Xplore in battle to retain its rural internet foothold

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After almost a decade, Ryan Christianson had grown tired of losing his internet connection during storms and on windy days.

The spotty service, delivered through wireless signals by rural provider Xplore Inc., made running his business – a wheat, barley and canola farm 90 kilometres east of Humboldt, Sask. – challenging.

“It was a struggle to try to do things online, even just simple banking,” Mr. Christianson said.

Several weeks ago, he made the switch to SpaceX’s satellite internet provider, Starlink. The service costs $20 more a month, but the difference in quality has been “night and day,” he said.

Mr. Christianson’s experience is emblematic of the problems facing Xplore, the Woodstock, N.B.-based telecom formerly known as Xplornet Communications Inc.

Earlier this month, credit rating agency Moody’s downgraded Xplore’s outlook to negative from stable, citing “continued weak operating performance, which has led to elevated financial leverage.” The agency currently rates the telecom’s debt as B3, a category that is non-investment grade and deemed speculative and high risk.

As a privately held company, Xplore doesn’t publicly disclose its financials. However, according to the Moody’s report by Peter Adu, a vice-president and senior credit officer at the agency, the company has been losing subscribers, causing its EBITDA (earnings before interest, taxes, depreciation and amortization) to decline.

Mr. Christianson is far from the only rural Canadian ditching the telecom in favour of Starlink, which has been offering steep discounts on its hardware in order to gain a larger foothold in the Canadian market.

“The Purolator driver who delivered our dish to us said he’d delivered over 50 of them to the area recently,” said Brittany Willows, an author, freelance artist and executive assistant who lives in Leeds and Grenville, a county just east of Kingston. Ms. Willows also recently ditched Xplore for Starlink, blaming a gradually degrading signal that eventually became “virtually non-existent.”

Xplore also faces growing competition from the incumbent telecoms – BCE Inc. BCE-T, Telus Corp. T-T and Rogers Communications Inc. RCI-B-T – which have been steadily encroaching on Xplore’s territory as they expand their networks into more rural areas.

Despite the gloomy outlook from Moody’s, though, Xplore’s new president and chief commercial officer, Rizwan Jamal, is optimistic that the strategic and financial plan he and the company’s new CEO are implementing will turn things around.

“The key is getting back to growing subscribers, revenue and EBITDA,” Mr. Jamal said in an interview.

The company hopes to do so by investing in its fibre-optic network, expanding its 5G home-internet service and launching a new satellite called Jupiter 3 that will offer faster upload and download speeds.

Xplore was acquired by U.S. private equity firm Stonepeak Infrastructure Partners in 2020. The Globe and Mail reported at the time that the deal was worth about US$2-billion, including debt.

Stonepeak, which is headquartered in New York, invests in communications infrastructure, transportation and logistics and renewable energy. The firm has made significant investments in recent years in wireless towers, residential broadband networks and fibre-optic networks.

Stonepeak typically holds on to its investments for five to seven years, spurring growth by investing capital to upgrade infrastructure.

“They are truly long-term investors,” Mr. Jamal said. “They deploy a large amount of capital in the investments that they make to really transform the business.”

In February, Xplore announced that Allison Lenehan was out as CEO after a decade in the job and almost 30 years at the company. He would transition to a role as a senior adviser to the board, the telecom said in a news release.

Francis Shammo, the board chair and a former chief financial officer of Verizon, took over as interim CEO. Mr. Jamal, a former BCE and Telus executive, joined the company several months later.

The leadership shuffle came almost a year after Stonepeak made an unsuccessful attempt to acquire Shaw Communications Inc.’s Freedom Mobile. The wireless carrier was being divested to address competition concerns stemming from Rogers Communications Inc.’s $20-billion takeover of Shaw. In the end, Freedom was snapped up by Quebecor Inc.’s QBR-B-T Videotron Ltd. subsidiary.

Mr. Jamal said that for Stonepeak, Freedom would have been “an incremental investment thesis on top of the investment thesis for Xplore.”

“That didn’t happen, but the investment thesis for Xplore is still extremely exciting,” he said.

He and Mr. Shammo are aiming to transform the telecom from what Mr. Jamal describes as a “legacy broadband company” to a “fibre, 5G wireless and next-generation satellite powerhouse for rural Canada.”

“I think that there’s still tremendous opportunity to provide better broadband experiences,” Mr. Jamal said.

Some of those efforts are already paying off, he said. The speed and cost of Xplore’s network build out has improved, as has its marketing execution. The company has also introduced some new promotions and more competitive pricing.

“We’re already seeing some good signs in terms of the direction we’re moving,” Mr. Jamal said.

Moody’s, meanwhile, said it could upgrade Xplore’s ratings if the company generates positive free cash flow and maintains its debt below six times its EBITDA. (As of the first quarter, Xplore’s debt-to-EBITDA ratio over the previous 12 months was at 9.2 times, Moody’s said.)

But unless Xplore sees “meaningful” EBITDA growth in the second half of this year and into next year, its ratings could continue to face downward pressure, Mr. Adu wrote in the research note.