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Cogeco's decision to drop IPTV project cuts profit

Fri, 07/11/2014 - 1:30pm
The Canadian Press

Cogeco Cable has abandoned an IPTV project for its Canadian operations after failing to meet performance expectations, resulting in a $32.2 million writedown in its third quarter and a decision to expand its partnership with TiVo by bringing that service to subscribers in Quebec and Ontario within the next year.

The Montreal-based company, which said its U.S. subsidiary Atlantic Broadband has had good experience with TiVo, made a profit of $35.5 million, or 73 cents per share, including the impairment charge related to its Internet protocol TV project. The project had been one of Cogeco's responses to increased competition from other TV services providers offering Internet-protocol television.

"We continue to be pleased with our solid quarterly results," Cogeco president and CO Louis Audet said in a statement.

"Moreover, I am delighted that we were able to build on the success achieved by the TiVo video platform at our Atlantic Broadband subsidiary by extending our partnership to bring this world leading platform to our Canadian customers at our Cogeco Cable Canada subsidiary."

Profit for Cogeco Cable was down from $48.1 million, or 98 cents per share, in fiscal 2013. The general estimate, which typically excludes items such as the IPTV impairment charge, had been for about $1.23 per share of earnings after adjustments.

Cogeco Cable's revenue was $496.4 million, up from $464.4 million and ahead of the general estimate of $488.7 million, according to data compiled by Thomson Reuters. Cogeco said that its Atlantic Broadband subsidiary in the United States and its business-oriented enterprise division, including Peer 1, had double-digit increases from a year ago.

Excluding the unusual items, such as the IPTV writedown, Cogeco Cable's adjusted earnings would have been closer to $232 million.

RBC Capital Markets analyst Drew McReynolds described the third quarter results as "solid" and said profit margins from Canadian cable services were better than expected and that Cogeco's outlook for the 2015 financial year starting Sept. 1 was ahead of RBC's estimates.

Dejardins analyst Maher Yaghi's analysis was more cautious.

"While FY15 guidance is in line with consensus, we believe CCA will witness the biggest year-over-year increase in IPTV competition over the next two years in its Canadian cable operation versus other public cable providers in Canada; hence, we prefer to remain neutral on the stock until the company can demonstrate an effective strategy to face this threat," Yaghi wrote.

Telecom companies such as Bell, Bell Aliant (TSX:BA), Telus (TSX:T) and Manitoba Telecom (TSX:MBT), have been winning over thousands of cable subscribers for the past several years by offering fibre-optic television service in addition to conventional phone, mobile phone and Internet.

Over the past few months, Cogeco Cable has been rolling out enhanced high-speed Internet service in some of the communities it serves in Ontario and Quebec. The enhancements included faster versions of existing packages and the launch of a new, even faster service that claims download speeds of up to 120 million bits per second.

In Magog, Que., about 130 kilometres east of Montreal, Cogeco Cable launched a free public WiFi service along two streets in the downtown area. It was described as a pilot project for the community of about 26,500 residents, which has a vision of becoming one of the province's first "smart" cities.

A similar strategy has been undertaken in Calgary with Shaw Cable (TSX:SJR.B), which has decided against investing in a conventional wireless service — which would require federal licences — in favour of free WiFi in public places for its customers in several communities throughout Alberta.

In April, when Cogeco Cable and its parent issued their results for the second quarter ended Feb. 28, president and CEO Louis Audet said the Montreal-based companies would attempt to avoid discounts to keep television customers from switching to a rival service offered by BCE Inc.'s Bell.

For the parent company Cogeco Inc. (TSX:CGO), third-quarter profit amounted to $35.6 million, or 69 cents per share, compared to profit of $50.0 million, or $1.03 per share, in the year-ago quarter. Revenue, primarily from the cable division, was $536 million, up from $504.4 million.

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