Cogeco 2004 Annual Report Download - page 18

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MANAGEMENT’S DISCUSSION AND ANALYSIS
16 Cogeco Cable Inc. 2004
Capital expenditures and the increase in deferred charges amount-
ed to $101.2 million, $10.1 million lower than planned, attributable
mainly to a reduction in the network upgrade program. The upgrade
program was delayed since management had intended to test low-
cost digital terminals in an all-digital conversion scenario. See
the “Investing Activities” section on page 18 for further discussion
on the network upgrade program. Free Cash Flow of $43.5 million
was generated, exceeding the target by about $28 million. The
target was exceeded since cash flow from operations was about
$18 million greater than anticipated and capital expenditures and
the increase in deferred charges were about $10 million lower
than planned (as explained above).
OPERATING AND
FINANCIAL RESULTS
Operating Results
Years ended August 31, 2004 2003
(in thousands of dollars, (restated) Change
except percentages) $$%
Revenue 526,480 489,194 7.6
Operating costs 315,208 305,716 3.1
Management fees –
COGECO Inc. 8,026 7,869 2.0
Operating Income 203,246 175,609 15.7
Operating Margin 38.6% 35.9%
Revenue
Revenue rose by $37.3 million, or 7.6%, mainly from HSI services
penetration improvement and various rate increases, as discussed
below:
•
HSI customer additions during fiscal 2003 and 2004 generated
incremental revenue of approximately $21.9 million over fiscal
2003. The addition of about 40,000 new HSI customers during
fiscal 2004 contributed approximately $9.4 million to this
growth. The balance resulted from the full-year impact of the
net gain of about 47,000 HSI customers during fiscal 2003.
•
Various rate increases during fiscal 2003 and 2004 created
incremental revenue of $16.3 million as a result of:
–
The introduction of rate hikes in June 2003 for the Ontario
customer base and in July 2003 for the Québec digital cus-
tomer base. Those rate increases resulted in incremental
average monthly revenue of approximately $1.75 per basic-
service customer in Ontario and approximately $2.20 per
digital-service customer in Québec.
–
An average monthly rate increase of approximately $0.74
per basic-analog-service customer, effective June 15, 2004 in
Ontario and August 1, 2004 in Québec, respectively. These
selective rate hikes will result in greater basic rate harmo-
nization across our cable systems. An increase of $4 in the
monthly digital basic rate was also implemented in Québec
on August 1, 2004. In addition, the monthly rate for the pay
television package has been raised by $3, and other limited
selective tier service rate increases have been implemented
in Ontario effective June 15, 2004.
Other sources, including new digital services, VOD and equipment
rental, contributed an additional $4 million to revenue growth.
The organic growth, detailed above, was offset by service revenue
losses of $3 million associated mostly with basic, extended tier,
and pay television customer losses in fiscal 2003 and a decline
in equipment revenue of $1.9 million.
Average monthly service revenue per basic-service customer
rose from $48.00 in fiscal 2003 to $52.27 in fiscal 2004, a 8.9%
increase. Most of this increase resulted from improved pene-
tration of HSI service and rate hikes.
Operating Costs and Management Fees
Operating costs increased by $9.5 million, or 3.1%, mainly as a
result of the factors discussed below:
•
Network fees rose because of improved penetration of bundled
services and program supplier fee increases. However, network
fees as a percentage of revenue was lower partly due to a decline
of approximately $2.8 million in IP transport costs, despite a 19%
expansion of the HSI customer base.
•
The rise in other operating costs is largely attributable to the 7%
rise in RGU that led to greater customer care and technical
expenses. Furthermore, as Cogeco Cable significantly surpassed
its Operating Income growth objectives for fiscal 2004, the pro-
vision for employee bonuses increased by $1.6 million. However,
operating expenses as a percentage of revenue was lower mainly
because of a decline in marketing expenses.
Management fees paid to COGECO Inc. are discussed in detail in
the “Related Party Transactions” section on page 10.