Cogeco 2004 Annual Report Download - page 9

MANAGEMENT’S DISCUSSION AND ANALYSIS
Cogeco Cable Inc. 2004 7
Competitiveness of the Offering
The distribution market for broadcasting and HSI services remains
competitive. Cogeco Cable’s management regularly evaluates
and adjusts its prices in accordance with market trends. According
to Cogeco Cable’s management, the upward trend towards
standardization of retail prices applied by competitors, who must
eventually strengthen their financial performance, should hold
steady over the long-term, but price reductions for individual
services or bundled services may intervene in the short-term upon
the initiative of one or more competitors. Future adjustments to
Cogeco Cable’s retail and bundled services prices will reflect the
need to maintain the Corporation’s competitive position in its
markets, the need to generate a return on its operations, as well
as the need to maintain the superior quality of services offered
by Cogeco Cable.
Capital Management
A capital committee, comprised of the President and Chief
Executive Officer, the Vice President, Finance and Chief Financial
Officer, the Vice President, Engineering and Development as
well as the Vice President, Marketing and Sales, establishes the
Corporation’s investment strategy and frequently examines the
allocation of capital. Projects aligned with our strategy and pro-
viding acceptable risk-adjusted return on investment are generally
prioritized. Return on investment is assessed giving consideration
to the expected additional Operating Income as well as cost savings.
These analyses are carried out on a case-by-case basis and by
individually affected cable systems, if required.
Expansion Through Acquisitions
To increase the Corporation’s value and returns, Cogeco Cable
strives to acquire, at attractive prices, cable networks that are
adjacent to currently serviced zones, and that serve a significant
number of customers in non-adjacent territories.
Anticipated Results of these Strategies
The above-described strategies should result in increased prof-
itability and reduced indebtedness, as measured according to the
following criteria. These criteria are described in greater detail in
“Fiscal 2005 Financial Guidelines” on page 24:
• Cogeco Cable expects to increase its Operating Income between
8% and 9%, compared to 16% in 2004 due to lower RGU growth
and price increases compared to fiscal 2004.
• The Corporation estimates that it will generate Free Cash Flow
between $45 million and $50 million, compared to $43.5 million
in fiscal 2004. The increase will stem primarily from growth in
Operating Income. A significant portion of the Free Cash Flow
will be applied to reduce indebtedness.
• RGUs should grow by 5% to 6% compared to the 7% increase
experienced in 2004. As penetration of HSI and digital services
increases, the demand for these offerings should diminish .
Cable Networks
Digital and VOD services are available to 98% and 86% of house-
holds respectively and 87% of households passed are served by
a two-way cable plant. Cogeco Cable’s fiber optic network extends
over 7,500 kilometres and includes 77,500 kilometres of optical
fiber. Cogeco Cable deployed optical fiber to nodes serving clusters
of typically 1,500 households, with many fibers per node in most
cases, which allows the Corporation to further extend the fiber
to smaller clusters of approximately 500 to 1,000 homes rapidly
with relative ease. Node splitting leads to further improvement
in the quality and reliability of services and allows for increasing
traffic of two-way services such as HSI and VOD.
Cogeco Cable has completed the conversion of its IP platform
to the DOCSIS 1.1 standard (Data Over Cable Service Interface
Specifications). DOCSIS 1.1 allows the prioritisation 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. Approximately 50% of all cable modems are currently
operating in a DOCSIS 1.1 mode, and this percentage is growing
as all the new modems are DOCSIS 1.1 and are upgradeable
to DOCSIS 2.0 when deemed necessary. DOCSIS 2.0 will allow for
higher speeds and capacity in the return path, thus providing very
high speed symmetrical services that are particularly well suited
for commercial customer applications; it is also more robust,
allowing for the use of portions of the return path spectrum
that are normally not useable in a DOCSIS 1.1 mode.
Key Performance Indicators
Cogeco Cable is dedicated to increasing shareholder value and
consequently focuses on optimizing profitability while efficiently
managing its use of capital without jeopardizing future growth.
The following key performance indicators are closely monitored to
ensure that business strategies and objectives are closely aligned
with shareholder value creation. The key performance indicators
are not measurements in accordance with GAAP and should not
be considered an alternative to other measures of performance
in accordance with GAAP.
Income Before Income Taxes Per Home Passed
and Return on Equity
Income before income taxes per home passed provides key
insights on how Cogeco Cable maximizes the value of its fran-
chises. Excluding income taxes from the profitability measure
removes an often volatile and non-controllable factor. The “per
home passed” concept measures Cogeco Cable’s effectiveness
in improving profitability in its franchised areas.