Cogeco 2005 Annual Report Download - page 23

Financial Results and Cash Flow
Cogeco Cable achieved 5.3% revenue growth, slightly over its initial
4% to 5% target. This revenue growth is primarily the result of an
increase in basic service rates and higher penetration rates of HSI
and digital services. Operating Income rose by 11.9%, exceeding
the initial objective of 8% to 9%. This result is attributable to higher
revenue per basic service customer, cost controls and process
improvement measures.
Financial expense went down by 3.9%, slightly lower than expected,
as average Indebtedness was lower than anticipated. Amortization
declined by 0.9% as expected, excluding the effect of a change in the
useful lives of certain long-term assets during fiscal 2004, described
in the “Fixed Charges” section on page 22. Cogeco Cable reports net
income higher than initial forecasts, standing at $28.7 million, mainly
due to Operating Income that was higher than expected and to
a financial expense that was slightly lower than forecast.
Capital expenditures, including assets acquired under capital leases,
and the increase in deferred charges amounted to $125.7 million,
$11.7 million more than initially expected. The decrease in deferred
charges is close to what was expected and is mainly attributable
to lower equipment subsidies, given that most new digital service
customers chose to rent their terminals. The increase in capital
expenditures (including assets acquired under capital leases),
which is higher than expected, is primarily due to an increase
in purchases of digital terminals and also to increased upgrade
and reconstruction activities. Free Cash Flow of $45.3 million
was generated, reaching the lower end of the anticipated range.
Cash flow from operations was about $9 million greater than
anticipated and is attributable to higher-than-expected Operating
Income and to financial expenses that were slightly lower than forecast.
OPERATING AND FINANCIAL RESULTS
Operating Results
Years ended August 31, 2005 2004
(in thousands of dollars, Change
except percentages) $$%
Revenue 554,404 526,480 5.3
Operating costs 318,704 315,208 1.1
Management fees –
COGECO Inc. 8,179 8,026 1.9
Operating Income 227,521 203,246 11.9
Operating Margin 41.0% 38.6%
Revenue
Revenue rose by $27.9 million, or 5.3%, mainly due to increased
penetration of HSI and digital services and to various rate increases,
as discussed below:
• HSI service customer additions during fiscal 2004 and 2005
generated incremental revenue of approximately $17.6 million
over fiscal 2004. The addition of about 38,000 new HSI service
customers during fiscal 2005 contributed approximately
$8.2 million to this growth and the addition of about 40,000
HSI service customers during the corresponding period in 2004
accounted for about $9.4 million.
• Various rate increases during fiscal 2004 and 2005 created
incremental revenue of about $4.2 million as a result of:
– Effective June 15, 2004 in Ontario and August 1, 2004
in Québec respectively, an average monthly rate increase
of approximately $0.74 per basic analog service customer
was established. An increase of $4 in the monthly digital
basic rate was also implemented in Québec. In addition,
the monthly rate for the pay television package has been
raised by $3, and other limited selective tier service rate
increases have been implemented in Ontario, effective
June 15, 2004.
– Monthly rate increases of at most $3 per customer and
averaging $0.50 per basic service customer took effect on
June 15, 2005 in Ontario and on August 1, 2005 in Québec.
As a result of these increases, the basic monthly rate is now
$24.99 in the large majority of the Ontario networks, and the
number of different basic rates has dropped from 22 to 7,
ranging essentially between $20 and $27.50 per month,
in Québec. The monthly rate for certain bundle services has
increased by $1 in Ontario, and other limited rate increases
for selective tier services have been implemented in Québec.
In addition, new digital services, VOD and equipment rentals
contributed about $7.7 million to revenue growth.
The organic growth, detailed above, was offset by a $4.4 million
drop in equipment sales revenue.
The improved penetration of HSI and digital services and the rate
hikes helped push average monthly service revenue per basic service
customer up from $52.27 in fiscal 2004 to $55.43 in fiscal 2005,
an increase of 6%.
Operating Costs and Management Fees
Operating costs increased by $3.5 million, or 1.1%. The main cost
variances are discussed below:
• Equipment cost of sales declined by $5.3 million as more customers
decided to rent their digital terminals instead of purchasing them.
Furthermore, IP transport costs for HSI services and affiliation
costs for television services declined despite an RGU growth
of 6.6%. As a result, cost of sales as percentage of revenue
has declined.
Cogeco Cable Inc. 2005
21
Management’s Discussion and Analysis