Cogeco 2004 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS
Cogeco Cable Inc. 2004 23
Cogeco Cable’s operating results are not generally subject to
material seasonal fluctuations. However, the loss in basic-service
customers is usually greater, and the addition of HSI customers
is generally lower in the third quarter, mainly because students
leave their campus at the end of the school year. Cogeco Cable
offers its services in several university and college towns such
as Kingston, Windsor, St.Catharines, Hamilton, Peterborough,
Trois-Rivières and Rimouski. Furthermore, the fourth quarter’s
Operating Margin is usually higher as lower management fees are
paid to COGECO Inc. Under the Management Agreement, Cogeco
Cable pays a fee equal to 2% of its total revenue subject to a
maximum amount. Since the maximum amount has been reached
early in the fourth quarter of fiscal 2003 and 2004, Cogeco Cable
has thus paid less management fees.
Cogeco Cable’s revenue has consistently grown over the last
eight quarters mainly as a result of improved HSI services pene-
tration and rate increases. Furthermore, Cogeco Cable’s focus
on improving its Operating Margin has resulted in the margin and
cash flow from operations increasing every quarter except for
the first quarter of fiscal 2004 because management fees paid
to COGECO Inc. are higher in the first quarter compared to the
fourth quarter. It is this consistent financial performance quarter
over quarter that has led to strong shareholder value creation.
Cogeco Cable’s quarterly net income consistently grew during
fiscal 2003 and 2004 with the exception of the first quarter of
fiscal 2004. The large net loss in the first quarter of fiscal 2004
was attributable to non-cash adjustments for amortization and
income taxes totaling $41.6 million. Those non-cash adjustments
are discussed in “Fixed Charges” and “Income Taxes” on page 17.
2004 vs 2003 Fourth Quarter
Operating Results
Revenue rose by $6.6 million, or 5.2%, mainly from improved HSI
services penetration and rate increases implemented effective
June 15, 2004 in Ontario and August 1, 2004 in Québec, respec-
tively. See the “Revenue” section on page 16 for further discussion
on rate increases.
Operating costs increased by $1.1 million, or 1.4%. Network fees
r
ose because of increased penetration of bundled services and
program supplier fee increases. The rise in other operating costs
is largely attributable to the 7% year-over-year rise in RGU that
lead to increased customer care expenses. However, operating
costs as a percentage of revenue was lower mainly due to a
decline in marketing expenses.
Quarterly Financial Highlights
Fiscal 2004 Fiscal 2003
Quarters ended
(1)
Nov. 30 Feb. 29 May 31 Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31
(in thousands of dollars, except (restated) (restated) (restated) (restated) (restated) (restated)
percentages and per share data) $$$$$$$$
Revenue 129,489 131,574 132,364 133,053 118,680 121,558 122,473 126,483
Operating costs 79,713 78,576 78,419 78,500 76,290 76,435 75,545 77,446
Management fees –
COGECO Inc. 2,562 2,585 2,616 263 2,302 2,364 2,415 788
Operating Income 47,214 50,413 51,329 54,290 40,088 42,759 44,513 48,249
Operating Margin 36.5% 38.3% 38.8% 40.8% 33.8% 35.2% 36.3% 38.1%
Income (loss) before
income taxes (11,004) 3,291 4,845 7,943 (1,831) 34 1,503 4,556
Net income (loss) (41,103) 588 1,852 6,469 (1,496) (826) 32 2,166
Cash flow from operations 31,882 35,278 36,593 41,025 24,277 26,953 28,722 32,573
Net income (loss) per share (1.03) 0.01 0.05 0.16 (0.04) (0.02) 0.00 0.05
(1)
The addition of quarterly information may not correspond to the annual total given rounding.