Cogeco 2004 Annual Report Download - page 10

MANAGEMENT’S DISCUSSION AND ANALYSIS
8Cogeco Cable Inc. 2004
Return on equity is defined as net income or loss divided by
average shareholders’ equity (computed on the basis of the
beginning and ending balance for a given fiscal year). Return on
equity measures the Corporation’s effectiveness in generating
net income on a given capital base from our shareholders. Cogeco
Cable’s key goal in the coming years is to achieve a return on
equity of 10% .
Operating Income Growth and Operating Margin
Operating Income is calculated as operating income before
amortization and unusual items that are non-recurrent revenue
or expense items such as restructuring charges and gains or
losses on asset disposals. Operating Margin is calculated by
dividing Operating Income with revenue. Operating Income growth
and Operating Margin are benchmarks commonly used in the
telecommunications industry, as they allow comparisons with
companies that have different capital structures and are more
current measures since they exclude the impact of historical
investments in assets. Operating Income indicators assess Cogeco
Cable’s ability to seize growth opportunities in a cost effective
manner, to finance its ongoing operations, and to service its
debt. Operating Income is a proxy for cash flow generated from
operations excluding the impact of the capital structure chosen.
Consequently, Operating Income is one of the key metrics used
by the financial community to value the business and its finan-
cial strength.
Free Cash Flow
Free Cash Flow is defined as cash flow from operations less capital
expenditures (including assets under capital lease that are
dis closed in Note 12 b) on page 45 which are not reflected in the
statements of cash flow) and increase in deferred charges. The
financial community also closely follows this indicator since it
measures the business’ ability to repay debt, distribute capital
to its shareholders and finance its growth.
RGU Growth and Penetration of Service Offerings
RGU expansion is a critical driver of revenue growth and measures
the success of the marketing strategy and the competitiveness
of our service offering and pricing. Penetration statistics measure
Cogeco Cable’s market share. Cogeco Cable computes the pene-
tration for basic services as a percentage of homes passed and, in
the case of all other services, as a percentage of basic customers
in the cable systems where the service is offered.
Customer Churn
Customer churn provides a key measure of customer satisfaction
and the effectiveness of loyalty programs. A retention focus is
more cost-effective than ongoing heavy acquisition efforts with
low retention success.
Productivity Indicators
Operating expenses per RGU is a prime measure of productivity
as RGU is the key driver of revenue growth. Cogeco Cable strives
to achieve strong RGU growth while closely monitoring its
cost structure.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP
requires management to adopt accounting policies and to make
estimates and assumptions that affect the reported amounts
of assets and liabilities, contingent assets and liabilities, and
revenues and expenses during the reporting year. A summary of
the Corporation’s significant accounting policies is presented in
Note 1 on page 30 of the consolidated financial statements. The
following accounting policies were identified as critical to Cogeco
Cable’s business operations:
Revenue Recognition
The Corporation considers revenue to be earned as services are
rendered, provided that ultimate collection is reasonably assured.
The Corporation earns revenue from several sources. The recog-
nition of revenue from the principal sources is as follows:
• Monthly fees from cable television and related services, and
from HSI access services are recognized on a pro rata basis
over the month.
• Since management considers the sale of home terminal devices
as a single unit of accounting of a multiple element arrangement,
equipment revenues are recorded upon activation of the service.
• Installation revenue is deferred and amortized over the
average life of a customer, which is four years. Management
considers that installation revenue is part of a multiple element
arrangement and has no standalone value. Accordingly,
revenue is deferred and amortized at the same pace as
cable television and HSI services monthly fees are earned.
• Promotional offers are accounted as a deduction of revenue
when customers are taking advantage of such offer.
Allowance for Doubtful Accounts
A large proportion of the Corporation’s revenues are earned
from individual customers. Accordingly, allowance for doubtful
accounts is calculated by examining such factors as the number
of overdue days of the customer’s balance owing as well as the
customer’s collection history with Cogeco Cable. As a result,
conditions causing fluctuations in the aging of customer accounts
will directly impact the reported amount of bad debt expenses.