Cogeco 2004 Annual Report Download - page 17

MANAGEMENT’S DISCUSSION AND ANALYSIS
Cogeco Cable Inc. 2004 15
PERFORMANCE HIGHLIGHTS
MOST FINANCIAL AND CUSTOMER GROWTH OBJECTIVES
WERE SURPASSED.
RGU growth was greater than anticipated thanks to unforeseen
expansion of the basic-service customer base and greater demand
than expected for digital services. Cogeco Cable has achieved a
key milestone by reversing the organic customer erosion it had
experienced since fiscal 1999. Competitive video, HSI and bundle
offers, targeted marketing as well as superior customer service
were paramount to customer retention. Churn rate for customers
subscribing to both digital and HSI services is about 50% lower
than the churn rate for customers subscribing only to one of
those services.
The 28% increase in digital-service customers is mainly attributable
to the competitive offering of a broad range of services to meet the
needs of both the cost-conscious and discerning customer.
HSI customer additions were lower than anticipated due, in part, to
a slowing demand as the penetration rate increases. To stimulate
demand in a more mature Ontario market, Cogeco Cable has started
offering HSI Lite since July 2004 to new HSI customers that are more
cost conscious. However, HSI Lite is only offered on a retention
basis in the less mature Québec market.
Financial Results and Cash Flow
Cogeco Cable achieved 8% revenue growth, exceeding its initial 4%
to 5% target
1
. The target was surpassed due to better marketing,
customer service, abatement of the black market, as well as
unbudgeted rate increases that were implemented in the fourth
quarter. Cogeco Cable’s Operating Margin increased from 35.9%
in fiscal 2003 to 38.6% in fiscal 2004, much better than the goal of
about 37.5%. This improvement is due to cost reduction initiatives,
ongoing process improvements, customer growth in all segments
as well as rate increases.
Financial expense went down by 5%, a greater decline than the
target of 1%, since short-term interest rates and Indebtedness
(defined as bank indebtedness and long-term debt) were lower
than anticipated. Amortization rose by 27%, much higher than the
target of 9%. Excluding the effect of a change in the useful lives of
certain long-term assets (described in the “Fixed Charges” section
on page 17), amortization rose by a more modest 9%. As a result of
non-cash adjustments for amortization and income taxes totaling
$45.6 million, Cogeco Cable recorded a net loss of $32.2 million
instead of the expected net income of $5 million. See sections on
“Fixed Charges” and “Income Taxes” on page 17 for a description
of those adjustments.
Customer Statistics
Net additions (losses) % of Penetration
(1)
2004 2003 August 31,
August 31, Initial
2004 Actual Guidance Actual 2004 2003
Revenue-generating units 1,277,317 88,948 51,300–62,700 64,011 NA NA
Basic-service customers 823,855 3,198 (11,000)–(13,000) (15,711) NA NA
HSI customers
(2)
245,026 39,847 35,000–40,000 46,987 34.2 28.5
Digital terminals
(3)
240,071 56,984 33,000–38,000 38,137 29.8 22.8
Bundled-service customers
(4)
356,268 68,188 NA 46,394 43.2 35.1
(1)
As a percentage of basic-service in areas served.
(2)
Including pending orders, the number would amount to 250,029
compared to 210,974 a year earlier.
(3)
82% of terminals were purchased compared to 77% a year earlier.
(4)
Bundles including basic service, discretionary tiers, multiple outlets with
the option to include pay television, the advantages of digital service and
HSI service. 52% of bundled-service customers had a digital service.
1
Fiscal 2004 initial financial targets have all been adjusted to reflect the impact of the adoption of new accounting standards regarding the timing of revenue
recognition and certain related costs and the classification of certain items such as revenue, expense or capitalized costs. The targets were modified on the basis
of the difference between the 2004 financial results before and after adoption of new accounting standards. See the “Adoption of New Accounting Standards –
Revenue Recognition” section on page 10 of this MD&A for a detailed description of these new accounting standards implemented on a retroactive basis.