Cogeco 2003 Annual Report Download - page 14

MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Results and Cash Flow
Cogeco Cable achieved 7% revenue growth, exceeding its
initial 5% target. The target was surpassed because basic service
customer losses were lower than anticipated and unbudgeted
rate increases were implemented last January, June and July.
Cogeco Cable’s Operating Income margin increased from 37.6% in
fiscal 2002 to 38.3% in fiscal 2003, slightly better than the goal
of 37.9%. This improvement is due to cost reduction initiatives,
ongoing process improvements as well as rate increases.
Financial expense went up by 2.5%, lower than the
target of 6% because short-term interest rates as well as capital
expenditures were lesser than anticipated. Depreciation of fixed
assets and amortization of deferred charges rose by 12.7%, higher
than the target of 10%. Deferred charges relating to customer
subsidies were greater than anticipated since Cogeco Cable sold
more digital terminals than expected. These deferred charges are
amortized over 4 years, more rapidly than most categories of fixed
assets. Capital expenditures and increase in deferred charges
amounted to $117.0 million, $2.0 million lower than planned, and
were entirely financed by Cash Flow.
Free Cash Flow of $3.3 million was generated, a first
since fiscal 1996. The break-even target was surpassed as a result
of greater Operating Income and lower capital expenditures
than planned.
Launch of VOD Services
Cogeco Cable launched its VOD service in October 2002
and the rollout was completed last March. The service offers about
200 titles to 85% of homes passed. VOD provides a competitive
edge to Cogeco Cable’s product offering as satellite distributors
do not have the two-way capabilities to offer this service.
VOD should contribute to greater customer retention and
additional sources of revenue.
(3) Operating and
Financial Results
Operating Results
Revenue
Revenue rose by $31.3 million, or 7.0%, mainly
from HSI services penetration improvement and various rate
increases as discussed below:
• HSI customer additions during fiscal 2002 and 2003
generated incremental revenue of approximately
$26.2 million over fiscal 2002. The addition of
about 47,000 new HSI customers during fiscal 2003
contributed approximately $12.7 million to this growth.
The balance resulted from the full-year impact of
the net gain of over 50,000 HSI customers during
fiscal 2002.
• Various rate increases during fiscal 2002 and 2003
created incremental revenue of $16.3 million. A $5 monthly
rate increase for HSI customers in Ontario and Québec
was introduced during the second half of fiscal 2002.
Subsequent to the basic rate deregulation authorised
by the CRTC, average monthly rate increases of about
$2.50 in Québec and $2.75 in Ontario were implemented
in August 2002 and January 2003, respectively, for
customers subscribing to basic service only. Cogeco Cable
introduced further rate adjustments effective in June for
the Ontario customer base and in July for the Québec
digital customer base. These adjustments resulted in
incremental average monthly rates of approximately
$1.75 per basic service customer in Ontario and
approximately $2.20 per digital customer in Québec.
Various sources, including installation, new digital services
and VOD, contributed an additional $4.9 million to revenue growth.
The organic growth, detailed above, was offset by internal
revenue loss of $16.1 million associated mostly with basic and
extended tier customer losses and with aggressive promotions:
12 Cogeco Cable Inc. 2003
Years ended August 31, 2003 2002 % Change
Operating Results
Revenue $479,293 $447,984 7.0
Operating costs 288,080 271,928 5.9
Management fees – COGECO Inc. 7,869 7,710 2.1
Operating Income $183,344 $168,346 8.9
Operating Income margin 38.3% 37.6%
Cogeco Cable achieved 7%
revenue growth, exceeding its
initial 5% target.
(in thousands of dollars except percentages)