Just get going here. Sorry. Let's start in the U.S. You've highlighted on your Q3 call that you thought there would be a step down in loading. We've heard commentary from some of your U.S. peers last week that seemed to confirm there is an industry issue going on there. What's the status of the U.S. competitive environment?
Sure. I'll try to paint the full picture here about the U.S. It sounds like we'll start with the U.S., which is the more challenging part of our business, and I'm sure we'll have a chance to end on Canada
Oh, for sure. Yeah.
Where we have some positive news to deliver. As we look at the U.S., yes, we did say on our last call that we would have elevated customer losses in the quarter, and some of our peers in the U.S. said the same as well. What's happening down there is, over the past few years, the market got progressively more and more competitive. We saw a further step up in competitive intensity about 12-18 months ago, and I would say an even further step up in recent months. Where is it coming from? It's coming from five different factors. First, FWA, or Fixed Wireless Access, has been there for a while. I would say it's calming down a little bit for us, so it's not the biggest factor right now, but it's still there.
Second, Starlink, or satellite, is there at the fringes, but it's not material right now. It's in our very rural footprint. We can have a longer conversation on Starlink if you'd like. But the big three competitive factors for us in the U.S. are really big cable overbuilding us, private equity-funded fiber overbuilding us, and some of the telephone companies upgrading from DSL to fiber. These are the big factors. There is room to believe that some of those will ease off over time. We're seeing green shoots in some markets of some of those easing off as capital for these players becomes more expensive, as consumer prices come down, lower return on capital. So there is room to believe it will ease off over time, but point in time, right now, it's quite elevated in terms of competitive intensity.
The question is: what are we doing about it? Two things. I would say strategically, we've said publicly in terms of bigger strategic moves for the U.S., we said publicly that we're not dogmatic about that. In parallel, there are what I would call some no-brainer operational improvements that we're putting in place. There are six of them. We've been upgrading our network. We've been growing a wireless business. We just launched a digital second brand. We've been growing new sales channels. We're ahead of the curve on AI. Last but not least, we just launched, a few weeks ago, a new streaming TV product, which is quite compelling. So all in all, quite an elevated competitive intensity in the U.S. May not be like that forever, but right now it is. We're not dogmatic strategically, and we're putting some operational improvements in place.
You've talked about trying to capture a fair share of your various markets, and there's obviously some differences between them, and you described some of them as a harvest region and some as a growth region. Can you talk about the differences in some of your franchises in the U.S.?
Yeah. If you take 100% share of the U.S. wireline market, and I'll let people in this room use their own assumptions, but illustratively, if you say FWA and satellite will take, for example, 20% of the market, the 80% that's left will be split between two or three wireline players, depending on the market. You can come up with a fair share. Across our footprint right now, we're around 30% market share, so we're not too far from what fair share would be. But it splits in two types of regions. We have about a half of our footprint, we're about 40% market share, so that's the part that's under pressure right now. But the other half of our footprint, we're around 20% market share, so there's room to grow.
Our strategy in the U.S. is a combination of harvesting and managing the decline in one half, but also growing and making sure we capture a fair share in the other half.
One of the things you've also done is you're introducing a new product platform in welo. Can you talk a little bit about welo? We'll get into oxio when we talk about Canada, but maybe what does welo bring to Breezeline and what are the economics around that?
welo is a new wireline brand that operates on our own network. It's fixed price for life. It's a cool brand that's more distinctive than some of the more traditional brands. Customers only buy online, so it's a cheaper cost to sell. Customer service is only online as well, either through a bot or sometimes a human can kick in. So far so good. Customers just love it, and we'll talk about the sister brand, oxio in Canada, in a minute. But it's already getting 4.8 Google stars out of five. Great comments. So customers love it. Margins are good because prices are not that different from our main brand, but cost to serve is lower. I would say the only question now is just sheer volumes of customers, because it's still early days, so we're still in the bottom of the S- curve.
As the S- curve of penetration kicks in, we see a lot of upside for that brand, similar to what we saw with oxio in Canada.
How is the wireless offering going in the U.S.?
It is going fine. The wireless market is very competitive in the U.S. so I would say volumes are moderate, but growing, and we do see a churn benefit, a sizable churn benefit, when a wireline customer also adds wireless.
Okay, good. You did take an impairment charge in fiscal Q3. Can you give people confidence that there is not going to be another one given the elevated level of CapEx? We do not have to go in too much detail, but how confident are you that that is not going to be a recurring theme?
Yeah. Back in the day, we had grown through six acquisitions in the U.S. Obviously, multiples were higher at that time. Every year, we review our book value, and looking at the current multiples in the U.S. market right now, which are much lower, we decided to update the non-cash book value of our assets to reflect what is a more current multiple for those types of assets.
Okay. You just mentioned the phrase, and you did use it on your last call, that you're not dogmatic about being in the U.S. What are you signaling to the street when you say those comments? Are you talking about asset mix or regional mix? Maybe unpack that phraseology a bit.
Sure. Happy to. Back in the day, as I just mentioned, we were growing in the U.S. via acquisitions. The market was different. We had a good run. You saw a few years ago, we started taking a more measured and conservative approach to the U.S. market. We haven't made an acquisition in the U.S. over the past five years. Then over the past couple of years, we got even more conservative, where we're maximizing cash flow generation, we're lowering the debt. The message, to your question, the message I would take away from this is that we see what you see about this market, so there are a variety of strategic actions that we could take, and we're not dogmatic about any of them.
Okay. Speak to timing. When is this fiscal year we'll see changes in that regard, or maybe put up some goalposts around it for people.
Yeah, the reason I don't want to get into specifics or timing is because some things we can control, some things we cannot control. So I would just keep it as we're not dogmatic, we're clear-eyed about this market, we see what you see, and we're focused on finding the right way to create value for shareholders.
Okay. Well, let's move on to Canada then. Your peers today have had some fairly consistent and constructive comments on the pricing environment. Obviously, a lot of that relates to wireless. But they've had similar comments on the wireline side. What are you seeing in the Canadian marketplace with respect to your systems and franchises?
We feel quite good and upbeat about our Canadian business, more so than I've felt in a while. That relates to the market environment, which, as you say, has stabilized. But it also relates to our own prospects. We're just brand new to wireless. This is pure upside for us, and that's going well. We got our oxio digital brand, which, by the way, is the most loved telecom brand in Canada. We've been upgrading our network in Canada, so in most of Canada, we offer one gig speeds, which is more than what customers need. And in about half, we even offer two gig speeds. We're ahead of the curve on AI, so there are a lot of reasons to feel pretty upbeat about our Canadian business.
What do you mean by you're ahead of the curve on AI? Because that was one of the initiatives that you undertook shortly after you became CEO. Can you provide more details on tangibly what that's doing for your operating results?
Yeah. I'll give you precise examples so that we don't fall into just the blah-blah of AI.
Yeah.
If you have internet problems at your house, you go on our website. Now I will talk about the U.S., but this is coming to Canada as well. You go on the chat. There is a bot chatting with you. The bot can authenticate you. The bot will understand natural language. If you say, "My white gizmo on the wall is blinking," it will be able to translate to, "This is an intermittent issue with the Wi-Fi extender." The bot will talk to another bot, which runs a complete network diagnostic of, is it a problem in Tim's house with his modem or in one of the rooms? Or is it in the wire that connects to the pole in the back? Or is it in the whole neighborhood? Therefore, do I dispatch a pole type of technician, or do I dispatch an in-home type of technician?
I make sure they have the right tool before they come because there is already a description of the problem. If you get transferred to a human on the phone, the human on the phone already has an AI summary of the discussions you have had with us, so you do not have to repeat, and the call is shorter. At the end of the call, our colleagues used to take two or five minutes taking notes at the end of the call. That is all done by AI right now. That is just in service operations. Then in marketing, we use AI to predict churn, understand churn, refine offers at a customer level, do campaign briefs, marketing campaign briefs, do marketing campaign targeting, and evaluate marketing campaign results. That is where we are at on AI so far. Much more coming.
When I say ahead of the curve, what I say is we go to conferences even in Europe where we meet with much larger peers, and they tell us that we are ahead of the curve on that.
Okay. I think you implied that is in the U.S. right now and coming to Canada? So that is-
The service operations side that I talked about was a U.S. example. That is coming to Canada over the coming months. The marketing example was also in Canada.
Okay. Got it. How about oxio? You hinted it is very well-liked. How big is that subscriber base? I know you are not disclosing it, but notionally, can you talk about that and obviously about the economics of the brand?
Yeah. I have worked in telecoms in five countries, and I never thought I would be using the word beloved for a brand in telecom. But oxio is the most beloved brand in telecom in Canada, as per Planhub, as per Protégez-Vous in Quebec. So it is very well-liked by customers with a very positive NPS. The brand, as you say, we do not disclose the customer base, but I would say it is an important driver to our subscriber growth in Canada. Every quarter, the sales keep increasing. More than half the sales are on our own network with margins comparable to our main brand. Less than half are, for example, in western Canada, with much thinner margins, but we are not investing in that. That is just happening organically as customers refer us to other customers.
Overall, very pleased with oxio, and I think we are just starting to scratch the surface on what it can do.
Right.
Sorry to interrupt, Tim. Are the margin dollars on oxio on net similar to the Cogeco Connexion dollars on net? In other words, if someone moves from one to the other or vice versa, does it really matter financially?
Yes, they are similar. What you see, hopefully people can hear me well, by the way, in the back. Yeah, okay. What you see is the prices per speed are not that different between the two brands. You get a slightly lower speed mix with oxio just because that's what customers choose. So the ARPU is a bit lower, but the cost to serve is also lower. So you get to a place that's pretty similar.
How about on the wireless side? You're in market now. You've outlined your partners there. It's early days, but what are you seeing in terms of contributions from wireless?
Yep. We had a bit of a drag this year on wireless fixed costs because some elements were brought from under EBITDA to above EBITDA, but that will get neutralized over time. I would say now for every new customer, so fixed costs are the fixed costs moving forward. Now with every new customer that we load, every new customer on wireless standalone is neutral to slightly positive margins. Then you get the benefit on the wireline business where you see lower churn and therefore better subscriber growth over time. In terms of sheer volumes and scale, when you look at the cable operators in the U.S., they reached about 20% penetration or bundling of their wireline base with wireless over a few years. That's roughly what we're benchmarking ourselves against, and that's going quite well.
I would say we are quite pleased with our progress on wireless, and the best is yet to come on that.
Okay. Is it worth calling out any differences between the Ontario and Quebec footprints with respect to both the wireless and wireline offerings, or are those two markets performing more or less in line?
It is interesting. I got this question this morning in the one-on-ones. Maybe for some of our peers, they may tell you that the Quebec market is more intense, more competitive. For us, Quebec was always cheaper, but I would say they are pretty similar, the two, maybe because we have the same main competitor. I am not going to name them, but the main incumbent that we compete with in both provinces. As I said, the market has been stable for us of late. That was wireline. On wireless, we operate in a different segment of the market from the incumbents. The incumbents' prices start at CAD 40, CAD 50.
They will give 50 or 100 gig. We target the lower gig user at a cheaper price that we cross-sell to our existing base. So we are less concerned about what is happening with the incumbents in the wireless space.
We are kind of doing our own thing.
Right. How about on the spectrum side? As you know, topical for investors that you might have monetization opportunities there. How are you thinking about your spectrum holdings in Canada and sort of potential monetization in time?
We do see spectrum monetization as an opportunity over time. We invested CAD 588 million in spectrum a few years ago. That is because we were not quite sure how we would enter wireless at the time. We got a discounted price as a new entrant. If you look at different markers, the value of that spectrum for an incumbent would be worth anywhere between CAD 1 billion and CAD 2 billion. Half of what we have is in markets where we do not actually operate, so that would be easier to monetize. The more our business grows with commercial deals with partners, we have a deal with TELUS right now, who is our network for wireless. We have the option of adding a second one over time.
The more we get commercial deals, the more we have flexibility on what we do with parts of our spectrum. So there is a clear monetization opportunity there.
There are restrictions in place. There is a 10% cap and there is a mid-band cap and all that. What I would say to summarize is selling a small tranche in the short to mid-term is a possibility. Then over time, over the next three to five years as the business unfolds and as restrictions get lifted, we could do more over time.
That is not going to impact your wireless strategy in Canada to monetize the spectrum?
We think we have a fair amount of flexibility because more and more we're going to be relying on commercial deals with partners.
Okay.
It reduces our obligation to spend a lot of CapEx to build things. Our strategy has always been capital light for our wireless business, and that very much remains the case.
Okay. Just stepping back to the company as a whole from a consolidated basis. You're in your third year as CEO. You introduced a number of measures when you came in, the development of analytics and AI being one of them. But the other thing you did is you collapsed the organizational structure effectively from three org charts to one at the company. Maybe give us an update there. Are you pleased with how that has played out? Do you think you're able to operate the company more efficiently or what's the update on that initiative?
I'm very pleased with how that has worked out. We now have a company, compared to two and half years ago, we now have a company that's much leaner, much faster, and much hungrier. That results in speed, it results in innovation, especially around AI. But financially, you've seen our OpEx come down quite substantially over the past couple of years. We're not done with that. But you've also seen our CapEx come down because as we merged Canada and the U.S., we started using the same vendors, the same platforms, and there are real scale benefits there. So you've seen our CapEx come down. We expect it to continue to come down. So all in all, both financially, as well as organizationally and culturally, I'm very pleased with the progress we've made.
Okay. The CapEx topic is obviously very interesting to investors because the message from the street or from the operators has been, "We get it," and everyone's grinding down their capital intensity." On the third quarter call, you said that you're going to have an optimization of capital investments in 2027. We're going to hear details about that when you report Q4, but maybe set the table and offer some context to people on what you meant by that comment.
There are three levers to keep lowering our CapEx over the next year or so. The first one is we were expanding our network to new areas, to new doors. That's pretty much done in the U.S., and we'll finish in Canada over the coming year or so, just as we reach the natural conclusion of every rural home has been connected. So that's number one. Number two, as I alluded to earlier, we've been quietly upgrading our network and our network speeds. But now that we have 1 gig speeds, for example, in Canada, pretty much everywhere, and 2 gig speeds in half of the footprint, which is more than anybody can use, these investments will taper off. We've already done enough.
Thirdly, as I said before, as we merge Canada and the U.S., started using the same vendors and the same platforms, we did see quite some material synergies there. That's not done. That will continue to improve over the coming year. We do see a material step down in CapEx. Of course, some of that is offset by top-line pressures in the U.S., but more to come when we give guidance on that.
Yeah. Okay. The follow on from that is obviously balance sheet management, and you made a comment on the Q3 call that you would reconsider your traditional leverage target of around three times. How are you thinking about the balance sheet? Obviously, the way you've managed so far has been a fairly balanced approach between leverage, buybacks, and dividend increases. I'm assuming that's going to continue going forward, but talk about how you're thinking about the balance sheet in light of those comments.
Sure. We produce a fair amount of cash. I think our cash flow yield is around 20%-22% or so. So it gives us flexibility in terms of how we use that cash. Only about 30% of that cash is used for the dividend. The dividend has been pretty predictable over the past few years. We've been increasing it a little bit every year, but the yield already being at 6%-7% on the dividend, we don't need to increase it that much over time. Therefore, paying down the debt is the top priority, and that's what we're focused on doing. As you said, our target leverage has been around 3x. There may be room to lower that over time. We'll see.
As we continue to bring down the debt, buyback may become an option in the future, but we would have to see the debt fall materially below 3x before we move ahead with that.
Okay. Look, we're coming up against it on time. Maybe I'll just leave it to turn it back to you, Frédéric. What are the messages you want to leave with the investment community as you go into Q4 reporting in the not-too-distant future?
We're brand new to wireless. That's only upside for us. We got two of the most beloved brands in the industry in oxio and welo. We're ahead of the curve on AI, and that's not just blah. We've given some examples of how we do that. I think we've proven that we're disciplined capital allocators, including the 20%-22% cash flow yield that we're producing. Last but not least, we see what you see about the U.S. We're clear-eyed about that market. We're not dogmatic about what to do strategically, but we're also putting some operational improvements in place to stabilize our performance in the U.S. over time.
Any last ones from the floor? Okay, we'll leave it there.
Thank you.
Frédéric, thanks for coming.
Thanks.
That was great. Thank you very much. Cheers.
Yeah.