Cogeco Inc. SV ((TSE:CGO)) has held its Q2 earnings call. Read on for the main highlights of the call.
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Cogeco Inc.’s latest earnings call struck a cautiously balanced tone as strong Canadian execution and rising free cash flow met stubborn headwinds south of the border. Management pointed to clear progress on transformation and AI initiatives and a helpful tax benefit, yet U.S. competitive pressure and a trimmed outlook reminded investors that the turnaround there will take time.
Canadian business leads with resilient growth
Canada again provided the bright spot, delivering year‑on‑year adjusted EBITDA growth in Q2 alongside ongoing customer gains. Executives highlighted that in three of the past four quarters Cogeco posted the best Internet customer base percentage growth among Canadian telecom peers and they expect Canadian revenue and EBITDA to keep growing through the rest of the year.
Free cash flow expansion underpins deleveraging
Free cash flow continues to climb, allowing the company to steadily reduce leverage and reinforce its balance sheet. Net leverage stood at 3.2x at Q2 and Cogeco is targeting roughly 3.0x by fiscal year‑end, while reiterating full‑year free cash flow guidance at about $530–$540 million and signaling an aspirational path toward about $600 million by fiscal 2027.
Tax benefit provides earnings tailwind
The quarter benefited from a $14.8 million retroactive tax gain tied to accelerated depreciation in Canada, which lowered the current year income tax rate. Management now expects a roughly 8.5% tax rate for the year compared with the prior 11.5% assumption, improving cash generation and reported net income without changing the underlying operating story.
New U.S. digital brand ‘welo’ targets growth
Cogeco launched its new digital challenger brand ‘welo’ in Ohio at the very end of February, positioning it as the U.S. counterpart to Canada’s oxio. Volumes were negligible in Q2 given only two days in market, but management expects an S‑curve ramp over coming quarters, especially in territories where Breezeline’s market share hovers near 20% and there is room to take share.
Transformation and AI initiatives gaining traction
The company’s three‑year transformation plan remains on schedule, driving both operating and capital expenditure synergies while broadening revenue streams through oxio, welo and wireless offerings. Cogeco is also pushing harder into AI, using tools such as customer service chatbots, automated troubleshooting and data‑driven ARPU and retention management, with early gains emerging and larger benefits expected over time.
Digital advertising offsets media softness
Within Cogeco Media, growth in digital advertising solutions continued to help soften the blow from a weaker traditional radio ad market. This shift underscores the broader industry trend toward digital formats and suggests the media segment is steadily repositioning itself around higher‑growth, more data‑driven offerings.
Selective U.S. markets show operational progress
Despite a difficult U.S. backdrop, Cogeco pointed to operational wins in Ohio, where residential broadband results improved for the third consecutive quarter. Overall U.S. Internet subscribers were roughly flat year over year, with Ohio adding about 3,000 customers while other regions collectively lost a similar number, partly due to prior bulk connections in Florida rolling off.
Guidance cut reflects U.S. competitive pressure
Management lowered full‑year consolidated guidance to reflect intensifying U.S. competition that is weighing on both subscribers and revenue per user. Revenue is now projected to decline 2% to 4% and adjusted EBITDA 1.5% to 3.5% in constant currency, marking a step down from prior expectations but still implying some margin resilience through cost action.
U.S. performance remains under pressure
The U.S. segment delivered another tough quarter, with revenue and adjusted EBITDA declines coming in slightly worse than management had anticipated. Cogeco still expects negative year‑over‑year trends in the U.S. for the full year in constant currency, though it anticipates smaller percentage declines in the second half and a narrowing gap between revenue and EBITDA erosion as efficiencies kick in.
Aggressive rival promotions challenge subscriber growth
Executives cited a barrage of aggressive promotional offers from competitors, including long free‑service periods, gift cards and multiyear price locks, alongside fresh fiber builds and upgrades in certain markets. These tactics have suppressed acquisition ARPU and made it harder for Cogeco to grow net subscribers in some U.S. regions, particularly outside its stronger Ohio footprint.
Muted U.S. subscriber trends outside Ohio
Overall primary service unit growth was described as more subdued than the company had hoped, with localized softness in specific U.S. territories. Outside Ohio, subscriber counts were roughly 3,000 lower year over year in Q2, about half of which reflected the unwinding of prior bulk connections in Florida, pointing to pockets of underlying demand pressure.
CapEx delays add timing uncertainty
Year‑to‑date capital spending is running about 10% below last year as some rural and network expansion projects, including subsidized builds in Ontario, face permitting and access hurdles. While Cogeco kept full‑year CapEx guidance intact, management flagged that certain investments may shift into fiscal 2027, pushing out the timetable for associated growth benefits.
Transformation revenue levers will take longer
While cost savings from the transformation plan are increasingly visible, management cautioned that revenue‑driven initiatives will take longer to meaningfully counter U.S. revenue declines. AI‑based ARPU and retention tools and the welo rollout are starting to contribute, but their impact is currently modest and is expected to build gradually rather than provide an immediate fix.
Monitoring emerging competitive technologies
Cogeco is also keeping a close eye on potential new threats such as satellite broadband platforms and converged offers from major telcos. At this stage these alternatives are not materially affecting results, but the company highlighted evolving risks around capacity, pricing and service stability that could become more relevant over time.
Guidance and outlook shaped by regional divergence
Looking ahead, management’s guidance assumes continued strength in Canada with year‑over‑year revenue and adjusted EBITDA growth through the balance of the year, offset by ongoing but moderating declines in the U.S. segment. With leverage targeted around 3.0x, unchanged CapEx and free cash flow guidance and a lower tax rate, Cogeco is betting that transformation savings, AI benefits and new brands will gradually improve profitability even as U.S. revenue remains under strain.
Cogeco’s earnings call painted the picture of a company leaning on its Canadian strength and rising free cash flow to navigate a more hostile U.S. landscape. For investors, the key takeaway is a story of disciplined execution and balance sheet prudence against heightened competitive risk, with the pace of U.S. stabilization and the scaling of new digital and AI initiatives emerging as the main swing factors for the stock.