Cogeco Inc. Earnings Call: Turnaround Hopes vs. Headwinds

Cogeco Inc. SV ((TSE:CGO)) has held its Q1 earnings call. Read on for the main highlights of the call.

Cogeco Inc. Earnings Call Balances Turnaround Hopes With Near-Term Financial Strain

Management painted a cautiously optimistic picture on the latest earnings call, pairing clear operational progress with some stark near-term financial pressure. Executives highlighted improving U.S. subscriber trends, robust Canadian internet growth, strong media and digital advertising performance, and better customer service metrics, alongside outlook upgrades from rating agencies and a higher dividend. At the same time, they acknowledged that U.S. revenue and EBITDA are still falling nearly 10%, consolidated revenue and profit are down, free cash flow has declined, and capital intensity has risen, meaning the next few quarters will remain challenging even as the company reiterates its full‑year guidance.

U.S. Subscriber Turnaround Underway

The key bright spot in the quarter came from the U.S. cable operation, Breezeline, where subscriber trends continued to improve for a second straight quarter. Management said the company delivered its best U.S. customer metrics in 15 quarters, with Ohio posting its strongest performance since being acquired, adding 2,600 net Internet subscribers. Across the U.S. footprint, quarterly Internet losses narrowed to just 1,100 subscribers, a marked improvement from previous periods. While this progress has not yet translated into revenue growth, it supports management’s narrative that operational fixes are starting to gain traction and should feed into better financials in the second half of the year.

Canadian Internet Growth and Margin Expansion

In Canada, Cogeco Connexion continued to show resilience, combining subscriber growth with improving profitability. The business added 8,900 Internet subscribers in the quarter and expanded adjusted EBITDA by 2% in constant currency, even with largely flat revenue. Cost‑reduction measures and efficiency efforts were the main drivers of this margin improvement. The company also modestly expanded its network, adding 1,100 homes passed, largely via fiber‑to‑the‑home, underscoring a measured approach to growth capex while still investing in higher‑quality infrastructure.

Media and Digital Advertising Deliver Growth

Cogeco’s media segment stood out as a growth engine, with revenue rising 8.1% year over year. The increase was driven by expanding digital advertising solutions and solid listener engagement across its platforms. This performance provides some diversification away from more pressured wireline segments and reinforces the strategic value of media and digital assets in the portfolio, particularly as advertisers continue shifting spend toward digital formats.

Customer Service Metrics Outperform the Industry

Customer experience was another area of outperformance. While industry complaints rose 17%, Cogeco reduced total complaints by 15% and cut billing-related issues by 25% compared with last year. The company also reported no breaches of the Internet code, and regulators ranked Cogeco as the top Canadian telecom for complaint reduction. This gap versus peers not only supports brand perception but can help lower churn and acquisition costs over time, potentially reinforcing the subscriber gains seen in Canada and the early improvements in the U.S.

Improving Credit Outlooks Support Balance Sheet Story

Credit markets are taking note of Cogeco’s execution. Both Moody’s and S&P recently improved their outlooks on the company’s debt, while DBRS reaffirmed a stable outlook. These moves reflect better visibility on the company’s financial trajectory and confidence in its ability to manage leverage, even as near‑term results are pressured. With net debt‑to‑EBITDA at 3.2x versus a low‑3x target, management is emphasizing continued deleveraging, aiming to strengthen its financial flexibility and preserve access to attractive funding over time.

Dividend Increase and Disciplined Capital Allocation

Despite softer earnings, Cogeco increased its quarterly dividend by 7% to $0.987 per share, signaling confidence in its cash‑generation capacity and long‑term outlook. Management reiterated that reducing leverage toward a low‑3x net debt‑to‑EBITDA level remains the priority, and any substantial escalation in share buybacks is likely only after fiscal 2026, once the balance sheet is closer to target and free cash flow visibility improves. The approach underscores a balancing act: rewarding shareholders today through a higher dividend while reserving future optionality for opportunistic repurchases.

Transformation and Product Initiatives Gain Momentum

The call also spotlighted the company’s ongoing three‑year transformation program, now in its second year. While year one focused heavily on cost take‑outs, management stressed that year two is shifting more toward revenue generation. Cogeco is rolling out further automation and AI‑driven efficiencies to streamline operations and lower costs. Importantly for growth, the company plans to launch a fully digital, oxio‑style second brand in the U.S. within its existing territories, aimed at capturing incremental, price‑sensitive customers online. These initiatives are designed both to underpin margins and to reignite top‑line momentum in highly competitive markets.

U.S. Revenue Decline Remains a Drag

Against the operational improvements, Breezeline’s financials remain under pressure. U.S. revenue fell 9.9% year over year in constant currency, reflecting the cumulative impact of past subscriber losses, smaller price increases versus the prior year, and a tough pricing environment. These forces are currently outweighing the nascent subscriber turnaround. The segment’s performance is the main headwind on the consolidated numbers and a central risk that investors will be watching as management promises a better second‑half trajectory.

U.S. EBITDA Weakness Offsets Canadian Strength

Breezeline’s adjusted EBITDA declined 9.1% in constant currency, driven primarily by the drop in revenue. This erosion more than offset the EBITDA gains generated in Canada, contributing directly to the consolidated EBITDA decline. The situation highlights the importance of stabilizing and then growing the U.S. business: even with disciplined costs and decent performance in Canada and media, the U.S. EBITDA shortfall is currently diluting overall profitability and returns.

Consolidated Revenue, Earnings and EPS Under Pressure

At the group level, the quarter showed clear top‑ and bottom‑line pressure. Consolidated revenue fell 4.9% and adjusted EBITDA declined 3.7% in constant currency, mirroring the U.S. drag. Diluted EPS dropped 12.2%, partly because last year’s quarter included a one‑time gain. Still, the underlying earnings softness aligns with the revenue and EBITDA trends, reinforcing the message that while the turnaround is underway, it has yet to fully show up in the consolidated P&L.

Free Cash Flow Squeezed and Capital Intensity Higher

Free cash flow in constant currency declined 15.9% in the quarter, largely due to the absence of last year’s non‑recurring sale‑and‑leaseback proceeds. At the same time, capital intensity rose to 22.2% from 20.4% a year ago, reflecting the timing and mix of investments. Management maintained that they are still on track to meet full‑year capex guidance, suggesting the elevated capital intensity is partly a timing issue. Even so, the combination of lower EBITDA and higher near‑term capex is tightening free cash flow in the short run, a key factor in the company’s measured stance on incremental shareholder returns.

Near-Term Guidance Signals More Weak Quarters

Looking ahead to the next quarter, management expects consolidated revenue and adjusted EBITDA to decline again in the low‑ to mid‑single digits, in constant currency, with the U.S. remaining the primary source of weakness. Competitive pressure is also expected to weigh on Canadian broadband net additions in Q2, particularly after intense Black Friday and holiday promotions. Though some of the promotional strategy includes resale that shows up as wholesale revenue, it still dampens retail net‑add optics. With net debt‑to‑EBITDA ticking up to 3.2x, the company continues to prioritize deleveraging ahead of any acceleration in buybacks.

Forward-Looking Guidance and H2 Turnaround Hopes

Management reiterated fiscal 2026 guidance for both Cogeco Communications and Cogeco Inc., despite the soft start to the year. They projected that Q2 will still show low‑ to mid‑single‑digit declines in consolidated revenue and adjusted EBITDA, but emphasized expectations for a materially better second half, especially in the U.S. As subscriber trends stabilize and specific cost and revenue initiatives take effect, the company is aiming to exit the year with U.S. EBITDA roughly flat year over year. Capex intensity is expected to remain in line with full‑year guidance, while financial expenses and restructuring-related costs should roughly match Q1 levels and depreciation should be slightly lower. Combined with a leverage ratio at 3.2x and a higher dividend, the guidance signals a belief that current headwinds are cyclical and manageable rather than structural.

In summary, Cogeco’s earnings call framed a company in transition: operational metrics, particularly in U.S. subscribers, Canadian internet, media, and customer service, are moving in the right direction, and rating agencies are signaling greater confidence. Yet the financial statements still reflect a challenging environment, especially in the U.S., with declining revenue, EBITDA, free cash flow, and earnings. For investors, the story hinges on management’s ability to convert the early operational gains and transformation initiatives into sustained financial improvement in the second half and beyond, while maintaining balance sheet discipline and a steadily rising dividend.