Cogeco 2008 Annual Report Download - page 37

36 COGECO CABLE INC. 2008 Management’s Discussion and Analysis
SEASONAL VARIATIONS
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations. However, the loss in Basic Cable
service customers is usually greater, and the addition of HSI service customers is generally lower, in the third quarter, mainly due to
students leaving their campuses at the end of the school year. Cogeco Cable offers its services in several university and college
towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières and Rimouski in Canada, and Aveiro,
Covilhã, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarter’s operating margin is usually higher as
no management fees are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a fee equal to 2% of its
total revenue subject to a maximum amount. Since the maximum amount was reached in the second quarters of fiscal 2008 and
2007, Cogeco Cable has paid no management fees in the second halves of fiscal 2008 and 2007.
2008 VS 2007 FOURTH QUARTER OPERATING RESULTS
In Canada, fourth-quarter 2008 RGU net additions were higher than for the same period last year but reflect an early sign of
maturation in some services. The net loss of customers for Basic Cable in the Canadian market stood at 1,476 customers compared
to 2,627 customers for the same period last year. Fourth-quarter Basic Cable service customer losses reflect traditional seasonality
and are due to the end of the school year for college and university students. In addition, 2007 fourth-quarter net losses were
unusually high due to an attractive promotional offer that ended in the third quarter of fiscal 2007 which resulted in a higher than
normal number of customer disconnections for the fourth quarter of fiscal 2007. The number of net additions to HSI service stood at
8,799 customers compared to 12,363 customers for the same period last year. Telephony customers grew in Canada, with net
additions of 19,436 to reach 219,601 compared to a growth of 21,173 for the same period last year. Canadian net additions of
Digital Television service stood at 16,150 customers compared to 8,747 customers for the same period last year due to targeted
marketing initiatives in 2008 to improve the penetration rate and the continuing strong interest for High Definition technology.
In Portugal, 2008 fourth-quarter and fiscal year were marked by an unfavourable economic climate in the Iberian Peninsula,
aggressive advertising campaigns from competitors and from the emergence of multiple triple-play providers in the Portuguese
market. Cabovisão chose not to match the competition’s intensive advertising programs due to the difficult economic environment.
The Digital Television service was launched in the third quarter of 2008, with net additions of 9,982 customers in the fourth quarter,
for a total of 24,452 net additions since the launch, surpassing management expectations. Fiscal 2008 fourth-quarter Basic Cable
service decreased by 4,456 customers compared to a growth of 4,756 in 2007, HSI service decreased by 5,009 customers
compared to an increase of 2,936 in 2007, and Telephony service decreased by 2,326 customers compared to a growth of 2,228 for
the same period of the preceding year.
Consolidated revenue rose by $40.6 million, or 16.6%, of which $32.3 million, or 17.1%, relates to Canadian operations and is
mainly attributable an increased number of RGU combined with rate increases and the impact of the recent acquisitions. European
operations revenue increased by $8.3 million in the quarter mainly as a result of rate increases. Furthermore the strength of the
Euro against the Canadian dollar compared with the prior year had a positive impact on revenue when translated to Canadian
dollars. See the “Revenue” section of the Canadian and the European operations on pages 30 and 32, respectively, for further
discussion on rate increases.
Operating costs increased by $21.9 million, or 15.4%, of which $17.6 million, or 16.5%, are generated by the Canadian operations.
The increase in costs directly related to service customers is largely attributable to the RGU growth of 11.4% in fiscal 2008 and to
the impact of recent acquisitions. For the fourth quarter, European operating costs amounted to $39.3 million, an increase of
$4.3 million, or 12.2% over the prior year. The increase was mainly due to the growth in RGU since the beginning of the year and
the strength of the Euro against the Canadian dollar.
The consolidated operating income before amortization for the fourth quarter 2008 increased by $18.7 million to reach
$121.1 million, an increase of 18.2% compared to the same period the year before. Operating income before amortization for
Canadian operations increased by $14.7 million or 18%, to reach $96.3 million. European operating income before amortization for
the fourth quarter 2008 increased by $4.1 million, or 19.3%, to reach $24.9 million, compared to $20.8 million in the same period of
2007. The increases were attributable to increases in revenue that surpassed increases in operating costs.
Cogeco Cable’s operating margin from the Canadian operations increased slightly to 43.6% from 43.3% in the fourth quarter of
2007. European operations generated an operating margin of 38.8% for fiscal 2008, compared to 37.3% the year before. As a
result, Cogeco Cable’s fourth quarter operating margin increased to 42.5% in fiscal 2008 from 41.9% in fiscal 2007.
During the fourth quarter 2008, cash flow from operations reached $99.5 million, 18.8% higher than the comparable period last year,
primarily due to the increase in operating income before amortization and to the increase in future income taxes. Changes in non-
cash operating items generated higher cash inflows compared to the same period last year, mainly as a result of an increase in
accounts payable and accrued liabilities and in income tax liabilities, net of increases in accounts receivable and prepaid expenses.