growth and acquisitions are key for Cogeco Cable

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Organic growth and acquisitions are key for Cogeco Cable in fiscal2008 third-quarter By marketwire
MONTREAL, QUEBEC -- (MARKET WIRE) -- 07/09/08 -- Today, CogecoCable Inc. (TSX: CCA) announced its financial results for the thirdquarter and first nine months ended May 31, 2008.
For the third quarter and first nine months of 2008:
- Consolidated revenue increased by 14.3% to $274.9 million and by14% to $791.9 million, respectively;
- Consolidated operating income before amortization grew by 20% toreach $117.5 million and by 20.9% to $324.3 million, respectively;

- Consolidated net income amounted to $31.1 million, up by $10.8million in the third quarter, and to $101.4 million, up by $53.1million for the first nine months as compared to the prior year;
- Free cash flow(1) reached $36.9 million in the third quarter and$77.8 million for the first nine months;
- Operating margin grew to 42.7% from 40.7% and to 41% from 38.6%,in the third quarter and for the first nine months, respectively;
- Revenue-generating units (RGUs)(2) grew by 50,889 and 190,109 netadditions, respectively, for a total of 2,675,774 RGUs at May 31,2008.
External growth:
- In order to further develop its business telecommunicationsactivities, the Corporation pursued its growth strategy andconcluded the acquisition of all the assets of MaXessNetworx®, ENWIN Energy Ltd.'s telecommunications division(City of Windsor's energy company). In addition, the Corporationannounced the acquisition of all the assets of FibreWiredBurlington Hydro Communications (Burlington Hydro Electric'stelecommunications division). On June 13, Cogeco Cable announcedits entry into the Greater Toronto Area market through theacquisition of all the shares of Toronto Hydro Telecom Inc., thetelecommunications subsidiary of Toronto Hydro Corporation, subjectto certain conditions, including regulatory approval by theCommissioner of Competition.
(1) Free cash flow does not have standard definitions prescribed byCanadian generally accepted accounting principles (GAAP) and shouldbe treated accordingly. For more details, please consult the"Non-GAAP financial measures" section. (2) Represents the sum ofBasic Cable, High Speed Internet (HSI), Digital Television and Telephony service customers.
"We are very pleased with our third-quarter results. Cogeco Cable'sinternal growth continued at a steady pace. Consequently, we are ontrack to attain our revised projections of last April, and expectthat revenues should stand at $1,060 million, operating incomebefore amortization at $440 million, net income at $123 million andfree cash flow at $70 million for fiscal 2008," declared LouisAudet, President and CEO of Cogeco Cable. "Cogeco Cable is alsopursuing its external growth strategy, as shown by the acquisitionsof MaXess Networx® and FibreWired Burlington HydroCommunications, which will enhance our Cogeco Business Solutionsoffering. As for the acquisition of Toronto Hydro Telecom, this isa great growth opportunity for the Corporation as it provides usthe ability to serve the business telecommunication market throughthe addition of owned and operated points of presence throughoutthe Greater Toronto Area, linked to our other broadband facilitiesextending over the dense telecommunications corridor from Windsorto Cornwall in Ontario".
Fiscal 2009 Preliminary Financial Guidelines:
The Corporation announces its 2009 preliminary guidelines, settingrevenue outlook at about $1,165 million, an increase of $105million compared to the revised fiscal 2008 projections issued inApril 2008. Operating income before amortization should increase toapproximately $495 million, an improvement of $55 million comparedto the revised fiscal 2008 projections, and free cash flow(1)should grow by approximately $35 million to reach $105 million.
FINANCIAL HIGHLIGHTS--------------------------------------------------------------------------------------------------------------------------------------------------($000, except Quarters ended May 31, Nine months ended May 31,percentages and per 2008 2007 Change 2008 2007 Change share data) $$ % $ $ %-------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Revenue 274,944240,612 14.3 791,879 694,566 14.0 Operating income beforeamortization 117,490 97,874 20.0 324,308 268,327 20.9 Net income31,142 20,381 52.8 101,416 48,323 --------------------------------------------------------------------------Cash flow from operations(1) 95,829 76,416 25.4 260,855 200,74029.9 Less: Capital expenditures and increase in deferred charges58,928 57,817 1.9 183,040 185,044 (1.1) Free cash flow(1) 36,90118,599 98.4 77,815 15,696 --------------------------------------------------------------------------Earnings per share Basic 0.64 0.45 42.2 2.09 1.14 83.3 Diluted 0.640.45 42.2 2.08 1.13 84.1--------------------------------------------------------------------------------------------------------------------------------------------------(1) Cash flow from operations and free cash flow do not havestandardized definitions prescribed by Canadian generally acceptedaccounting principles ("GAAP") and therefore, may not be comparableto similar measures presented by other companies. For more details,please consult the "Non-GAAP financial measures" section.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constituteforward-looking information within the meaning of securities laws.Forward-looking information may relate to our future outlook andanticipated events, our business, our operations, our financialperformance, our financial condition or our results, and, in somecases, can be identified by terminology such as "may"; "will";"should"; "expect"; "plan"; "anticipate"; "believe"; "intend";"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure"or other similar expressions concerning matters that are nothistorical facts. In particular, statements regarding our futureoperating results and economic performance and our objectives andstrategies are forward-looking statements. These statements arebased on certain factors and assumptions, including expectedgrowth, results of operations, performance and business prospectsand opportunities, which we believe are reasonable as of thecurrent date. While we consider these assumptions to be reasonablebased on information currently available to us, they may prove tobe incorrect. Forward-looking information is also subject tocertain factors, including risks and uncertainties (described inthe "Uncertainties and main risk factors" section of theCorporation's 2007 annual MD&A) that could cause actual resultsto differ materially from what we currently expect. These factorsinclude technological changes, changes in market and competition,governmental or regulatory developments, general economicconditions, the development of new products and services, theenhancement of existing products and services and the introductionof competing products having technological or other advantages,many of which are beyond our control. Therefore, future events andresults may vary significantly from what we currently foresee. Youshould not place undue importance on forward-looking informationand should not rely upon this information as of any other date.While we may elect to, we are under no obligation (and expresslydisclaim any such obligation), and do not undertake, to update oralter this information before next quarter.
This analysis should be read in conjunction with the Corporation'sfinancial statements, and the notes thereto, prepared in accordancewith Canadian GAAP and the MD&A included in the Corporation's2007 Annual Report. Throughout this discussion, all amounts are inCanadian dollars unless otherwise indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
Cogeco Cable's objectives are to improve profitability and createshareholder value. The strategies for reaching those objectives aresustained growth through the diversification and the improvement ofproducts and services, as well as of clientele and territories; thecontinuous improvement of networks and equipment and tight costcontrol over business processes. The Corporation measures itsperformance, with regard to these objectives, by monitoring revenuegrowth, RGU(1) growth and free cash flow(2). Below are the recentachievements in furthering of Cogeco Cable's objectives.
(1) See the "Customer statistics" section for detailedexplanations. (2) See the "Non-GAAP financial measures" section forexplanations. Continuous improvement of the service offering andexpansion of the customer base Canadian operations - Acquisitions:- June 30, conclusion of the acquisition of all assets ofFibreWired Burlington Hydro Communications, Burlington HydroElectric's telecommunications division (City of Burlington's energycompany) to expand Cogeco Business Solutions' commercial broadbandservice offering in Burlington, Ontario; - June 13, announcement ofthe acquisition of all the shares of Toronto Hydro Telecom Inc.,the telecommunications subsidiary of Toronto Hydro Corporation(City of Toronto's energy company); subject to certain conditions,including regulatory approval by the Commissioner of Competition,in order to further develop Cogeco Cable's businesstelecommunications activities by entering the Greater Toronto Areamarket; - March 31, conclusion of the acquisition of all the assetsof MaXess Networx®, ENWIN Energy Ltd.'s telecommunicationsdivision (City of Windsor's energy company) to strengthen CogecoBusiness Solutions' Data offering in Windsor, Ontario. - High SpeedInternet service: - June 7, launch of Wi-Fi Internet access at LaSalle Park in Burlington, Ontario; - May 7, launch of Wi-FiInternet access in Quebec with the deployment of the first seven Quebec hotspotsin Trois-Rivieres. - Digital Television services: - June 24, launch of Food Network On Demand, HGTV OnDemand and National Geographic On Demand in Ontario territories; -May 6, launch of RDI HD and ARTV HD, two new High Definition (HD)channels in Quebec; - March 4, launch of Family On Demand inOntario, a new On Demand service. - Telephony service: - June 24,launch of Telephony in Maitland and Prescott, Ontario; - June 17,launch of Telephony in Wickham, St-Cyrille-de-Wendover,Morin-Heights, Shawbridge, St-Germain-de-Grantham andSt-Prosper-de- Dorchester, Quebec; - June 4, launch of Telephony inTillbury, Ontario; - During the third quarter, the Telephonyservice was launched in the following cities: - St-Pie, St-Damase,Ste-Madeleine, Acton Vale, St-Thomas d'Aquin,St-Dominique-de-Bagot, Val-David, St-Donat-de-Montcalm, St-Faustin,St-Adolphe-d'Howard, Bic, Ste-Luce, Ste-Blandine, St-Fabien, St-Gedeon and St-Martin-de-Beauce in Quebec; - Kemptville, Acton,Winona, Smithville, Ridgeway, Huntsville, Bracebridge andGravenhurst, in Ontario. - Customer service: - Opening of a CogecoCable store located in Drummondville, Quebec. European operations - Digital Television services: - Cabovisao - Televisao por Cabo, S.A. ("Cabovisao")continued its Digital Television service deployment. - Customer service: - Opening of two (2) newCabovisao stores located in Paivas (Seixal) and Castelo Branco.Continuous improvement of networks and equipment - During the firstnine months of fiscal 2008, the Corporation has investedapproximately $71.8 million in its infrastructure includingheadends and upgrade/rebuild. Tight cost control over businessprocesses - For the third quarter of 2008, consolidated operatingcosts increased by 10.3% while revenue grew by 14.3%; - ThePortuguese cable subsidiary maintained tight control over its costsand continued to improve its business processes; - The design ofinternal controls over financial reporting as per NationalInstrument 52-109 is still underway. As discussed in the 2007annual MD&A, the Corporation had identified certain materialweaknesses in the design of internal controls over financialreporting and there has been improvement in the design of internalcontrols on some significant processes during the quarter. Thedocumentation and remediation of internal controls weaknesses areprogressing normally.
RGU growth
During the first nine months ended May 31, 2008, the consolidatednumber of RGUs increased by 190,109, or 7.6% to reach 2,675,774units, which is in line with the Corporation's revised RGU growthprojections of 225,000 units, representing approximately 9%, forthe fiscal year ending August 31, 2008. Please consult the fiscal2008 revised projections in the "Fiscal 2009 preliminary financialguidelines" section for further details.
Revenue growth
Fiscal 2008 third-quarter revenue increased by $34.3 million, or14.3%, to reach $274.9 million. During the first nine months of2008, revenue increased by $97.3 million, or 14%, to reach $791.9million. For fiscal 2008, the Corporation expects revenue to reach$1,060 million. Please consult the fiscal 2008 revised projectionsin the "Fiscal 2009 preliminary financial guidelines" section forfurther details.
Free cash flow
In the third quarter of fiscal 2008, Cogeco Cable generated freecash flow of $36.9 million, compared to $18.6 million for the sameperiod last year. For the nine-month period ended May 31, 2008, theCorporation generated free cash flow of $77.8 million compared to$15.7 million the year before. The free cash flow improvementsresulted mainly from an increase in operating income beforeamortization and a reduction in financial expense. Fiscal 2008third-quarter and first nine month periods capital expenditures anddeferred charges remained essentially the same compared to thecorresponding periods of the prior year. Due to the usual higherlevel of capital expenditures in the fourth quarter, theCorporation projects free cash flow of $70 million for the fiscalyear ending August 31, 2008. Please consult the fiscal 2008 revisedprojections in the "Fiscal 2009 preliminary financial guidelines"section for further details.
OPERATING RESULTS - CONSOLIDATED OVERVIEW--------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000,except 20082007 Change 2008 2007 Change percentages) $ $ % $ $ %-------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Revenue 274,944240,612 14.3 791,879 694,566 14.0 Operating costs 157,454 142,73810.3 458,857 417,671 9.9 Management fees - COGECO Inc. - - - 8,7148,568 1.7-------------------------------------------------------------------------Operating income before amortization 117,490 97,874 20.0 324,308268,327 20.9-------------------------------------------------------------------------Operating margin 42.7% 40.7% 41.0% 38.6%--------------------------------------------------------------------------------------------------------------------------------------------------
Revenue
Fiscal 2008 third-quarter consolidated revenue improved by $34.3million, or 14.3%, to reach $274.9 million, and, for the firstnine-month period by $97.3 million, or 14% to reach $791.9 million.Driven by an increased number of RGUs combined with rate increases,2008 third quarter Canadian operations revenue went up by $28.2million, or 15.4%, and 2008 first nine-month period by $86.7million, or 16.5%.
Fiscal 2008 third-quarter European operations revenue increased by$6.2 million, or 10.7%, to reach $64 million, and 2008 nine-monthperiod by $10.6 million, or 6.3%, to reach $179.5 million comparedto the same periods last year. European operations implemented rateincreases and have generated lower RGU growth. Furthermore, thestrength of the Euro against the Canadian dollar compared with lastyear has increased revenue growth when translated to Canadiandollars.
Operating costs
For the third quarter and the first nine months of fiscal 2008,operating costs, excluding management fees payable to COGECO Inc.,increased by $14.7 million, or 10.3% and $41.2 million, or 9.9%,compared to last year, to reach $157.5 million and $458.9 million,respectively. The increase in operating costs for the third quarterand first nine-month period of 2008 was mainly attributable toservicing additional RGUs in Canada and Portugal. In addition, forthe first nine-month period, operating costs were impacted by thetiming of certain marketing initiatives in Portugal, including amajor campaign to increase brand awareness, and costs related tothe design of internal controls and review of business processes tocomply with National Instrument 52-109.
Operating income before amortization
Fiscal 2008 third-quarter and first nine-month period operatingincome before amortization increased by $19.6 million, or 20%, toreach $117.5 million and by $56 million, or 20.9%, to reach $324.3million, respectively, as a result of various rate increases andRGU growth generating additional revenues which outpaced operatingcost increases. Cogeco Cable's 2008 third-quarter operating marginincreased to 42.7% from 40.7% for the third quarter of fiscal 2007.The operating margin in Canada improved for the third-quarter of2008 to 44.3% from 43.2% and in Europe to 37.7% from 32.7% comparedto the same period of the prior year.
For the first nine months of fiscal 2008, the operating marginimproved to 41% from 38.6% due to the reasons described above withthe Canadian operating margin improving to 42.6% from 40.2% and theEuropean operating margin to 35.4% from 33.7% when compared to thesame period the year before.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.3% ofthe Corporation's equity shares, representing 82.7% of the votesattached to the Corporation's voting shares. Under a managementagreement, the Corporation pays COGECO Inc. monthly management feesequal to 2% of its total revenue for certain executive,administrative, legal, regulatory, strategic and financial planningand additional services. In 1997, management fees were capped at $7million per year, subject to annual upwards adjustments based onincreases in the Consumer Price Index in Canada. Accordingly, forfiscal 2008, management fees have been set at a maximum of $8.7million, which was reached in the second quarter, and therefore, nomanagement fees were paid in this third quarter. For fiscal 2007,management fees were set at a maximum of $8.6 million, and werefully paid in the first six months of the year.
Furthermore, Cogeco Cable granted 22,683 stock options to COGECO'semployees during the first nine months of 2008, compared to 319,647for the same period last year. Of these 319,647 stock optionsgranted in the first nine months of fiscal 2007, 262,400 wereconditional on the achievement of certain yearly financialobjectives by the Portuguese subsidiary over a period of threeyears. During the third quarter and first nine months of fiscal2008, Cogeco Cable charged COGECO Inc. an amount of $0.1 millionand $0.3 million, respectively, with regards to Cogeco Cable'soptions granted to COGECO's employees. Details regarding themanagement agreement and stock options granted to COGECO Inc.'semployees are provided in the MD&A of the Corporation's 2007Annual Report. There were no other material related partytransactions during the first nine months of 2008.
FIXED CHARGES----------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000, except 20082007 Change 2008 2007 Change percentages) $ $ % $ $ %--------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Amortization 58,20947,278 23.1 166,885 135,159 23.5 Financial expense 17,372 21,273(18.3) 51,243 66,045 (22.4)----------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2008 third quarter and first nine-month period amortizationamounted to $58.2 million and to $166.9 million compared to $47.3million and $135.2 million for the same periods the year before.Amortization expense increased for both periods mainly due to thefollowing factors: the completion, in the fourth quarter of fiscal2007 of the purchase price allocation of the Cabovisao acquisition,which includes the revaluation of tangible and intangible assetsfor an additional amortization expense of approximately $6.2million and $16.4 million in the third quarter and first ninemonths, respectively, and additional capital expenditures arisingfrom the required customer premise equipment to sustain RGU growthand to support the deployment of the Digital Television service in Portugal.
Fiscal 2008 third quarter and first nine-month period financialexpense decreased by $3.9 million and $14.8 million, respectively,compared to the same periods in fiscal 2007 due to the reduction ofthe level of Indebtedness (defined as bank indebtedness andlong-term debt) from the net proceeds of subordinate voting sharesissued during fiscal 2007 as well as free cash flow generatedduring those periods. In addition, during the first nine-monthperiod of fiscal 2007, the Corporation recorded a onetime charge of$2.6 million related to the early repayment of the Second SecuredDebentures, Series A.
INCOME TAXES
Fiscal 2008 third quarter income tax expense amounted to $10.8million compared to $8.9 million in fiscal 2007. The effective taxrate for the three months ended May 31, 2008 was 25.7% compared to30.5% for the same period of 2007, mainly due to lower corporateincome tax rates in Canada and to income tax reductions in Europeanoperations resulting from the revaluation of tangible andintangible assets upon the completion of the Cabovisao purchaseprice allocation in the fourth quarter of fiscal 2007.
For the first nine months of fiscal 2008, income tax expenseamounted to $4.8 million compared to $18.8 million in 2007.Included in first nine-month 2008 expense is a recovery of $24million related to the reduction in corporate income tax ratesannounced on October 16, 2007 by the Canadian federal government inits Economic Statement. According to the new tax initiatives,corporate income tax rates have been further reduced from 20.5% to19.5% effective January 1, 2008, from 20% to 19% effective January1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to16.5% effective January 1, 2011, and to 15% effective January 1,2012. These corporate income tax rates were consideredsubstantively enacted on December 14, 2007. The effective tax ratesfor the first nine months of 2008 and 2007 were 4.5% and 28%,respectively. Excluding the effect of the tax rate reductions, the effective tax rate for the firstnine months of 2008 was 27.1%.
NET INCOME
Fiscal 2008 third quarter net income amounted to $31.1 million, or$0.64 per share, compared to $20.4 million, or $0.45 per share, forthe same period in 2007, an increase of 52.8% and 42.2%. Firstnine-month period net income amounted to $101.4 million, or $2.09per share. Excluding the effect of the fiscal 2008 income tax rate reductions of $24 million, netincome for the first nine months would have amounted to $77.4million, or $1.60 per share, compared to $48.3 million, or $1.14per share, in 2007, an increase of 60.2% and 40.4%, respectively.Net income progression, excluding the effect of the income tax rate reductions, has resulted mainly from thegrowth in operating income before amortization exceeding that offixed charges.
CASH FLOW AND LIQUIDITY--------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000) 2008 20072008 2007 $ $ $ $-------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Operatingactivities Cash flow from operations 95,829 76,416 260,855 200,740Changes in non-cash operating items 16,970 (23,029) (11,720)(101,545)-------------------------------------------------------------------------112,799 53,387 249,135 99,195--------------------------------------------------------------------------------------------------------------------------------------------------Investing activities(1) (74,014) (53,548) (196,655) (179,801)--------------------------------------------------------------------------------------------------------------------------------------------------Financing activities(1) 17,957 (14,920) (36,466) 30,260-------------------------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents denominatedin foreign currencies 1,063 (1,774) 1,265 1,486--------------------------------------------------------------------------------------------------------------------------------------------------Net change in cash and cash equivalents 57,805 (16,855) 17,279(48,860) Cash and cash equivalents at beginning 23,682 39,51164,208 71,516--------------------------------------------------------------------------------------------------------------------------------------------------Cash and cash equivalents at end 81,487 22,656 81,487 22,656--------------------------------------------------------------------------------------------------------------------------------------------------(1) Excludes assets acquired under capital leases.
Fiscal 2008 third quarter cash flow from operations reached $95.8million, 25.4% higher than the comparable period last year,primarily due to the increase in operating income beforeamortization and to the reduction in financial expense. Changes innon-cash operating items generated higher cash inflows compared tothe same period last year, mainly as a result of an increase inaccounts payable and accrued liabilities and in income taxliabilities.
Fiscal 2008 first nine-month period cash flow from operationsreached $260.9 million, an increase of 29.9% compared to the sameperiod the year before, primarily due to the growth in operatingincome before amortization and to the reduction in financialexpense. Changes in non-cash operating items generated lower cashoutflows than for the same period last year, mainly as a result ofa smaller decrease in accounts payable and accrued liabilities andan increase in income tax liabilities. The larger reduction inaccounts payable and accrued liabilities in the first nine monthsof fiscal 2007 was due to non-recurring payments made by thePortuguese subsidiary in accordance with the terms of theacquisition.
Investing activities, including capital expenditures segmentedaccording to the National Cable Television Association (NCTA) standard reporting categories, are as follows:
------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000) 2008 20072008 2007 $ $ $ $------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Customer PremiseEquipment(1) 20,238 18,985 70,477 76,188 Scalable Infrastructure8,627 10,940 30,726 31,700 Line Extensions 2,160 2,598 7,738 7,798Upgrade / Rebuild 15,498 13,936 41,105 41,967 Support Capital 5,3555,358 12,433 8,133------------------------------------------------------------------------Total Capital Expenditures(2) 51,878 51,817 162,479 165,786------------------------------------------------------------------------Deferred charges and Others 7,002 5,571 20,488 18,790------------------------------------------------------------------------Business acquisition and related adjustments 16,105 (3,279) 16,105(1,894)------------------------------------------------------------------------Decrease in restricted cash - - - (88)------------------------------------------------------------------------Total investing activities 74,985 54,109 199,072 182,594------------------------------------------------------------------------------------------------------------------------------------------------(1) Includes mainly new and replacement drops as well as hometerminal devices. (2) Includes capital leases, which are excludedfrom the statements of cash flow.
Fiscal 2008 third quarter Total Capital Expenditures amounted to$51.9 million, essentially the same level when compared to thecorresponding last year period, due to the following factors:
- An increase in customer premise equipment capital spendingresulted from higher RGU growth fuelled in part by increasedinterest for High Definition technology for the Canadian operationscombined with the deployment of Digital Television in Portugal, partly offset by lower RGU growth in Portugal.
- A decrease in scalable infrastructure capital spending mainly dueto the timing of the expansion and headend improvements, systempowering and equipment reliability to sustain increased customerdemand for HSI and Telephony services.
- An increase in capital expenditures associated with networkupgrades and rebuilds due to the construction costs incurred toincrease the number of homes passed in Portugal.
Fiscal 2008 first nine-month period Total Capital Expendituresdecreased to $162.5 million from $165.8 million for the same periodlast year due to the following factors:
- A reduction in customer premise equipment resulted from thetiming to acquire such equipment in fiscal 2007, in the Canadianoperations, to ensure the availability of equipment required tosustain expected RGU growth, partly offset by the deployment ofDigital Television service in Portugal.
- An increase in support capital is due to the improvement ininformation systems to sustain the business operations and to theacquisition of vehicles.
Deferred charges and Others are mainly attributable to reconnectcosts. Fiscal 2008 third quarter and first nine-month periodcapital spending amounted to $7 million and $20.5 million comparedto $5.6 million and $18.8 million for the same periods the yearbefore. The higher reconnect costs associated with RGUs in Canadacombined with the deployment of the Digital Television service inPortugal explained the increases recorded so far in 2008.
In the third quarter and first nine months of fiscal 2008, theCorporation generated free cash flow amounting to $36.9 million and$77.8 million, respectively, compared to $18.6 million and $15.7million for the same periods of the preceding year. The free cashflow improvements over last year's same periods are mainly due toan increase in operating income before amortization and to areduction in financial expense. The aggregate amount of TotalCapital Expenditures and Deferred charges increased by $1.1 millionin the 2008 third quarter and decreased by $2 million for the firstnine-month period compared to the corresponding periods of lastyear due to the factors explained above.
Indebtedness increased by $22.7 million in the third quarter offiscal 2008. This increase is primarily due to the issuance by theCorporation on March 5, 2008 of a $100 million senior unsecureddebenture by way of a private placement, the proceeds of which wereused in part to reimburse the bank indebtedness of $17.7 millionand to finance the acquisition of MaXess Networx® for $16.1million. The debenture bears interest at a fixed rate of 5.936%, isredeemable at the Corporation's option at any time, in whole or inpart, prior to maturity, at 100% of the principal amount plus amake-whole premium and will mature on March 5, 2018. The increasein Indebtedness was partly offset by repayments on the revolvingcredit facility of $58.6 million from the generated free cash flowof $36.9 million and the increase in non-cash operating items of$17 million. For the same period last year, Indebtedness decreasedby $13.6 million. The reduction was mainly due to the generatedfree cash flow of $18.6 million and the net change of $16.9 millionin cash and cash equivalents, partly offset by a decline of $23million in non-cash operating items. In addition, during the thirdquarter of fiscal 2008, a dividend of $0.10 per share was paid tothe holders of subordinate and multiple voting shares, totalling$4.9 million, compared to a dividend of $0.06 per share, or $2.7million, for the third quarter of fiscal 2007.
During the first nine months of fiscal 2008, the level ofIndebtedness decreased by $25.3 million mainly due to a netreduction of $123.1 million on the revolving credit facility. Thisdecrease was partly offset by the issuance of a senior unsecureddebenture as discussed above. For the same period last year,Indebtedness decreased by $153.1 million, mainly due to thecompletion of a public offering of 5,000,000 subordinate votingshares for a net proceeds of approximately $184.2 million, thegenerated free cash flow of $15.7 million and the net change of$48.9 million in cash and cash equivalents, partly offset by adecline of $101.5 million in non-cash operating items. In addition,quarterly dividends of $0.10 per share were paid to the holders ofsubordinate and multiple voting shares totalling $14.5 millionduring the first nine months of fiscal 2008 compared to quarterlydividends of $0.04 per share in the first quarter and $0.06 pershare in the second and third quarters totalling $6.7 million forthe same period the year before.
As at May 31, 2008, the Corporation had a working capitaldeficiency of $345.9 million compared to $120.7 million as atAugust 31, 2007. The greater deficiency is mainly attributable tothe US$ 150 million Senior Secured Notes, Series A and the relatedderivative financial instruments of $91.3 million for an aggregateamount of $240.1 million due on October 31, 2008. Due to the natureof its business, Cogeco Cable maintains a working capitaldeficiency due to a low level of accounts receivable since themajority of the Corporation's customers pay before their servicesare rendered, contrary to accounts payable and accrued liabilities,which are paid after products or services are rendered, thusenabling the Corporation to use cash and cash equivalents to reduceIndebtedness.
As at May 31, 2008, the Corporation had used $366.8 million of its$900 million Term Facility, for a remaining availability of $533.2million.
FINANCIAL POSITION
Since August 31, 2007, there have been major changes to the balanceof Fixed assets, Cash and cash equivalents, Accounts payable andaccrued liabilities, Income tax liabilities, Accounts receivable,Future income tax assets, Future income tax liabilities, Goodwill,Accumulated other comprehensive income (loss), Derivative financialinstruments and Indebtedness.
The $55.5 million fixed assets rise is mainly related to increasedcapital expenditures to sustain RGU growth and by the appreciationof the Euro over the Canadian dollar. The $17.3 million increase incash and cash equivalents is mainly related to the net proceeds ofissuance of senior unsecured debentures, as discussed in the "CashFlow and Liquidity" section, as well as the free cash flowgenerated of $77.8 million, partly offset by the net reduction ofthe revolving credit facility of $123.1 million, the acquisition ofMaXess Networx® for $16.1 million, and dividends paid of $14.5million. The $16.1 million reduction in accounts payable andaccrued liabilities is related to the timing of payments made tosuppliers. The $14.2 million increase in income tax liabilities isdue to the utilization of most of the Corporation's tax lossescarry forwards before fiscal 2008. The $5.7 million accountsreceivable increase is essentially due to revenue growth and itsrelated level of receivables. The $9.8 million reduction in futureincome tax assets is mainly due to the utilization of tax lossescarried forward from prior years, and the $20.4 million futureincome tax liabilities reduction is mainly due to the corporateincome tax rate reductions announced by the Canadian federalgovernment and considered substantively enacted on December 14,2007. The $25.2 million goodwill increase is due to theappreciation of the Euro over the Canadian dollar. The $15.1million increase in accumulated other comprehensive income (loss)is mainly the result of the appreciation of the Euro over theCanadian dollar, partly offset by the changes in accountingpolicies related to financial instruments. The derivative financialinstruments have increased by $91.3 million and Indebtedness hasdecreased by $83.4 million as a result of accounting changes andfactors previously discussed in the "Cash Flow and Liquidity"section, net of the unfavourable impact of the appreciation of theEuro over the Canadian dollar. Please consult "Accounting policiesand estimates" section for further details.
A description of Cogeco Cable's share data as of June 30, 2008 ispresented in the table below:
------------------------------------------------------------------------------------------------------------------------------------------------Number of Amount shares/options ($000)------------------------------------------------------------------------Common shares Multiple voting shares 15,691,100 98,346 Subordinatevoting shares 32,813,371 890,228 Options to purchase subordinatevoting shares Outstanding options 862,237 Exercisable options332,210------------------------------------------------------------------------------------------------------------------------------------------------
In the normal course of business, Cogeco Cable has incurredfinancial obligations, primarily in the form of long-term debt,operating and capital leases and guarantees. Cogeco Cable'sobligations, as discussed in the 2007 annual MD&A, have notmaterially changed since August 31, 2007, with the exception of thenew financing discussed in the "Cash Flow and Liquidity" section.
On June 30, 2008, Cogeco Cable completed the acquisition of all theassets of FibreWired Burlington Hydro Communications, BurlingtonHydro Electric's telecommunications division (City of Burlington'senergy company) for a total consideration of $12.5 million.FibreWired Burlington Hydro Communications operates a broadbandnetwork equipped with next generation Ethernet technology, providesBurlington organizations with the broadband capacity they need fordata networking, high-speed Internet access , hosting services, e-business applications, video conferencing andother advanced communications. Cogeco Cable will use this networkto expand its commercial broadband service offering in the area,which is in Cogeco Cable's footprint.
On June 13, 2008, Cogeco Cable announced the acquisition of all ofthe shares of Toronto Hydro Telecom Inc., the telecommunicationssubsidiary of Toronto Hydro Corporation (City of Toronto's energycompany), subject to certain conditions, including regulatoryapproval by the Commissioner of Competition. Toronto Hydro TelecomInc. offers data communications and other telecommunicationsservices such as Ethernet, private line, Voice-over-Internetprotocol ("VoIP"), high-speed Internet access , dark fibre, data storage , data security and co-location to a wide range of businesscustomers and organizations throughout the Greater Toronto Area("GTA"). This agreement will allow Cogeco Cable to further thedevelopment of its business telecommunications activities.
On March 31, 2008, Cogeco Cable completed the acquisition of allthe assets of MaXess Networx®, ENWIN Energy Ltd.'stelecommunications division (City of Windsor's energy company), fora total cost, including acquisition costs, of $16.1 million. MaXessNetworx® operates a broadband network equipped with nextgeneration ATM and Ethernet technology and provides organizationsin southwestern Ontario with the broadband capacity required fordata networking, high-speed Internet access, e-businessapplications, video conferencing and other advanced communications.
DIVIDEND DECLARATION
At its July 9, 2008 meeting, the Board of Directors of Cogeco Cabledeclared a quarterly eligible dividend of $0.10 per share forsubordinate and multiple voting shares, payable on August 6, 2008,to shareholders of record on July 23, 2008.
FOREIGN EXCHANGE MANAGEMENT
Cogeco Cable has entered into cross-currency swap agreements to setthe liability for interest and principal payments on its US$150million Senior Secured Notes. These agreements have the effect ofconverting the U.S. interest coupon rate of 6.83% per annum to anaverage Canadian dollar fixed interest rate of 7.254% per annum.The exchange rate applicable to the principal portion of the debthas been fixed at CAN$1.5910. Amounts due under the US$150 millionSenior Secured Notes, Series A decreased by CAN$9.5 million at theend of the third quarter compared to August 31, 2007 due to theCanadian dollar's appreciation. The fair value of cross-currencyswaps increased by a net amount of $7.8 million, of which $9.5million offsets the foreign exchange gain on the $US debt. Thedifference of $1.7 million was recorded as an increase of othercomprehensive income.
As noted in the MD&A of the 2007 Annual Report, theCorporation's investment in the Portuguese subsidiary, Cabovisao,is exposed to market risk attributable to fluctuations in foreigncurrency exchange rates, primarily changes in the values of theCanadian dollar versus the Euro. This risk is mitigated since themajor part of the purchase price for Cabovisao was borroweddirectly in Euros. This debt is designated as a hedge of netinvestments in self-sustaining foreign subsidiaries and,accordingly, the Corporation realized a foreign exchange gain ofCAN$16.2 million in the first nine months of 2008, which ispresented in other comprehensive income. The exchange rate used toconvert the Euro into Canadian dollars for the balance sheetaccounts as at May 31, 2008 was $1.5448 per Euro compared to$1.4390 per Euro as at August 31, 2007. The average exchange ratesprevailing during the third quarter and first nine months of 2008used to convert the operating results of the European operationswere $1.5694 and $1.4851 per Euro, respectively, compared to$1.5202 and $1.4946 per Euro respectively, for the same periodslast year.
CANADIAN OPERATIONS CUSTOMER STATISTICS----------------------------------------------------------------------------------------------------------------------------------------------Net additions (losses) Quarters ended Nine months ended May 31, May31, May 31, 2008 2008 2007 2008 2007-----------------------------------------------------------------------RGUs(2) 1,948,999 36,658 35,768 160,491 192,916 Basic Cable servicecustomers 858,570 (520) (2,910) 9,413 18,607 HSI service customers464,668 8,480 11,030 48,832 60,393 Digital Television servicecustomers 425,596 11,585 8,583 45,717 43,768 Telephony servicecustomers 200,165 17,113 19,065 56,529 70,148----------------------------------------------------------------------------------------------------------------------------------------------% of Penetration(1) May 31, 2008 2007-----------------------------------------------------------------------RGUs(2) Basic Cable service customers HSI service customers 57.550.7 Digital Television service customers 50.4 44.5 Telephonyservice customers 28.1 18.5----------------------------------------------------------------------------------------------------------------------------------------------(1) As a percentage of Basic Cable service customers in areasserved. (2) Represents the sum of Basic Cable service, HSI service,Digital Television service and Telephony service customers.
Fiscal 2008 third quarter RGU net additions were higher than forthe same period last year but the growth rate reflects an earlysign of maturation in some services. The number of net losses forBasic Cable stood at 520 customers compared to 2,910 customers forthe same period last year. Third-quarter Basic Cable servicecustomer losses are due to the end of the school year for collegeand university students. In addition, 2007 third-quarter net losseswere unusually high due to an aggressive promotional offer thatended in the third quarter of fiscal 2007 which resulted in asignificant number of customer disconnections. Telephony customersgrew by 17,113 to reach 200,165 compared to 19,065 for the sameperiod last year. The lower growth is mostly attributable to theincreased penetration in areas where the service is already offeredand to fewer new areas where the service was launched. Telephonyservice coverage, as a percentage of homes passed, has now reached83% compared to 77% last year.
The number of HSI net additions stood at 8,480 customers comparedto 11,030 customers for the same period last year. During the thirdquarter of 2008, the growth in HSI customer net additions continuesto stem from the enhancement of the product offering, the impact ofthe bundled offer (Cogeco Complete Connection) of Television, HSIand Telephony services, and promotional activities.
The Digital Television service net additions stood at 11,585customers compared to 8,583 customers for the same period last yeardue to targeted marketing initiatives in 2008 to improve thepenetration rate. It also reflects the continuing strong interestfor High Definition technology.
OPERATING RESULTS----------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000, except 20082007 Change 2008 2007 Change percentages) $ $ % $ $ %--------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Revenue 210,928182,763 15.4 612,337 525,620 16.5 Operating costs 117,580 103,77813.3 342,949 305,733 12.2 Management fees - COGECO Inc. - - - 8,7148,568 1.7--------------------------------------------------------------------------Operating income before amortization 93,348 78,985 18.2 260,674211,319 23.4--------------------------------------------------------------------------Operating margin 44.3% 43.2% 42.6% 40.2%----------------------------------------------------------------------------------------------------------------------------------------------------
Revenue
Fiscal 2008 third quarter and first nine months revenue rose by$28.2 million, or 15.4%, and $86.7 million, or 16.5%, to reach$210.9 million and $612.3 million, respectively. This growth isexplained mainly by an increase in the number of Telephony, DigitalTelevision and HSI service customers as mentioned in the "CustomerStatistics" section, combined with the following rate increasesimplemented by the Corporation:
- In the second half of fiscal 2007: - In March 2007; a monthlyrate increase of $3 per Digital Television service customer inOntario; - In April 2007; a monthly rate increase of $3 per DigitalTelevision service customer in Quebec and a rate increase of $1.50per Analogue Value Pak service customer in Ontario. These rateincreases represent an average increase of approximately $1.25 perBasic Cable service customer. - In the first quarter of fiscal2008: - In October 2007 in Quebec; a rate increase of between $1and $2 per Analogue Basic Cable service customer without a bundle,a rate increase of $0.50 per basic and tier service customerwithout a bundle, and rate increases from $2 to $5 per HSI Liteservice customer and $5 per HSI Standard stand-alone servicecustomer; - In November 2007 in Ontario; a rate increase of between$1 and $2 per Analogue Basic Cable service customer without abundle, and rate increases from $2 to $5 per HSI Lite servicecustomer and $5 per HSI Standard stand-alone service customer. -Finally, a rebate of $5 per Telephony service customer with twoservices bundled offers was also introduced in fiscal 2008 inOntario and in Quebec. These rate adjustments implemented in fiscal2008 represent an average increase of approximately $0.50 per BasicCable service customer.
Operating costs
Fiscal 2008 third quarter and first nine months operating costs,excluding management fees payable to COGECO Inc., increased by$13.8 million, or 13.3%, and $37.2 million, or 12.2%, to reach$117.6 million and $342.9 million, respectively. The operatingcosts increase is mainly attributable to servicing additional RGUs.
Operating income before amortization
Fiscal 2008 third quarter and first nine months operating incomebefore amortization rose by $14.4 million, or 18.2%, to reach $93.3million and by $49.4 million, or 23.4%, to reach $260.7 million,respectively. The operating income before amortization has risendue to the increased revenue outpacing the operating costs growth.Cogeco Cable's Canadian operations third-quarter operating marginincreased to 44.3% from 43.2%, and for the nine-month periodincreased to 42.6% from 40.2%, mainly as a result of RGU growth andimplemented rate increases.
EUROPEAN OPERATIONS CUSTOMER STATISTICS------------------------------------------------------------------------------------------------------------------------------------------Net additions (losses) Quarters ended Nine months ended May 31, May31, May 31, 2008 2008 2007 2008 2007---------------------------------------------------------------------RGUs(2) 726,775 14,231 16,666 29,618 58,196 Basic Cable servicecustomers 300,591 (1,069) 5,694 6,588 19,553 HSI service customers164,310 (1,615) 5,424 4,287 20,809 Digital Television servicecustomers 14,470 14,470 - 14,470 - Telephony service customers247,404 2,445 5,548 4,273 17,834------------------------------------------------------------------------------------------------------------------------------------------% of Penetration(1) May 31, 2008 2007---------------------------------------------------------------------RGUs(2) Basic Cable service customers HSI service customers 54.754.3 Digital Television service customers 4.8 - Telephony servicecustomers 82.3 83.3------------------------------------------------------------------------------------------------------------------------------------------(1) As a percentage of Basic Cable service customers in areasserved. (2) Represents the sum of Basic Cable service, HSI serviceand Telephony service customers.
Fiscal 2008 third-quarter and first nine-month periods were markedby an unfavourable economic environment, aggressive marketingcampaigns from competitors, including periodic intense pricecompetition, and the arrival of multiple triple-play providers inthe Portuguese market. Cabovisao was not matching the competition'shighly discounted offering at all times. These factors were themain contributors to net customer losses in the Basic Cable and HSIservices and lower customer growth in Telephony services comparedto the same period last year. The Digital Television service waslaunched in the third quarter of 2008, with net additions of 14,470customers in that period, surpassing management expectations.Fiscal 2008 third-quarter Basic Cable service decreased by 1,069customers compared to a growth of 5,694 in 2007, HSI servicedecreased by 1,615 customers compared to an increase of 5,424 in2007, and Telephony service grew by 2,445 customers compared to5,548 for the same period of the preceding year. Managementconsiders the current competitive dynamics in Portugal to betransitory. Cabovisao's performance since its acquisition by CogecoCable has exceeded management's original business plan and growthprospects for the long-term remain excellent in management's view.
OPERATING RESULTS----------------------------------------------------------------------------------------------------------------------------------------------------Quarters ended May 31, Nine months ended May 31, ($000, except 20082007 Change 2008 2007 Change percentages) $ $ % $ $ %--------------------------------------------------------------------------(unaudited) (unaudited) (unaudited) (unaudited) Revenue 64,01657,849 10.7 179,542 168,946 6.3 Operating costs 39,874 38,960 2.3115,908 111,938 3.5--------------------------------------------------------------------------Operating income before amortization 24,142 18,889 27.8 63,63457,008 11.6--------------------------------------------------------------------------Operating margin 37.7% 32.7% 35.4% 33.7%----------------------------------------------------------------------------------------------------------------------------------------------------
Revenue
Fiscal 2008 third-quarter and first nine months revenue increasedby $6.2 million and $10.6 million to reach $64 million and $179.5million, respectively, an increase of 10.7% and 6.3%, compared tofiscal 2007. This growth for the third quarter is mainly due to thefollowing monthly rate increases implemented by Cabovisao: anincrease of $1 (0.65 EUR) per Basic Cable service customereffective in March 2007, an increase averaging $1.50 (1 EUR) perBasic Cable customer and an increase averaging $0.90 (0.60 EUR) perHSI customer effective in January 2008, and the launch of DigitalTelevision services. The growth for the first nine-month period ismainly due to the increase in the number of Basic Cable, HSI andTelephony service customers, and to the monthly rate increasesdescribed above, as well as the launch of Digital Televisionservices. Revenue from the European operations in its localcurrency, for the third quarter and first nine months of fiscal2008, amounted to 40.8 million EUR and 120.8 million EUR, anincrease of 2.7 million EUR, or 7.2%, and 7.9 million EUR, or 6.9%,respectively.
Operating costs
For the third quarter and the first nine months of fiscal 2008,operating costs increased by $0.9 million and $4 million to reach$39.9 million and $115.9 million, respectively, an increase of 2.3%and 3.5% compared to last year. The increase in operating costs forthe third quarter of 2008 is mainly attributable to the launch ofDigital Television services as well as servicing additional RGUs.The operating costs increase for the nine-month period is due toservicing additional RGUs, timing of certain marketing initiatives,including a major campaign to increase brand awareness, and costsrelated to the design of internal controls and review of businessprocesses to comply with National Instrument 52-109. Operatingcosts from the European operations in its local currency, for thethird quarter and first nine months of fiscal 2008, amounted to 25million EUR and 77.7 million EUR, a decrease of 0.7 million EUR, or2.6%, and an increase of 2.8 million EUR, or 3.8%, respectively.
Operating income before amortization
Fiscal 2008 third quarter and first nine months operating incomebefore amortization increased from $18.9 million to $24.1 million,an increase of 27.8% and from $57 million to $63.6 million, anincrease of 11.6%, respectively. The operating income beforeamortization increased due to revenue growth outpacing the rise inoperating costs. Fiscal 2008 third quarter European operationsoperating margin increased from 32.7% to 37.7%. For the firstnine-month period of 2008, the operating margin increased from33.7% to 35.4% . Operating income before amortization from theEuropean operations in its local currency, for the third quarterand first nine months of fiscal 2008, amounted to 15.8 million EURand 43.1 million EUR, an increase of 3.4 million EUR, or 27.3%, and5 million EUR, or 13%, respectively.
FISCAL 2009 PRELIMINARY FINANCIAL GUIDELINES
The fiscal 2009 preliminary financial guidelines exclude theacquisition of Toronto Hydro Telecom Inc., which is subject to theapproval by the Commissioner of Competition. The revisedguidelines, with other changes as required, will be presented uponcompletion of the transaction and the release of the 2008 year-endresults.
For fiscal 2009, Cogeco Cable expects to grow revenue and operatingincome before amortization. The preliminary guidelines take intoconsideration the global economical slowdown that is occurring andshould continue during 2009. In Canada and Portugal, mortgageinterest rate increases and higher commodity prices are leavingconsumers with a lower level of disposable income. In addition,Portugal's anticipated gross domestic product growth for 2009 willbe negatively impacted as the Government deficit will be one of thehighest of the European Union in recent history, while thecompetitive landscape should remain unchanged. Results from thisscenario should generate slower growth when compared to prioryears.
The revenue increase of approximately 10% should come from thecombined Canadian and European operations. The Canadian operationsrevenue should increase by approximately 13% from continueddeployment of Telephony service, by expanded penetration of HSIservice and Digital Television services in fiscal 2008 and 2009 andthe impact of the rate increases implemented in fiscal 2008 inOntario and in Quebec, averaging $1.75 per Basic Cable servicecustomer for both divisions. Cogeco Cable plans to expand itsCanadian Basic Cable Service clientele through consistentlyeffective marketing, competitive product offerings and superiorcustomer service. As the penetration of HSI, Telephony and DigitalTelevision services increase, the demand for these products shouldslow, reflecting maturity. Revenue from European operations shouldincrease by approximately 3.5% from 162 million EUR to 168 millionEUR mainly from rate increases of approximately 1.30 EUR (CDN$2)per Basic Cable service customer implemented in fiscal 2008,sustained RGU growth from fiscal 2008 and 2009 and from the launchof Digital Television service in the second half of fiscal 2008.European operations should contribute to approximately 2% in revenue growth due to the effect of foreignexchange translation. For fiscal 2008, the expected Canadian dollarvalue of the Euro should be approximately $1.48 per Euro while forfiscal 2009, it is anticipated that the Euro should be converted ata rate of approximately $1.44 per Euro.
Growth in revenue and sustained cost control should help achieve asignificant increase in operating income before amortization byapproximately 12% to 13%. Cogeco Cable expects to achieve anoperating margin of approximately 42.5%.
Cogeco Cable expects the amortization of capital assets anddeferred charges to increase by $25 million, mainly due to capitalexpenditures and deferred charges for RGU additions in fiscal 2008and 2009. Management expects that cash flows generated byoperations will finance capital expenditures and deferred charges,expected to amount to $275 million, essentially the same as forfiscal 2008. The Corporation expects t
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