Cogeco 2003 Annual Report Download - page 10

MANAGEMENT’S DISCUSSION AND ANALYSIS
•Cogeco Cable expects to pursue Operating Income
growth of 8% to 10% in fiscal 2004 compared to 9%
in fiscal 2003.
•The Corporation believes it will generate Free Cash Flow
of $15 million to $20 million in fiscal 2004, compared to
$3.3 million in fiscal 2003. This increase will essentially
come from Operating Income growth. Generated Free
Cash Flow will be applied to reduce Indebtedness.
Cable Network
Notwithstanding a few exceptions in remote areas,
Cogeco Cable’s network is now fully digital, with 87% of house-
holds passed served by two-way cable plant. VOD service is now
available to 85% of households. The Corporation is studying the
possible introduction of low-cost digital terminals as a strategy to
accelerate the migration to a fully digital platform to offer, among
other things, to a majority of its clientele the VOD service.
Cogeco Cable’s fiber optic network extends over
7,800 kilometres and includes 78,900 kilometres of optical fiber.
Cogeco Cable initially deployed optical fiber to nodes serving
clusters of typically 2,000 homes, with many fibers per node,
which now allows the Corporation to further extend the fiber to
smaller clusters of approximately 500 to 1,000 homes rapidly and
relatively easily. On average, fiber nodes currently serve about
1,500 homes. Node splitting leads to further improvement in the
quality and reliability of services offered and allows for increasing
traffic of two-way services such as HSI and VOD.
Cogeco Cable is completing the conversion of its IP
platform to the DOCSIS 1.1 standard (Data Over Cable Service
Interface Specifications). DOCSIS 1.1 allows the prioritization of
the signal packets that must be transmitted in real time, so as to
ensure a continuous transmission flow. Furthermore, DOCSIS 1.1
enables encryption in the local loop and eases doubling of
upstream throughput.
Uncertainties and Main Risk Factors
The following is a statement of the main risks and
uncertainties that are considered likely to significantly affect,
or have the potential to significantly affect, the financial
condition, operating results or business of the Corporation and its
subsidiaries. This statement is not intended to cover all possible
material contingencies, nor is there any assurance that the risks
and uncertainties discussed in this statement will actually unfold
as expected, or have the anticipated consequences.
Market Conditions and Competition
Cogeco Cable’s activities are conducted essentially in the
field of the distribution of video and audio programming services,
non-programming services and telecommunication services
through wireline broadband systems. These broadband services
are marketed to residential and business customers. The market
for these broadband services continues to be very competitive in
Canada. There are several wireline and wireless competitors vying
for more customer connections, a greater share of the available
budget of residential customers, and long-term arrangements
with property owners or managers and business customers.
All competitors have high exit costs.
Rivalry between broadband service competitors, although
intense, has recently shifted to some extent from retail price
cutting to value propositions in the form of bundles of discrete
services for a single price, incentives on terminal equipment
required to receive the services, and time-limited introductory
offers for new customers. Largely as a result of this shift in
competitive pricing strategies, retail prices have tended to be
more stable and have actually moved upward for the distribution
of programming services over the last fiscal year. This has had a
positive impact on the Corporation’s operating margins. There is,
however, no assurance that this trend will continue.
One of the main competitors of Cogeco Cable, Bell Canada,
has decided to offer service bundles that include video and audio
programming, HSI and telephony services with single integrated
billing. Cogeco Cable has not rolled out telephony services or
concluded joint marketing arrangements with alternative telephone
service providers, and may face a new competitive challenge as a
result. The bundling of telephone services with video and Internet
services by Bell Canada and other incumbent local exchange
carriers (ILECs) is currently under review by the CRTC.
The market for analog programming services is generally
considered mature, while the market for digital services and
HSI services is more recent and is generally considered to have
significant potential for additional growth. HSI services are a main
contributor to the Corporation’s revenue growth and Operating
Income. The growth in HSI service subscriptions has lagged in
Québec compared to Ontario in the past, and it may abate more
8Cogeco Cable Inc. 2003
The Corporation believes it
will generate Free Cash Flow
of $15 million to $20 million
in fiscal 2004, compared to
$3.3 million in fiscal 2003.