Cogeco's bet on cloud services in peril as profits continue to slide

MONTREAL — Cogeco Inc.'s new CEO is leaving the door open to a slim-down or selloff of its cloud services provider down the line, though he stressed continued commitment in the near term.

"We remain open to all options," said Philippe Jette twice on a conference call with investors Friday.

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Cogeco Peer 1, which Jette headed before taking over the top spot from longtime CEO Louis Audet in September, saw revenue dip 3.2 per cent year over year to $67.7 million in the quarter ended Nov. 30. That was after revenue fell 4.5 per cent between the first quarters of 2016 and 2017.

The subsidiary of Cogeco Communications Inc. brings in only 11 per cent of the company's revenues, which derive from business-to-business products and information technology services. But analysts have long fretted about the performance of Peer 1, with the latest results falling below analysts' expectations and prompting one RBC Dominion Securities executive to cite "another step back" for the Montreal-based parent.

Jette stressed various attempts at renewal for Peer 1, whose predecessor Cogeco acquired in 2012.

"We have invested a lot of effort to turn it around. Competition is very intense," Jette told reporters Friday.

"Sometimes you make good plans and good guesses, but it's a question of timing. Things have not worked in our favour in the first quarter of this year. We are going to roll up our sleeves and see, can we do better for the next quarter?"

Cogeco Inc. brings in the vast majority of its revenues through retail customer cable operations. Its smaller U.S. division has been gaining subscribers over the past few years, but its Canadian business has struggled with falling customer numbers as Cogeco strives for growth in IT services.

Peer 1 faces some stiff competition. In 2016, rival BCE Inc. bought out the remaining 65 per cent of data centre operator Q9 Networks Inc. for $675 million. The year before, U.S.-based Zayo Group Holdings Inc. bought Manitoba Telecom Services' Allstream unit, which provided cloud computing to business clients.

After staking some of its hopes on Peer 1 — which now has 16 data centres in Canada, the U.S. and the United Kingdom and customers in more than 50 countries, mainly in North America and Western Europe — the Cogeco subsidiary's revenues fell eight per cent between 2014 and 2018 to $279.7 million.

In the latest quarter, Peer 1 earnings before interest, tax, depreciation and amortization fell 10 per cent year over year to about $17.8 million.

"The segment was affected by continued competitive pressure in hosting and connectivity services, leading to higher churn," said Desjardins analyst Maher Yaghi in a note to investors.

Things weren't all bad for investors at Cogeco's annual general meeting Friday. A recent acquisition by the company's cable and internet segment pushed up first-quarter revenue, though profit was down due to higher costs associated with integrating and restructuring the business.

Cogeco Inc.'s revenue bump to $674 million from $585.7 million last year was largely attributable to last year's acquisition of the MetroCast cable systems by Cogeco Communications Inc., according to the telecom.

Cogeco Inc.'s net income attributable to shareholders for the quarter fell to $26.2 million or $1.60 per diluted share. That compared with $29.5 million or $1.78 per diluted share a year ago.

"Cogeco Connexion's results were weaker relative to last year, unfortunately,” Jette told investors.

Cogeco Communications eliminated 125 positions last quarter — about five per cent of its workforce — after implementing a new customer service platform, a process that cost at least $11 million due to recent pitfalls.

Key to the company's turnaround, the new platform integrated 22 client management systems, allowing Cogeco to operate with fewer support staff, Jette said.

Cogeco Communications has also been mulling a push into the wireless business within its cable and internet territory recently. The company acquired licences for spectrum — the radio frequencies required for wireless communication — last year, but opted not to participate in the auction process for more licences in 2019.

"The structure of the auction based on large geographic areas makes the acquisition of such spectrum uneconomical," Jette said, stressing a "disciplined and thoughtful" market entrance.

Companies in this story: (TSX:CGO, TSX:CCA, TSX:BCE)

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