The past few years the telecom sector has gotten more competitive: Cogeco CEO

Key Concepts

• Kosiko Communications: A telecommunications company operating in Canada and the US.
• Revenue Lag: Fourth-quarter revenue fell short of estimates.
• Core Businesses: High-speed home internet, home phone, home TV, and wireless services.
• Geographic Split: Approximately 50% revenue from Canada and 50% from the US.
• Canadian Wireless Strategy: Currently requires customers to be existing or new landline customers to access wireless services.
• Wholesale Markets (Canada): The CRTC (Canadian Radio-television and Telecommunications Commission) mandates landline players to resell their networks at set rates, but this is not reciprocated for wireless players.
• US Competition: Facing tough competition in the US market, which is industry-wide.
• Stock Performance: Best performing Canadian telecom stock in 2024, but recent performance is in line with peers. Outperforming US peers.
• Investor Concerns: Increased competition in the telecom sector over recent years.
• Growth Avenues (Canada):
  • WLine (Landline Services): Best customer growth in 13 years, driven by multiple factors.
  • Oxio: A fully digital second brand targeting younger customers.
  • Rural Network Expansion: Extending network reach.
  • Wireless Launch: A new growth vector.
• WLine Definition: Home internet delivered via wire, often bundled with TV and phone.
• Network Technology: A mix of fiber (for new builds) and cable technology (for legacy networks), with fiber being the primary technology for the last mile to the customer.
• Internet Traffic Trends:
  • AI Impact: Suspected to have a greater effect on wireless, but too early to assess for Kosiko.
  • Home Internet Growth: Progressive and consistent, not a massive spike.
  • Historical Driver: IP video (customers watching TV via internet channels).
  • Current Main Driver: Over-The-Top (OTT) platforms (e.g., Netflix) and general streaming (e.g., YouTube).
• Network Resilience: Demonstrated strength during the COVID-19 pandemic when increased demand from work-from-home and video conferencing did not cause significant network issues.

Kosiko Communications Q4 Performance and Business Overview

Kosiko Communications reported fourth-quarter revenue that lagged estimates. The company's CEO, Frederick Peron, discussed the company's business operations, which generate approximately $3 billion in revenue, split roughly half and half between Canada and the United States. Their core offerings include high-speed home internet, home phone, and home TV. Notably, Kosiko has expanded to offer wireless services in both Canada and the United States.

Canadian Wireless Strategy and Regulatory Landscape

In Canada, Kosiko's wireless service is currently restricted to existing landline customers or new customers purchasing both landline and wireless services. This strategy positions Kosiko as indirectly competing with major Canadian telecom players, including BCE. Peron expressed that Kosiko sees opportunities in the wholesale markets in Canada, which have been opening up for some time, particularly for landline services where different providers resell each other's networks. Kosiko also operates on a resell basis for wireless.

However, Peron highlighted an "unfairness in the regulatory regime" by the CRTC. He explained that while the CRTC mandates landline players to resell their networks at a mandated rate, it does not compel wireless players to do the same. Peron believes that addressing these regulatory issues could enable Kosiko to become a "broader competitive force in this country."

Stock Performance and Investor Concerns

Despite recent stock declines, Peron put the performance into perspective, stating that in 2024, Kosiko was the best-performing stock in Canadian telecoms. He noted that over the past month or three months, their performance is "in the same ballpark as the other Canadian players" and that they are "performing better than our American peers." He indicated that the company does not "react too much to daily fluctuations."

Regarding investor concerns, Peron acknowledged facing "tough competition in the United States," which he described as an industry-wide challenge. However, he stated that Kosiko is "starting to turn things around," reporting "better customer trends this quarter than last quarter" and expecting further improvement in the next quarter.

Looking at a five-year chart, the stock is down approximately 33% excluding dividends. Peron attributed this trend to the increasing competitiveness of the telecom sector in both Canada and the US over the past few years. He mentioned that since stepping in as CEO 18 months ago, they have been "really increasing our competitiveness in both Canada and the US."

Growth Avenues and Network Technology

In Canada, Kosiko reported its "best customer growth in the past 13 years" for its WLine services in the most recent quarter. This growth is attributed to several factors:

• Oxio: A fully digital second brand targeting younger customers, which has been highly successful.
• Rural Network Expansion: Extending their network into rural areas.
• Wireless Launch: Providing an additional growth vector.

Peron clarified that WLine refers to home internet delivered via a wire, typically bundled with TV and home phone services. He explained that Kosiko utilizes a mix of technologies, with most of their network being fiber. For the "last mile" to the customer's house, all new network builds are fiber, while some legacy networks use cable technology.

Internet Traffic Trends and Network Resilience

Regarding internet traffic trends, Peron suspects that AI is having a greater effect on wireless, though it's too early for Kosiko to assess these trends due to their recent wireless launch. They are observing progressive growth in home internet traffic, without a massive spike, but a consistent increase over time.

Historically, the biggest driver of traffic growth was IP video (customers watching television through internet channels). Currently, Over-The-Top (OTT) platforms like Netflix, along with general streaming services like YouTube, are identified as the "main driver of that growth."

Peron also highlighted the industry's success in maintaining network performance, even during the COVID-19 pandemic. He noted that when everyone started working from home and engaging in extensive video conferencing, "our networks are really strong," indicating that necessary network upgrades were made, and the infrastructure proved robust. He described this period as a "good test for us."

Conclusion

Kosiko Communications is navigating a competitive telecom landscape, with its Q4 revenue missing estimates. The company is strategically expanding its services, particularly in wireless, and is focused on increasing competitiveness in both Canada and the US. Growth is being driven by innovative strategies like the Oxio brand, rural expansion, and the recent wireless launch. Despite stock market fluctuations, Kosiko highlights its strong historical performance and ongoing efforts to adapt to evolving market dynamics and technological trends, such as the increasing importance of OTT platforms for network traffic. The company's network infrastructure has demonstrated significant resilience, as evidenced by its performance during the COVID-19 pandemic.