Cogeco 2005 Annual Report Download - page 30

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Cogeco Cable Inc. 2005
2005 vs 2004 Fourth Quarter Operating Results
Revenue rose by $7.1 million, or 5.4%, mainly attributable to
improved HSI services penetration and rate increases implemented.
See the “Revenue” section on page 21 for further discussion
on rate increases.
Operating costs increased by a modest $1 million, or 1.2%.
As Cogeco Cable significantly surpassed its Operating Income
growth objectives for fiscal 2005, the provision for employee
bonuses increased in the fourth quarter. Furthermore, the rise
in customer care expenses is largely attributable to the 6.6% year-
over-year rise in RGUs. On the other hand, costs of sales, including
equipment sold, network fees and IP transport costs for HSI services,
have declined.
Operating Income improved by $6.4 million or 11.8% as a result
of revenue growth partly offset by a modest increase in operating
costs. Cogeco Cable’s focus on improving its Operating Margin
has resulted in the margin going up from 40.8% to 43.3%.
Net income amounted to $11 million, or $0.28 per share, compared
to $6.5 million, or $0.16 per share, for the same period in fiscal
2004. This increase was primarily due to the strong growth in
Operating Income.
Cash flow from operations increased by $5.5 million or 13.4%,
compared to last year, mainly due to the growth in Operating
Income. Investing activities related to capital expenditures and
deferred charges, including assets acquired under capital leases,
rose from $34.7 million to $46.3 million, mainly due to increased
upgrade and reconstruction activities and purchases of digital
terminals. Free Cash Flow of $0.3 million was generated, a decline
of $6.1 million compared to the same period last year as a result
of a $5.5 million increase in cash flow from operations, offset by
a $11.6 million increase in capital expenditures and deferred charges.
Indebtedness declined by $44.7 million essentially due to an increase
in non-cash
operating items of $46.1 million.
FISCAL 2006
FINANCIAL GUIDELINES
Cogeco Cable will strive to expand its basic service customer base
through continued effective marketing, a competitive product
offering and superior customer service. However, the strength
of the competition in the regions served by Cogeco Cable could
partly compromise the attainment of this objective. As penetration
of HSI services increases, growth in that service is likely to level off.
However, growth in digital services should remain relatively stable.
Based on the current competitive environment and demand, the
Corporation anticipates gaining up to 3,000 basic service customers,
32,000 to 37,000 HSI service customers, 60,000 to 65,000 digital
terminals and 32,000 to 37,000 digital telephony service customers
by August 31, 2006.
The Corporation expects to achieve revenue growth between 6%
to 7%. About 45% and 40% of services revenue growth should
stem from the increase in penetration of HSI services in fiscal 2005
and 2006 and the launch of digital telephony, respectively.
The balance should stem mostly from rate increases implemented
in June and August and from wider penetration of digital services.
The demand for HSI services will likely slow down but should be
compensated by increased demand for digital telephony services.
Revenue increase should contribute to Operating Income growth
of approximately 3% to 4%. The Operating Margin should decline,
compared to fiscal 2005, to about 40% due to the launch of
Cogeco Cable’s digital telephony service in most of its major markets.
The digital telephony service will contribute to a $4 million decline
in Operating Income.
Cogeco Cable expects amortization of fixed assets and deferred
charges to decrease by $10 million mainly due to a reduction
in the amortization of subsidies for residential equipments,
digital terminals and cable modems. Financial expense should
remain stable.
Capital expenditures and deferred charges will increase compared
to fiscal 2005, primarily as a result of an increase of approximately
$18.7 million related to digital telephony (compared to an amount
of $5.3 million in fiscal 2005) and from a $4.5 million increase
(excluding telephony expenditures) in support capital mainly
for improvements in information systems. These increases should
be partially offset by a $10.4 million decline in expenditures
mainly due to a greater number of digital terminals purchased
at the end of fiscal year 2005.
Cash flow from operations should finance capital expenditures
and deferred charges planned at $140 million. Free Cash Flow
in the order of $35 to $40 million should be generated, a decrease
of approximately $8 million compared to fiscal 2005 mainly
attributable to the launch of digital telephony in most of networks
during fiscal year 2006. Excluding digital telephony, Cogeco Cable’s
Free Cash Flow should have increased by $15 million compared
to fiscal 2005. Cogeco Cable expects that the generated Free Cash
Flow will be used mainly to reduce the debt and therefore improve
the Corporation’s leverage ratios. Cogeco Cable expects to generate
net income of approximately $39 million, as a result of growth
in Operating Income and a reduction in fixed charges.
ADDITIONAL INFORMATION
This MD&A was prepared on October 31, 2005. Additional
information relating to the Corporation, including its Annual
Information Form, is available on the SEDAR Web site at
www.sedar.com.
Management’s Discussion and Analysis