recognition for the J-curve there. These are very good ROI projects with good government subsidy in Quebec and Ontario.
Yeah.
Just takes a while to build them and get the subscribers on. So maybe level set us where we are on that curve in Canada, and also your thoughts on the U.S., and I think most of us are aware of the massive BEAD program that is in the process of starting to be allocated in the U.S. Like, how much risk are you willing to take in terms of bidding for those types of projects?
Sure, and maybe I can answer in three parts. First, I'll comment on the pacing of the investments, then I'll talk about some early results that we're seeing, and then I'll address your question about BEAD, specifically. So on the pacing of our network expansion investments, we are done in Quebec. We are building in Ontario right now. That will continue through our fiscal 2025, and will ease off in fiscal 2026. And BEAD, I'll talk about that separately. In terms of results, the ones that we can really read so far are Quebec. And we're very pleased with the results.
So I think we've said publicly, our target penetration, which is over 50% over three years, that was the original target, and we're ahead of that target, both in terms of the speed of the ramp as well as the possible endpoint. So that is the read on Quebec. The Ontario program is very similar. It's rural fiber to customers who didn't have fantastic options before. So, you know, let's see how the results are, but it's a very similar program to Quebec. As it relates to BEAD, you know, of course, it's $42 billion dollars that the American government is pumping in as subsidies. We will play it state by state.
We've built some strong analytics in Canada, looking at projects lot by lot even, and really making sure that we reach the ROI threshold that we're looking for in a disciplined way. That's how we will play BEAD. We are open to it if there are great deals on ... good deals on the table, but let's see how this plays out.
It seems to me that some of the U.S. carriers are looking to BEAD as a bit of a savior to, to show some subscriber growth after multiple quarters of very weak, internet subscriber growth for most of the cable industry. Do you view it as just this is a way to get subscriber growth, no matter what the economics are, or does it have to be make sense financially? And maybe if, if I can get you to package into that, you didn't seem to win as many, rural projects in Ontario as you did in Quebec. Was that a signal of the type of internal rigor and discipline you have?
It is. So we're not going for a land grab here. Disciplined IRR optimization is what we're going for. And as you point out correctly, Vince, I think we've shown our discipline in the Ontario reverse auction, where we could have won more doors, but stuck to our IRR thresholds, and we're happy we did.
Excellent. I'm going to ask one more question, which is a bit more Canadian-focused, and then move to the U.S., but after the Canadian question, I'm going to apologize in case anyone in the audience has a question, so please, please get it ready. You mentioned oxio. I think some of us analysts shook our head a little bit when that announced that the somewhat eye-popping valuation, but it seems now that it is working out well, as you said. Can you... And I'm especially excited about what you guys talk about, and we thought of oxio as just an out-of-region TPIA way to expand your footprint, but can you fill everybody in on what you're doing inside your own Cogeco footprint and how valuable that second brand is?
Yeah, thanks for pointing that out. And it's interesting, right? Because maybe some of the head shaking you're referring to was just comparing to other TPIA acquisitions that were happening at the time. In our case, it was a very different and much more strategic acquisition. So oxio happened to be a TPIA, but that's not the main reason we were buying them. We were buying them for the strategic digital capabilities that came with it. So what we're seeing now is, first, the brand of oxio is very strong. If you go even in Google Reviews, you'll see that their customers really like them. It's also a brand that lets us penetrate new customer segments that the Cogeco brand was not as strong in. So it's true incrementality for us, as opposed to cannibalization within our own footprint.
And so the brand is one strategic advantage, but the fact that they're a completely digital play is the other thing that we were going for here. So oxio sales are completely digital and only digital. oxio customer service is mostly digital. There's no customer service or call center you can call. The most you can get in terms of a human is a chat. So this is something we really wanted to leverage and deploy across the rest of the company. And to your point about out-of-footprint versus in-footprint, where we're seeing more of the growth now is in-footprint, incremental sales on our own network, at a good margin. So we're pretty pleased overall with this acquisition.
So if somebody calls your call center and says, "Look, Cogeco price is too high," or, "Something I don't like about the brand," you can direct them to oxio?... give them a lower price and still generate more margin because it's all digital without all the customer service costs? Is it a fair characterization?
So the answer to the first part of your question about our ability to redirect customers, yes. On the margins, we haven't disclosed publicly exactly what the margins are versus the Cogeco margin, but I can only comment that they are very healthy because there's a lower cost to serve.
We've seen... Sorry to belabor this, but I think it is important for people to understand that this is a new digital brand for you guys. It's a new source of growth and profitability. We've seen other companies build these types of capabilities up organically, Public Mobile at Telus, Fizz at Quebecor. It takes some time and takes some money to do that. You guys have effectively been able to hit the ground running with oxio, with a well-established digital platform and brand. Is it fair?
Exactly.
Okay.
Yeah.
Much, much shorter answers than the lunch we had yesterday... for anybody who was here, which, it's refreshing in some ways. I said I would pause. Does anybody have any... It doesn't have to be about, about Canada. Any question on, anything about the strategic focus or anything for Fred before I keep going? Quiet bunch. So let's turn to the U.S. I don't want to sugarcoat it. I mean, it's been a challenging market.
Yep.
Some people think it's going to get even tougher, not nothing specific to Cogeco or, or your Breezeline, brand name down there. It's really just an industry-wide phenomenon of, more overbuilding than we see in Canada, fixed wireless competition expanding pretty rapidly. T-Mobile at first, now we seem to see Verizon leaning in on mobile with fixed wireless bundles and expanding seemingly eventually across their entire, footprint. What are your thoughts? Is this is there any way to sort of fight back against that, or is it inevitable that you have to lose a bit of internet share and just find ways to manage your cost structure and, and pricing to, to try to offset as much of it as you can?
Yeah. So FWA has been the main challenge in the U.S. market. Now, Vince, I've managed myself FWA businesses in two other countries, and what I've seen in those experiences is that you get the initial sugar rush from having a low price offer, lower product quality offer in the market. But in the markets where I worked, that sugar rush it lasted 18-24 months, and then you hit a little bit of a wall. There are kind of two walls you hit at that point. One of them is when your wireless network starts filling up with those customers, it fills up very quickly, and it fills up not in a linear fashion. Because in some cases, you're talking about customers not using gigabytes, but terabytes.
And you can have one customer on one site, deteriorating the experience of 100 wireless, normal wireless customers. So that's, that's the first wall we hit, in my experiences. And the second one is, you capture a segment of the market who's willing to trade off product quality for a lower price, but the product quality does have real limitations. And what we've- we realized that, that that segment of the market is relatively finite. Now, let's see if that experience that I'm sharing translates into the United States, but you already see some slowing customer loading numbers from the two major players there, pretty much after the, the two-year mark that I was, that I was referring to. So, so let's see how this, this unfolds.
Does that mean, Fred, you're willing to lose some of those low-end subscribers who care more about price than quality? You're willing to lose them knowing that that's the better alternative than repricing the entire base? 'Cause I think you would acknowledge there are some of your Breezeline territories that have not seen even the initial fixed wireless launch yet. And even if there are limitations on how many customers they can add, the limitation is not zero. If they come into a new market, they're probably going to take some share. Is it better to just let them have the low-end share as long as you're retaining your better high-end customers, or is it better to fight them back on price initially?
Yeah, so I'll answer your question, and then I want to go back to one comment you made. So we're there—I won't speak in absolutes, but if we're there to maximize value, and the P times Q of our sales. So, you know, that's what I would say. So the more we can emphasize product superiority, and again, there are real limitations to the FWA product. And now you see that the key players are even imposing new caps. They impose new caps to new customers, the usage caps, and now they've applied it to their entire customer base. So we'd rather emphasize the limitations of that product and compete on value. So that's a long way of saying, for the most part, yes, to your question.
There's something you said, which is they haven't fully deployed in certain regions. I can't comment in detail about their strategy, but we do know that some of them pretty much deployed everywhere they had network capacity. So again, let's see how this unfolds. We see their subscriber loading performance coming down. We see some of them also mentioning, two of them, mentioning that more and more they'll be focusing on the B2B segment as a backup product for the main product. So, so let's see where it goes.
Fair enough.
Mm.
You face other types of competition in the U.S., obviously, not just the fixed wireless threats, especially in the Ohio market with multiple operators there. Have you seen anything in your first 70 days to suggest that what you learned on how to compete with fiber to the home in Canada, maybe there are certain things you can do to improve the traction in the U.S.? And I know you mentioned synergies in your opening remarks. You also mentioned data analytics. Does that sort of segue into revenue generating or revenue-saving tools, as opposed to just cost cutting?
Yeah. Thanks for pointing out the progress that we've made in Canada in terms of building fiber. Because a couple of years ago, we were getting the question all the time: "How will you sustain and grow your market share against incumbents who are now mainly fiber in Canada?" And I think we've proven by now that we compete with fiber very well and very favorably due to the sales and marketing engine and the analytics that we've built. And it's no coincidence that we got five consecutive quarters of good growth, of good customer growth in Canada. Now, to your question about the U.S., is there an opportunity to leverage some of the sales and marketing capabilities from Canada to the U.S.? Absolutely. This can also be two ways.
There are things that our U.S. business is doing that can be leveraged in Canada, and that's very much part of some of the synergies that I was mentioning earlier. When people think synergies, they usually think cost, but there's a real kind of talent, capability, synergy that can be deployed as well.
Excellent. The other risk that comes up a lot in the U.S. is the ACP program-
Yeah
... that is winding down, or you can confirm, is now officially expired. Can you update us on your thoughts there of how exposed Breezeline might be, and how you can potentially offset some of the hit of some of those customers who were getting government subsidies are no longer getting them?
Sure. The ACP program is the Affordable Connectivity Program. It is a government program that was giving a $30 subsidy or discount to customers who qualified due to a number of criteria. That program has expired. What we see, I can share, I think we've said publicly, that it's 4% of our U.S. customer base, which is on this program, which is much lower than the overall industry average, and, you know, you hear about some players being north of 15%. That's as a percentage of our customers, but as a percentage of our revenue, it's much lower. We have a number of targeted program to make sure that these customers are migrated to new offers.
In addition, they, a number of them are buying other products anyways, so they were not zero-dollar customers before, so they're more likely to stay. So all in all, we do expect some variations in the reported sub numbers from that expiry of the program in the next two quarters or so. But from a revenue perspective, as I said, it's very small, and we think it's very manageable around revenue and EBITDA.
I moved my last couple of questions. I'm going to see if anybody had another sip of coffee, if there's any questions in the room first. Not unusual. I know, Fred, this may be your first conference, but I don't think I've had a question from the audience at a conference.
Well, let's make it a first.
Don't take it personally.
Otherwise, my team is gonna be asking the questions, and I'm not too much tougher than that.
The dividend question, any thoughts there? I mean, the growth has been pretty steady and attractive at 10% in the past few years. Do you see dividend growth continuing, and is that kind of pace possible to sustain?
Sure. We, we always strive to balance reinvesting in growth, giving money back to shareholders, and also lowering our leverage. So we will always strive to balance that. As you know, our cash flow is strong. The percentage of our cash flow that we redistribute as dividends gives us room to increase it in the future if we choose to do that, so we have that flexibility. And in terms of specifics, we usually disclose decisions in with our Q4 results, and we intend to do the same again this time.
And the last one, rarely get through one of these sessions without at least some sort of regulatory question. The TPIA file in Canada, I know there has been a bit of complaining by some carriers about how it's evolved on the fiber access side, and there's a lot of debate over just the whole regime. Should it apply to the big national incumbent carriers or only to smaller regional players? Clearly, Cogeco's view is, you know, is the latter. Any updated thoughts on when we might hear something? And I think there was a little, an interim decision last week that may have slightly gone against you, but maybe you can level-set me if I had that wrong.
... Yeah, the interim decision was a small thing, which we read mostly as a non-decision, as a decision to delay until the full hearing is done. So I wouldn't read too much into that one, but in terms of the bigger hearing, we expect to hear back by the fall. What we're really advocating here is... So I appeared in front of the commission in Gatineau, and the commission asked me, "Why is it that the market is more competitive in Quebec and, to a lesser extent, Ontario versus out west?" And my answer was that infrastructure-based regional players like ourselves contribute to a healthy, competitive ecosystem in the market. So the answer is not just TPIAs.
And that's why it's fundamental that we don't let big players, the Big Three in particular, ride as TPIAs on the networks of regional players like ourselves. This is a regime that was intended to help small players. It should not be there to help the Big Three. So that is the main part of what we're advocating. There's certainly a growing movement and growing sympathy for that position because now, you know, it's all the mid-sized players, the small players advocating that position with us, but we even have two of the Big Three advocating that position themselves. So we're waiting to hear back from the CRTC, but again, I think they're realizing the importance of regional infrastructure-based players such as Cogeco.
We'll look forward to that decision, and we have run out of time, but that was a great conversation, Fred. Thanks very much for joining us and kicking off our conference. You have to. We have a bit of a break, like 5-7 minutes, so maybe you can hit him up offline, because we've run to the end of our time.
Thanks, everybody.
Thanks a lot.
Thank you.