Cogeco Inc
TSX:CGO
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Cogeco Inc
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Good day, and welcome to Cogeco Inc. and Cogeco Communications Inc. Q4 2023 -- sorry, 2022 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Senior Vice President and Chief Financial Officer of Cogeco and Cogeco Communications Inc. Please go ahead, Mr. Ouimet.
Thank you. So good morning, everybody, and welcome to this quarterly conference call, which Philippe Jette and I will present as usual.
So before we begin this call, I'd like to remind listeners that the call is subject to forward-looking statements, which can be found in the press release issued yesterday.
So I'll turn the call over to Philippe.
And good morning. Welcome to this discussion of the fourth quarter results for Cogeco Communications and Cogeco Inc. We're glad you could join us as we present both our fourth quarter and 2022 fiscal year results. We're happy to report that we met the targets we set out in our financial guidelines for fiscal 2022. In the fourth quarter, Cogeco's overall performance was in line with our expectations. Performance in our U.S. operations was as expected, except for the PSUs, and we will talk more about this later.
In Canada, our broadband operations performed as expected, even as things got more challenging in our business environment and the economy in general. The radio market for [ once ] remains soft, but our stations continue to rank at the top of the ratings and 98.5 is again the most listened to station in Canada. All those results put us in a good position to start 2023, a year that promises more geopolitical and economic instability.
So what did we do in 2022? On organic growth, excluding the impact of acquisitions, we increased by 2% our internal service customers in both U.S. and Canada, which helped drive organic revenue growth. We pursued our broadband network expansion projects in both countries where we added in fiscal 2022 a total of about 70,000 homes passed. This represents an increase of 4% in the U.S. and 2% in Canada. These network expansions are anticipated to begin contributing to growth in our internal customer base in fiscal 2023 with benefits to EBITDA and free cash flow flowing through in fiscal 2024 and beyond. We also continued to make progress on our move into mobile markets in Canada.
The CRTC has finally released its terms and conditions for the MVNO regulatory framework, and we are glad that the CRTC has denied many unreasonable terms and conditions that would have otherwise rendered the MVNO regulatory regime totally ineffective. However, the CRTC has introduced a new eligibility requirement, which is to be already commercially offering a mobile service. And Cogeco has, over the past 2 years, started developing its mobile wireless network capabilities. However, this new requirement will need to be carefully factored into our planning.
We also have strengthened our Cogeco brands, with branding Atlantic Broadband as Breezeline in the U.S., reflects the fact that we're no longer on -- just on the Atlantic seaboard, the breadth of our product offering and our commitment to convenient customer service. In Canada, our branding effort positions us as a local brand champion, reflecting the proximity and trust with our customers. We also further enhanced our products for our customers. We increased internet feeds once more, invested in digital tools, enabling more personalized services and improved operational efficiencies. And we launched Breezeline Stream TV, a modern IPTV service.
In the U.S., we completed the acquisition of broadband assets in Cleveland and Columbus, and we are well advanced with the various integration steps there. The transition of the Ohio customer base onto Breezeline's customer management and billing platform was more challenging than expected, which unfortunately has led to higher customer disconnections than planned. For the transition, we had a higher-than-usual call volumes, which have been significantly reduced since then and short-term service-related issues are now restored.
All of these secured in a high inflation environment, which as some customers reviewing their discretionary spending and while telecommunication providers are becoming more competitive in general across the United States. We are now focusing our marketing efforts to enhance service and product offering in that market, which has a strong growth potential. During the fourth quarter of this year -- the first quarter of this year, we should still see some customer reductions in Ohio, which we expect to stabilize afterwards. You already know Cogeco to accept ESG also commitment seriously.
And during the year, we were gratified to our efforts recognized by leading voice in ESG practices and reporting. And more recently, Imagine Canada awarded Cogeco its Caring Company Certification for outstanding leadership and community investment and social responsibility in Canada again this year. Cogeco will remain committed to its environmental, social and governance agenda. As we work to keep growing our business in the years to come, it is also important to note that this year, we increased dividends and continued share buybacks.
Now let me share with you our priorities for fiscal 2023. As I said, Cogeco intends to stay focused on growing its business. At Breezeline, we will pursue our fiber-to-the-home edge-outs into areas where growth potential looks attractive. The plan is to increase homes passed by about 5% over the year. And we aim to achieve our targeted penetration rate of 36% over the next few years in our U.S. network expansions. We believe this will be an important growth driver for our business.
This expansion excludes potential further edge-outs of our network into future years under the broadband equity access and deployment program, BEAD, that will provide USD 43 billion in grants for high speed internet access. We also expect to complete the integration of the Ohio broadband assets by further interconnecting this network with the Breezeline network and launching our IPTV platform in that market by the end of this calendar year.
Turning to Canada. Cogeco Connexion will pursue market expansion opportunities through its FTTH program in underserved and unserved regions of Québec and Ontario. We expect that to increase homes passed by approximately 3% by fiscal year-end or 5%, including fiscal 2022. Within these areas, we are targeting a customer penetration rate of 50% over the next few years, and similar to the U.S., this will also be an important growth driver for our business. For mobile, we are determined to launch a service in Canada, if we can meet our financial return objectives.
At Cogeco Media, we continue to build on our strong network of radio stations and extend our multi-platform audio content options. We'll also stay focused on the execution of our ESG strategy, including some key initiatives, aimed at reducing our emissions, to achieve our goals, maintaining our push for workforce diversity and inclusion and pursuing our digital inclusion efforts.
Now Patrice will discuss our financial results.
Thank you, Philippe. During the fourth quarter, revenue at Cogeco Communications was up 12.7% and adjusted EBITDA up 17.7% in constant currency when compared to the same quarter last year, which reflects the impact of the Ohio broadband systems acquisition and organic growth. Capital intensity reached 30.8% compared to 27.7% last year due to increased activity related to network expansions in both countries. Excluding network expansion projects, capital intensity was 22.3% in the quarter. Free cash flow decreased by 49.2% to $36.3 million in constant currency due to higher capital expenditures related to the network expansion investments, higher interest costs, higher restructuring costs and current income taxes as well.
Excluding network expansions, free cash flow during the quarter would have been $96.1 million. In total, we have invested $156 million in network expansion in fiscal '22. In fiscal '23, we do expect to invest a further $180 million to $230 million in network expansion projects. We target unlevered returns in the mid-teens for such projects, and this can be an important contributor to our EBITDA in the medium term. We have -- we, therefore, have the financial flexibility to drive shareholder value and accommodation of ways, including growth in our operations and additional network expansion projects notably under government subsidized programs. We have accretive acquisitions and mobility services, as Philippe mentioned, in the capital-efficient manner and returning capital to shareholders.
On that topic, Cogeco Communications continued to be active in that share buyback program at a faster pace than the first 3 quarters of the year due to the low stock price value, with the repurchase of 391,000 shares in the quarter for $35 million. Under the current environment, we do expect to continue to actively buy back our stock in the coming quarters. We announced an increase of 10% in the quarterly dividend from $0.705 to $0.776 per share, in line with the rate of increases of the past years, and which reflects our confidence in the growth of free cash flow in future years.
On future network expansions, we don't have sufficient clarity right now in the U.S. on how the revenue subsidized broadband expansion projects will invest under the $43 billion BEAD program. It is still early to discuss this, and we will have to see how the program is extended, although we are very interested in participating.
Now let's look at the performance of the individual segments. In the United States, Breezeline revenue and EBITDA in constant currency increased by 27.6% and 30.7%, respectively, in the fourth quarter, mainly as a result of the Ohio broadband systems acquisition. On an organic basis, revenue in constant currency increased by 4.9%, mainly driven by a 2% increase in our Internet service customer base and a higher value product mix. EBITDA, excluding the Ohio acquisition and constant currency increased organically by 11.6% in the quarter. As for internet service customers and overall PSUs, we have an elevated number of disconnections, amounting to 14,200 internet customers during the transition of Ohio, and as Philippe mentioned earlier.
However, excluding the net loss in Ohio, we added 4,700 internet customers in the rest of the footprint in fourth quarter. This is due to our internet-first strategy and ongoing interest for wireline high-speed offerings, despite a generally slow environment. The product mix has also improved with a greater proportion of new connections taking faster-speed internets -- internet speed, sorry, resulting in a higher average revenue per unit. The larger loss in video and phone customers in the fourth quarter relative to last year and mainly due to losses in the Ohio system and our internet-led strategy.
Turning to our Canadian operations. Cogeco Connexion's revenue increased by 1.1% in constant currency relative to the same quarter last year, mainly due to a higher revenue per customer and growth in the commercial sector. EBITDA increased by 6.7% in constant currency, mainly from lower marketing expenses and some year-end investments. The internet customer statistics are now presented, excluding wholesale customers, in line with the presentation adopted by industry peers. Internet customer additions, which stood at approximately 3,200 additions in the fourth quarter, were lower compared to a very strong quarter last year in the context of the pandemic. However, similar to the U.S., the Canadian business is also improving its ARPU for the internet product by having an improved customer product mix. The video and phone customer losses reflect higher cord for some customers who are more impacted by the current high inflation environment.
Now let's discuss Cogeco Inc. In the fourth quarter, consolidated revenue increased by 12.1% and EBITDA increased by 16.9% in constant currency. Revenue related to the radio operations slightly decreased as the advertising market remains soft. As for shareholder distributions, Cogeco acquired during the fourth quarter, 32,000 shares for $2.2 million, and we announced an increase of 17% in the quarterly dividend from $0.625 per share to $0.731.
Moving on to the fiscal '23 financial guidelines. Both corporations have maintained their guidelines as issued in July. Although the general economic prospects for fiscal '23 have deteriorated since then, we have initiated measures to offset potential impacts on revenue and EBITDA. And as the year unfolds, we will continue to assess market conditions and the impact they have on operations. At Breezeline, we expect low single-digit revenue growth and low to mid-single-digit EBITDA growth, reflecting higher value product mix, growth in the commercial sector and to a lesser extent, new customers coming from the network expansions we have undertook. We expect quarterly results at Breezeline to improve sequentially during the year.
This is different from what happened in fiscal '22, when we have lower marketing costs and less staff in our Ohio assets last year as the assets were still operated under the previous owners brand for a portion of the year. For this reason, we expect the first quarter EBITDA results this year to be lower than last year, which is normal because last year was an exceptionally high EBITDA number. Excluding Ohio, internet net additions are expected to be soft in the first quarter and then grow stronger throughout the year from our traditional operations as well as from the network expansion projects. In Ohio, even though the customer and billing system transition is behind us, we still expect a certain number of disconnections in the first quarter, but not to the same extent as in the fourth quarter of fiscal '22.
As for Canadian operations, Cogeco Connexion still expects low single-digit growth in both revenue and EBITDA, reflecting stability in our traditional operations and growth in newly built expansions in Québec and Ontario. Cogeco Connexion EBITDA growth in the first half of the year should be higher than the second half, mostly driven by the rate increase implemented in September this year versus several increases on different services throughout the year last year.
So I'll turn the call over to Philippe for concluding remarks.
Thank you, Patrice. So all in all, as you heard, 2023 looks promising, even if the business climate will be challenging. In 2022, Cogeco celebrated the 65th Anniversary of its founding, and over the years, it's been an impressive growth story that we can be proud of. I would say that at 65 years young, Cogeco is still in the dynamic prime time of its life. And there is still more to come for our communities, our customers, our colleagues and our shareholders.
At this point, Patrice and I will be happy to answer your questions.
[Operator Instructions]
And your first question will be from Drew McReynolds at RBC.
A couple for me here. Just on the wireless side, thanks for the update and obviously, with the new eligibility requirement presumably requires you to launch before, I guess, benefiting or getting into the framework. So, Philippe, are you able just to give us a sense of what that looks like at the moment? And if you're still working through it, when do you think we'll get an update in terms of what that kind of capital requirement looks like? And what that kind of start-up road map looks like?
Yes. Thank you, Drew. And we stated -- we've said it many times over and over, we are looking for a capital-light model. Now the definition -- it's unfortunate that the CRTC had to insert a new eligibility factor in the mix. We are going to understand exactly what they mean by being operating somewhere in Canada. It's kind of a loose definition, but I'm expecting pretty soon we will have more clarity on what they meant there. Obviously, other players are already in operations, and for our case, we've been working on this lan for the last 2 years. But we need visibility, understanding and a clear understanding of every parameter of this business case before launching, and we're going to be working with the CRTC and as well as the governments as I said to clarify that very soon.
Okay. Okay. Great. And just 2 others for me. I think first from the economic headwinds that you point to. Obviously, others are pointing to it as well, but you've got a very interesting lens into any differences in economic headwinds between Canada and the U.S., if there are any. So could you give us a sense of any differentiation between the 2 markets on that front from your perspective at least.
Yes. And I would also add to your question that as a regional operator, we have a different perspective because most of our operations are not influenced by what's happening in dense urban center, which is another dynamic. So where we operate, competition, I would say, is reasonable is more predictable. The -- all the headwinds that are coming to the consumer market in terms of wage pressure, interest rising and inflation, they're simply having consumers to revisit their discretionary spending at this time.
But in the end, I think we have -- we're well positioned with the best customer service and the best products, and you need to connect to the internet for entertainment, but also for work -- for most of our consumers in our region. So I feel that we're going to weather the storm. We're going to go through and customers will still enjoy the good products that we have. Maybe they will temporarily reduce or drop a PSU, but it will come back after the storm.
Okay. And just a follow-up there. Are you seeing any major differences between the U.S. and Canada within your respective footprints in terms of those economic headwinds? Or is it just thematically all generally the same?
Generally speaking, it's aligned, it's the same.
Okay. Okay. One last one for me. So good to see the positive internet net adds inside of Ohio, and I think you've been certainly flagging the dynamic in Ohio and integration for a quarter or 2. Just big picture relative to your initial assumptions when you made the acquisition in this market where there's obviously 3 players. The competitive dynamics in that market, so not including everything you're dealing with with the migration and integration, but just the underlying dynamic. How is it comparing to your initial expectations when you looked at this asset?
I think it's pretty much in line to how we model this acquisition. Of course, competitors had some time to prepare themselves and to welcome us in the 2 cities of Cleveland and Columbus. So there was a little bit of a more intensity for some areas where, for example, AT&T converted some DSL neighborhoods to fiber, but the general intensity does not increase that much. If we were -- if we would have a little bit here with some outages and more careful with some of the steps in our transition, we would have lost less PSUs for sure.
Next question will be from Maher Yaghi at Scotiabank.
Maybe I just want to follow up on the discussion of broadband connections in the U.S., and definitely, it's top of mind for investors. Looking at cable companies in the U.S. having to deal with more competition, I want to ask you about your reference that in Q1, you expect internet net adds in the U.S. outside of the Ohio area to see some weakness. Can you explain what is driving that comment? And how long do you think it will take before we can reestablish growth in your broadband connections outside of Ohio? And in terms of Ohio, you mentioned that you do expect an improvement -- sequential improvement in the losses, but any comment as to when we will turn into growth in Ohio?
Great. So yes, so on outside the Ohio, as you pointed out, during Q4, we did have growth, actually. We are expecting Q1 to be softer partially due to seasonal disconnections. They will vary by state and by quarter, obviously. We are now operating in 12 states and soon in 13 through our expansion. So it's mainly due to this. The market is also, I would say, slower at the moment. And at the same time, we're -- we always have to decide if we're going to go after all the PSUs. So for entry-level packages, if sometimes competition is more aggressive on pricing and discounts, we always have a choice to go for it or not.
And so these are the choices we make on a quarterly basis. So we try to balance the financials and deliver on our guidance first before delivering [indiscernible] the PSUs. We do expect that past Q1, though, that we'll have strength. Obviously, this will evolve throughout the year, but we do expect more strength. And a portion will come also from the network expansions we've done in the U.S. But you'll remember that these are -- we're expecting to ramp up over time a bit slower than what we're expecting in Canada because they're not subsidized networks in areas where there's no high-speed Internet.
For Ohio, what happened is, during the transition, we were more flexible with some customers in payment terms. And partially because there is a technical aspect to it, where sometimes when you change the name of the company, the platform, sometimes the -- actually, the invoices will not get paid through the credit card or the banking information. So we still have some customers to go in the quarter. Afterwards, we do expect stability. That's our plan, and from there, planning to grow.
And last thing I could add on this is, from the initial thesis on Ohio, obviously, we did lose some customers who we're not planning to lose, but we were mainly banking on growing ARPU over time. As we're densifying the network, we're going to introduce an IPTV product and this is planning -- the IPTV is actually coming before the end of the year, we're going to start to introduce it at this point to new customers.
Okay. Okay. Great. And in terms of the transition in Ohio, what percent of your subscriber base is now under the new billing? And how much of your network has switched to the new broadcasting telecommunication signal, i.e., are there any other additional reconnections that you need to do that could cause some issues with outages, et cetera?
Yes. So the whole base is now on a 100% is now transferred to the new platform. What we have left to do is more in the background. We do have some -- we're investing in infrastructure as we had planned to do. So we don't expect at this point more issues coming from it. When we -- when you make a change of systems, you change the invoice, you change the rate codes and the brand name as well. It's a lot of change for customers, and it gives them an opportunity to rethink their telecom spending and their providers. But this is clearly behind us now because 100% of the base has transited to our systems [indiscernible].
Okay. Great. And I have a question on margins in Canada. If you may help us understand how much more upside can we see in your Canadian cable service margins given the strength we've seen in this quarter? What's driving that margin increase? And are there any onetime lower cost that is accounting for that 6% EBITDA growth in the quarter year-on-year.
Yes. So our question is due to the organic growth year-on-year, which we were expecting, and we did have some year-end adjustments. They're not very large, but when you focus on 1 business unit in 1 quarter, it adds up a little bit. So if you look at the margins for CCX for the full year, we did 53.8%. You could assume that next year we'll be in a similar place. So a bit lower than what we did in Q4, but very similar to what we did during fiscal '22. And from there, as we typically -- with the various activities that we have and also the network expansions we're doing now and as we're going to enroll customers, I could see that in fiscal '24 and on, that this will expand as well, but we'll wait a little bit to talk more about this as the year unfolds.
Next question will be from Vince Valentini at TD Securities.
First, the hurricane Ian in Florida. Can you just confirm, is there any impact on your Miami systems? Or were they far enough way to not really have any damage or disrupted customers?
No. We were, I would say, with the path of the hurricane. It actually did not hit our network. So we have a very little impact for it.
Second, clarify -- correct me if I'm wrong, I think you said Breezeline EBITDA growth in the first quarter will be negative on a year-over-year basis. I assume you're talking on a constant currency basis when you say that, if we factor in FX now versus FX rates in Q1 last year. I assume there's -- the reported number would still be higher? Or are you actually saying reported it out even with the FX change?
Well, you're right. It's in the constant currency. So over the last year, we had $140 million of EBITDA in Q1, which was much higher than the other quarters. So we do expect in current currency to be lower. I must say, I have not converted it in FX. So -- but it's going to be a lot closer. It's not the same number, but -- I haven't done the number, but it's in constant currency.
One more clarification and then a bigger picture question. The rural expansions, I believe -- I mean you're getting new stuff in the U.S., you're getting new staff in Ontario, but I believe you've already built out a fair number of new homes in Québec. I think you said, 2% expansion in your total homes. Should we start to see some internet sub-adds from those new territories as early as the first quarter of 2023?
Yes. So we added in Canada 37,000 homes passed. A lot of them were delivered in the past quarter and 2 quarters. So yes, we should start seeing -- because they're expanding in areas where there's no high-speed internet, typically the subscriber loading is faster. We do expect the penetration rate over 3 years of 50%, but normally, we do expect the first year to be a more important one than the other 2. So yes, it's going to be gradual. Now we do have a number of homes passed that we're going to add throughout the year, so these will count as well. So as we go throughout the year, we should see this number grow.
Great. And last. So I'm not sure if Drew tried to ask this before, but I just want to ask more specifically. Is it even possible to buy a wireless core network from a vendor that's just like a mini core that only covers 1 town as opposed to most people have core networks to cover entire countries. Can you get us a pared-down version that you can buy from somebody? And if so, any idea, I think investors are scrambling to figure out is just some sort of massive CapEx to try to get radio access network and a core network up in at least some small area to qualify for the MVNO rules. Can you give us any sense of if it's possible? And how much CapEx we're talking about?
Yes. Well, I will repeat again that we're working on a capital-light model. In terms of the land, if you can scale it from very small to very large, but you have other components than the land. You have the billing system, you have the customer relationship management, and the new systems as opposed to the ones that were rolled out 20 years ago or 10 years ago, you can scale them because they're cloud-based. You can pay for capacity along the scale up. So I hope that directionally answer your question.
So Philippe, you can basically have an outsourced core and basically just buy it on a cloud-based basis from somebody already has one as opposed to actually having your own -- have to invest in your own large physical core. Is that a fair way to interpret what you're saying?
Well, these options exist right now, and that's why we've been working on our planning to see, is the new technology ready enough to launch an operation or do we want an hybrid? So all these things, we will disclose them later with our commercial -- when we're closer to a commercial launch, but at this point in time, we have many options.
Just on this, though, we're not necessarily planning to change our guidance based on this in the future. So it's not as if we'll come back next quarter, at least that's not the plan with a big change based on this. So we did factor this into account when we reconfirmed our guidance for next year.
Next question will be from Stephanie Price at CIBC.
Inflation was mentioned a few times in your prepared remarks. I hope you can talk about the impact of inflation in the quarter and how Cogeco is offsetting the impact?
Yes. So often, when we talk about inflation, people think about their costs. So they are impacted, but I would say, overall, we're able to manage every year through the various procurement activities that we do, we're able to decrease costs. So I would say, we're able to manage this on our cost side. It's a bit more impactful on the consumer side because inflation, especially when you look at grocery prices, gas prices and now interest rates, are impacting the personal budgets of customers. And that's why we have seen actually more cord cutting in the quarter. I think it's happening with other operators in the space as well, looking at recent releases. So this is something that's happening. So a bit more cord cutting on video and phone, not necessarily on HSI, but I would say, this is where we see it.
Okay. And then in terms of wireless, just curious if you had any updated thoughts on wireless rollout in the U.S.?
Yes, wireless in the U.S. is different as the MVNO framework that we're talking about in Canada here. There is no such need in the U.S. The MVNO commercial environment exists already. It wasn't at the top of our priority. We had many other profitable initiatives to -- we felt we should be executing before going into wireless. It's on our list. It's possible. We don't need to purchase spectrum to enter the MVNO arena in the United States. So we'll do it when and if it makes sense to help our business. But in the very short term, it's not in our immediate plans.
Okay. And then just finally for me. Just curious if there's any major differences that you're seeing in the competitive environment in Ohio versus the rest of the U.S.
Ohio being an overbuilder. We have a very similar footprint in Florida where's there is actually more competitive intensity. We've been operating in Florida for some times. We're not afraid of competition, and it's working rather well for us down there. So we see certainly AT&T upgrading some DSL neighborhoods to fiber. Charter is already there. They're quite competitive. But I don't see any fundamental things changing going forward. We are going to continue to invest in our customer promise, our customer care as well as network product. And maybe in addition to what was said earlier, there is more network investment coming. So we can keep on improving the speeds of Internet, for example, and make our products better in Ohio, including the Breezeline Stream TV, IPTV product that is coming.
Next question will be from Jerome Dubreuil at Desjardins.
My first question is on the U.S. broadband. Thanks for the color you provided already there. But is it possible to share what percentage of your U.S. footprint is currently actively seeing over a building by some of your competitors? I know you already have some of your footprint over built and you also have the condo towers in gated communities, which are possibly not affected by this trend. But just overall, the proportion of your U.S. footprint that is facing active overbuilding right now?
Yes. There's -- I would say, there's not necessarily active overbuilding at the moment. We're not seeing any new activities or any material new activities. We have, obviously, Ohio, which is competitive. Florida and some other states where there's been some overbuilding done about 2 years ago. Overall, when you look at our competition in the U.S., we're facing fiber in about 15%, 1-5, of the network and about 55% is still DSL. And the balance is a mix of different products, including coax overbuilds. So I would say, those statistics have not changed recently, except for the profile mining for Ohio.
Okay. Great. And then second, a bit similar to Vince's question. But in terms of the FX impact, I mean it's easy to calculate the impact on the top line. However, I wonder if you can help us in terms of the margin. How does this behave when you're seeing maybe an FX tailwind of 7% or 8% in the coming quarters. Should we be expecting some sort of margin lift on that front? And if so, of what magnitude approximately?
If you're talking about the U.S. only, because it's -- the top line and the costs are in U.S. dollars, then it will not really impact the margin in percentage. If you look at it on a consolidated basis with a higher FX rate, it means that the U.S. business will be more significant. And because the margins are a bit lower in the U.S., it would reduce the consolidated margin to a certain extent, probably not any meaningful number. And the reason why our margins are lower in the U.S. is primarily due to the video content costs. The video packages that consumers have in the U.S. are much larger than what we sell in Canada and cost more as well. So that's the main reason why the margins are different. I hope that's answered your question.
[Operator Instructions]
Your next question will be from Matthew Griffiths at Bank of America.
I just wanted to touch on wireless again, sorry. But in the prepared remarks, Philippe, I think you mentioned that you've already started developing a mobile network. And so I mean, obviously, you've been purchasing some spectrum. Was that all you're referring to there? Or what -- besides that, what have you done? And maybe if there is anything beyond spectrum, like how much have you spent on that?
So preparing such a operation requires, of course, skilled talent inside our business. So we do have a team that is dedicated to wireless with a strong wireless expertise. And by the way, the whole senior leadership team at Cogeco is verse in mobile as we all have mobility somewhere on our CVs. So we are looking for an operation over our existing wireline footprint. That's about a coverage of 4 million Canadians. It's a small-scale operations compared to the major MNOs that are covering coast-to-coast countries.
And it requires a lot of skill to balance the quality with a light expenditure using of -- the usage of new technology and also planning how we will work in this MVNO framework with MNOs that are really looking for every opportunities to delay things and make interconnections difficult, if I could simplify it with just such a statement. So we've been working on this for 2 years, but it was more of a regulatory hurdle. Now with the Ts & Cs, the terms and conditions, we have more clarity. The next step will be to get going on negotiating the rates with the MNO, and then we will have all the variables to decide if we can launch a profitable business or not.
Okay. So it's mostly on -- you're referring to like the kind of intellectual investment rather than already being underway on some sort of physical investments. Is that a good way to sum it up?
Well, of course, we have labs, and we're playing with real stuff as well. So it's not just contractual, we are testing many, many things.
Okay. And just another clarification. In the 2023 priorities that you laid out, you mentioned in the U.S. homes passed growth of 5%, and in Canada of 3%. I just wanted to double check that you're basically referring to like an incremental 1% in the U.S. and an incremental 1% in homes passed year-over-year. Do I have that right? Or is it actually in 2023, a new 5% increase from 2022 in the number of homes passed?
Yes. So it's the latter. So actually, no, we're planning to add another 5% in the U.S. and another 3% in Canada.
Okay. Good. And then just in the U.S. and Canada, also, but I think particularly in the U.S., where I think everyone has been noting the increase in competition just generally, it affects some markets more than others. Obviously, you pointed that out. But can you talk a little bit about your intentions around marketing spend? And what -- if you think that, that -- I think you mentioned already in Q4, it was elevated.
Do you -- going into the next year, is this something we should assume is going to have to stay elevated, given that net adds generally in the U.S. seems to be quite low? And so the competition for each one of them has to be much more intense. And then just kind of related to that, if you could also talk about your confidence in your -- since PSU growth outside of the new territories might be a little limited, what kind of confidence do you have in your ability to pass on or pass through price increases in each of the markets?
Okay. So on the marketing cost, they do vary by quarter, obviously, and by year as well, especially when we just came out of a COVID period. The pattern of expenses was different than what we would normally do. I would say, we're closer to what we normally do now. So difficult to get more granular necessarily on this.
On your second question, we are really pro consumers all the time. We pass on what we must pass on. We -- as you noticed in the last several years, our price increase are not set at a given date every year. We try to stretch it the longest possible. We were under the very big numbers you've seen for inflation rates. So we try to control a lot of cost on our side and really pass to the consumer markets, which we need to. So in the end, it actually is -- it's working well. We are maintaining good customer relationships. So the experience is something that is really important to us. So good products, good customer service, but also good price.
Okay. And maybe if I could just squeeze maybe one last one in just to get your thoughts on -- you mentioned, the -- since the initial guidance was given conditions have deteriorated. I was just wondering -- and this is a hard thing to speak to because you don't lay out exactly all of the assumptions that go into the guidance, but is there a way to frame kind of the magnitude of how things have shifted since the initial guidance was given? And you also mentioned you're working to counter those, and so if -- is there anything you can highlight initiatives that you're working on to counteract some of that deterioration? That would be helpful.
Sure. So in our guidance, we do provide a range. But when you look at the range as a percentage of the overall business, it's not very large. So I would not say that things have changed dramatically since then. But the more impact from the current environment and also the losses of some customers we've had in Ohio had an impact on revenue. So I would say, that's the line that -- there is more of the impact of these changes.
On the cost side, we have a number of things that we are doing. For example, we did have some restructuring during the quarter that will provide some financial benefits in fiscal '23. So that was done recently. And we have a number of other elements we're working on to alleviate potential weakness in some level of revenue. But again, we did maintain the guidance with a range that is not very large in the first place.
It's a whole set of pluses and minus, for example. Yes, the inflation is not even every month. We've seen it going up and then coming down for some products. We can think of people coming back with teleworking because the commute is really long and expensive. So it's benefiting internet connection services. So there are pluses and minus in that. So that's why we continue to see some challenges, but we'll be able to weather the storms.
And at this time, gentlemen, we have no further questions. Please proceed with your closing remarks.
Okay. Well, thank you, everybody. We're going to be meeting back in January -- in mid-January for the first quarter results. And in the interim, we're very happy to take questions. So have a good day. Thank you.
Thank you sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.