Cogeco 2003 Annual Report Download - page 6

MESSAGE TO SHAREHOLDERS
this problem, will be the defining factor in dealing effectively
with this illicit market segment. Decisive and sustained action is
required as black and blue markets are harmful to the Canadian
programming and distribution industries. In the interim, we must
plan while keeping in mind that major progress on this front may
require yet more time. Cogeco Cable actively enforces the
security of its network on an ongoing basis.
We continue to examine all aspects of our operations
to increase our efficiency in delivering our services at the lowest
possible cost. Since the year 1998, all our services have been billed
on a single invoice in most of the areas we serve. We continue to
seek more balanced affiliation terms with all program suppliers.
A number of Canadian program services, licensed during the first
rounds of specialty service licensing in Canada, which are now
very successful, well entrenched in the Canadian market and
controlled by large integrated broadcasting groups, continue
to benefit from protective regulatory measures that are no
longer justified. This has created a major imbalance between
programming services and broadcasting distribution services.
Whereas the distribution sector is extremely competitive and
exposed to market risk and consequently yields suboptimal
returns on investment, the Canadian programming sector is
protected by regulation from competition and market risk, and
enjoys superior returns on investment. This imbalance must be
addressed by the regulator, and we will continue to press for
prompt corrective action in this regard.
As the Telephone and Cable industries, including their
respective direct-to-home satellite services, compete, Canadian
consumers have a unique opportunity to enjoy advanced video
and Internet services of the highest quality and fast-paced
innovation unparalleled anywhere in the world. As competitors,
it is our duty to build the quality of life of our customers
first and foremost.
From an investment standpoint, we have been on a plan
to gradually reduce the sum of capital expenditures and deferred
charges as our network approaches its optimal state of being
87% two-way and broadband, in line with market potential,
with broadband being defined as 550 MHz and higher. The sum
of capital expenditures and deferred charges has come down
from a peak of $195 million in fiscal 2000 to $117 million this
year, slightly under generated Cash Flow of $120 million, thus
explaining the first occurrence of positive Free Cash Flow,
since fiscal 1996, of $3 million.
This pattern is attributable to two fundamental trends.
First, the sophistication of digital compression and multiplexing
techniques provides for greater carrying capacity in our existing
networks. This, in turn, reduces the need for further rebuild
activity, thus limiting capital expenditures. Second, with the
advent of the low cost Motorola DCT-700 all digital terminal
(around $100 CDN), more people will have access to our digital
services including VOD with lower terminal costs and much
reduced terminal-related deferred charges on Cogeco Cable’s
balance sheet! As a result, more people will be in a position
to use VOD and consume sophisticated digital services.
Management is currently analyzing a scenario to reap
bandwidth in an all-digital conversion scenario. This avenue,
while complex, appears promising.
As we continue to work on improving our Operating
Income margins and reducing our capital expenditures and
deferred charges, net earnings and Free Cash Flow should
continue to increase nicely. Our balance sheet continues to
improve as our ratio of Indebtedness to Operating Income
has been reduced from 4.9 to 4.4 at August 31, 2003.
We continue on our mission to tap a greater share of
the discretionary spending of the customers we serve, on home
information, entertainment and communications, adding more
services on top of basic video, such as digital services, including
VOD, and high-speed Internet. As regards telephony, we are still
on the lookout for an appropriate low capital cost solution on the
market with sufficient customer appeal. However, we have no
specific plans to launch cable telephony at this point in time, as
this solution and more workable regulatory interconnection rules
have not been forthcoming. The strength and sophistication of the
cable platform make it unparalleled in its ability to offer the full
bundle of complex services, interactive in real time, such as VOD
and eventually video telephony at attractive consumer prices,
on a single bill and, of course, a single wire. On our journey to
quadruple revenue in the medium term, the ARPU has risen
10.2% due to sales of high-speed Internet and digital services,
to reach $48 for fiscal year 2003. Cogeco Cable continues to
4Cogeco Cable Inc. 2003
We continue to examine
all aspects of our operations
to increase our efficiency in
delivering our services at the
lowest possible cost.