MONTREAL, QUEBEC--(Marketwire - Oct. 30, 2008) - Today, COGECO Inc. (TSX:CGO) announced its financial results for the fourth quarter and fiscal year 2008 ended August 31, 2008.
For the fourth quarter and fiscal year 2008:
- Consolidated revenue increased by 16.5% to $292.9 million and by 14.4% to $1,108.9 million, respectively;
- Consolidated operating income before amortization(1) grew by 20.4% to reach $121.1 million and by 20.9% to $448.9 million, respectively;
- Consolidated net income amounted to $9.7 million and $25.1 million compared to $30.4 million and $74.8 million, respectively, a decrease for both periods compared to last year mainly due to gains on dilution recorded in fiscal 2007;
- Free cash flow(1) reached $21 million in the fourth quarter compared to $9.1 million the year before. For the fiscal year, it amounted to $100.4 million compared to $29.4 million the prior year;
- Operating margin(1) grew to 41.4% from 40% and to 40.5% from 38.3%, in the fourth quarter and the fiscal year, respectively;
- In the cable sector, revenue-generating units ("RGU")(2) grew by 41,100 and 231,209 net additions, respectively, for a total of 2,716,874 RGU at August 31, 2008.
External growth:
- During the fourth quarter, the cable subsidiary, Cogeco Cable, announced its entry into the Greater Toronto Area market through the acquisition of all the shares of Toronto Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro Corporation, which now operates under the name of Cogeco Data Services Inc. ("CDS").
"Our fourth-quarter was marked by the entry of Cogeco Cable in the Greater Toronto Area market with the acquisition of Toronto Hydro Telecom. Our new subsidiary, Cogeco Data Services, gives us access to complementary markets and expertise that should contribute to our future commercial growth and development. This acquisition is perfectly aligned with our long-term external growth strategy. On the radio side, we are pleased to report that our RYTHME FM network continues to be the favorite choice of the 25-54 year old female audience in Montreal. As for our fiscal year-end results, we are very pleased to report continued growth with the generation of financial results above expectations. Our withdrawal from TQS was done in the best interests of our shareholders. As for fiscal 2009, we have reviewed our guidelines in light of the global economic climate, the competitive landscape in Portugal, and to include our projections for CDS," declared Louis Audet, President and CEO of COGECO.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(2) Represent the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.
Fiscal 2009 Preliminary Financial Guidelines:
The Company issued its 2009 financial guidelines, setting revenue outlook at about $1,243 million, an increase of $45 million compared to the 2009 preliminary financial projections issued in July 2008. Operating income before amortization should increase to approximately $513 million, an improvement of $13 million compared to our preliminary projections, and free cash flow should amount to approximately $95 million, a decrease of $15 million due to an increase in capital expenditures driven by the recent acquisitions in the cable sector. Please consult the fiscal 2009 projections in the "Fiscal 2009 Financial Guidelines" section for further details.
FINANCIAL HIGHLIGHTS
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($000, except Quarters ended Years ended
percentages and August 31, August 31,
per share data) 2008 2007(1) Change 2008 2007(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 292,873 251,300 16.5 1,108,900 969,335 14.4
Operating
income from
continuing
operations
before
amortization(2) 121,135 100,595 20.4 448,894 371,235 20.9
Income from
continuing
operations 9,656 37,097 (74.0) 43,165 85,623 (49.6)
Loss from
discontinued
operations - (6,713) - (18,057) (10,883) 65.9
Net income 9,656 30,384 (68.2) 25,108 74,740 (66.4)
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Cash flow from
operations(2) 99,969 78,153 27.9 362,788 283,565 27.9
Less:
Capital
expenditures
and increase
in deferred
charges 78,988 69,022 14.4 262,352 254,141 3.2
Free cash
flow(2) 20,981 9,131 - 100,436 29,424 -
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Earnings
(loss) per
share
Basic
Income from
continuing
operations 0.58 2.23 (74.0) 2.59 5.16 (49.8)
Loss from
discontinued
operations - (0.40) - (1.08) (0.66) 63.6
Net income 0.58 1.83 (68.3) 1.50 4.50 (66.7)
Diluted
Income from
continuing
operations 0.58 2.21 (73.8) 2.58 5.13 (49.7)
Loss from
discontinued
operations - (0.40) - (1.08) (0.65) 66.2
Net income 0.58 1.81 (68.0) 1.50 4.48 (66.5)
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(1) The comparative figures reflect the reclassification of discontinued
operations. Please refer to note 15 of the consolidated financial
statements for further details.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to COGECO's future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, 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 not historical facts. In particular, statements regarding the Company's future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Company, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the "Uncertainties and main risk factors" section of the Company's 2007 annual Management's Discussion and Analysis ("MD&A") that could cause actual results to differ materially from what COGECO currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Company's control. Therefore, future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Company is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.
This analysis should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 2007 Annual Report. Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO Inc.'s ("COGECO" or the "Company") objectives are to maximize shareholder value by increasing profitability and ensuring continued growth. The strategies employed to reach these objectives, supported by tight cost control and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous improvement of networks and equipment are the main strategies used. The radio activities focus on continuous improvement of programming in order to increase market share, and, thereby, profitability. COGECO uses growth of operating income before amortization(1), free cash flow(1) and revenue-generating units ("RGU")(2) growth in order to measure its performance against these objectives for the cable sector. Below are the Company's recent achievements in furthering the corporate objectives.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section
(2) Represent the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
Tight control over costs and business processes
- For the fourth quarter of 2008, the Company's operating costs increased over last year by 12.2% compared to a revenue growth of 16.5%;
- The design of internal controls over financial reporting as per National Instrument 52-109 is still ongoing. As discussed in the 2007 annual MD&A, the Company identified certain material weaknesses in the design of internal controls over financial reporting have been working to improve in design of internal controls on some significant processes during the quarter. The documentation and remediation of internal controls weaknesses are progressing normally.
Cable sector
Sustained corporate growth
Canadian operations
- Acquisitions:
- July 31, conclusion of the acquisition of all the shares of Toronto
Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro
Corporation (City of Toronto's energy company), in order to further
develop Cogeco Cable's business telecommunications activities by
entering the Greater Toronto Area market. The new subsidiary now
operates under the name of Cogeco Data Services ("CDS");
- June 30, conclusion of the acquisition of all assets of FibreWired
Burlington Hydro Communications, Burlington Hydro Electric's
telecommunications division (City of Burlington's energy company) to
expand Cogeco Business Solutions' commercial broadband service offering
in Burlington, Ontario.
- Digital Television services:
- October 9, launch of CBS College Sports on Digital Television services
in Ontario;
- October 2, launch of TSN2 and TSN HD on Digital and HD Television
services in Quebec;
- September 3, launch of TSN2, TSN2 HD and Super Channel HD on Digital
and HD Television services in Ontario.
- Telephony service:
- October 8, launch of Telephony service in Vineland, Stevensville and
Port Robinson, Ontario;
- October 3, launch of Telephony service in Bromptonville, Richmond and
Windsor, Quebec;
- September 10, launch of Telephony service in Tecumseh and LaSalle,
Ontario;
- During the fourth quarter, the Telephony service was launched in the
following cities:
- Gentilly, St-Leonard-d'Aston, St-Gregoire-de-Nicolet, Ste-Angele-de-
Laval, Becancour, Maskinonge, Yamachiche, Champlain, St-Boniface-de-
Shawinigan, Delisle, Wickham, Morin-Heights, Shawbridge,
St-Cyrille-de-Wendover, St-Germain-de-Grantham, and St-Prosper-de-
Dorchester in Quebec;
- Maitland, Prescott, Tillbury, Odessa, Bath and Millgrove in Ontario.
- HSI service:
- Expanded Wi-Fi services to non-customers in Ontario;
- Phased launch of Wi-Fi service for Cogeco Cable customers and non-
customers in Quebec.
European operations
- Digital Television services:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") continued its
Digital Television service deployment.
- HSI services:
- Increased uploading and downloading capacity for all services;
- Launch of free security services for all HSI customers.
Continuous improvement of networks and equipment
- During fiscal 2008, the Company has invested approximately $103.9 million
in its cable infrastructure including head-ends and upgrades and rebuilds.
Other
- RYTHME FM network and the 93,3 station in Quebec City continue to grow
advertising revenue.
Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the previous months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio-television and Telecommunications Commission's ("CRTC") refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada ("SRC"), which acts like a commercial player rather than a publicly-owned television broadcaster and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS, its subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed. Under the order, RSM Richter Inc. was appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors arrangement plan. On March 10, 2008, the Quebec Superior Court agreed with TQS's Board of Director's decision to accept the offer made by Remstar Corporation Inc. ("Remstar") to acquire all shares of the TQS Group held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS. On May 22, 2008, the plan of arrangement proposed by Remstar was approved by the creditors of the TQS Group and subsequently approved by the Superior Court of Quebec on June 4, 2008. On June 26, 2008, the CRTC approved the proposed transfer of ownership and control of TQS to Remstar and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed. This new transaction allows a new ownership group to pursue the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the investment in the TQS Group as at August 31, 2007, as well as its results of operations and its cash flow for the period of September 1, 2007 to December 18, 2007 and for the three and twelve-month periods ended August 31, 2007 have been reclassified as discontinued operations.
The Company has no investment in the TQS Group as at August 31, 2008. The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
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($000) $
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(audited)
Accounts receivable 23,611
Prepaid expenses 442
Broadcasting rights 14,647
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Current assets 38,700
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Broadcasting rights 17,456
Fixed assets 21,653
Broadcasting licenses 3,000
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Non-current assets 42,109
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Bank indebtedness 8,173
Accounts payable and accrued liabilities 28,893
Broadcasting rights payable 8,531
Income tax liabilities 141
Deferred and prepaid income 42
Current portion of long-term debt 251
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Current liabilities 46,031
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Share in the partners' deficiency of a general partnership 518
Broadcasting rights payable 4,408
Pension plan liabilities 1,444
Non-controlling interest 11,219
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Long-term liabilities 17,589
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The results of the discontinued operations were as follows:
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Revenue - 18,071 38,499 102,972
Operating costs - 20,486 35,822 108,496
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Operating income (loss)
before amortization - (2,415) 2,677 (5,524)
Amortization - 1,295 1,364 4,583
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Operating income (loss) - (3,710) 1,313 (10,107)
Financial expense - 266 291 925
Impairment of assets - - 30,298 -
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Loss before income taxes
and the following items - (3,976) (29,276) (11,032)
Income taxes - 7,112 - 7,011
Non-controlling interest - (4,477) (11,219) (7,257)
Share in the earnings of
a general partnership - 102 - 97
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Loss from discontinued
Operations - (6,713) (18,057) (10,883)
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The cash flows of the discontinued operations were as follows:
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
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(unaudited) (unaudited) (audited) (audited)
Cash flows from operating
activities (703) 7,585 (4,676) (469)
Cash flows from investing
activities - (1,671) (133) (2,926)
Cash flows from financing
activities - (6,754) 4,106 2,555
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Cash flows from discontinued
Operations (703) (840) (703) (840)
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Continuing Operations
RGU growth in the cable sector
During the year ended August 31, 2008, the consolidated number of RGU increased by 231,209, or 9.3% to reach 2,716,874 RGU, surpassing Cogeco Cable's revised RGU growth projections of 225,000 RGU issued on April 10, 2008, which represents growth of approximately 9%, for the fiscal year ended August 31, 2008.
Revenue and operating income from continuing operations before amortization growth
For the fourth quarter of fiscal 2008, revenue increased by $41.6 million, or 16.5%, to reach $292.9 million while operating income before amortization grew by $20.5 million, or 20.4%, to reach $121.1 million. For fiscal 2008, revenue increased by $139.6 million, or 14.4%, to reach $1,108.9 million, while operating income before amortization grew by $77.7 million, or 20.9%, to reach $448.9 million. For fiscal 2008, the Company exceeded revised projections of revenue and operating income before amortization expected to reach $1,090 million and $445 million, respectively.
Free cash flow
In the fourth quarter of fiscal 2008, COGECO generated free cash flow of $21 million, compared to $9.1 million for the same period last year. For the year ended August 31, 2008, the Company generated free cash flow of $100.4 million compared to $29.4 million the year before. These increases result mainly from the cable sector and are attributable to an increase in operating income before amortization and a reduction in financial expense. Capital expenditures and deferred charges increased by $10 million and $8.2 million respectively when compared to the corresponding periods of the prior year.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (audited) (audited)
Revenue 292,873 251,300 16.5 1,108,900 969,335 14.4
Operating costs 171,738 150,705 14.0 660,006 598,100 10.4
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Operating income
from continuing
operations before
amortization 121,135 100,595 20.4 448,894 371,235 20.9
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Operating margin(1) 41.4% 40.0% - 40.5% 38.3% -
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(1) Operating margin does not have a standardized definition prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section.
Revenue
Fiscal 2008 fourth-quarter revenue improved, mainly by its cable segment, by $41.6 million, or 16.5%, to reach $292.9 million, and for fiscal 2008, by $139.6 million, or 14.4%, to reach $1,108.9 million. Cable revenue, driven by an increased number of RGU combined with rate increases and the acquisitions of Cogeco Data Services, FibreWired Burlington Hydro Communications and MaXess Networx(R) (the "recent acquisitions"), went up by $40.6 million, or 16.6%, and by $137.9 million, or 14.7%, respectively, in the fourth quarter and for the 2008 fiscal year.
Operating costs
For the fourth quarter and fiscal 2008, operating costs increased by $21 million or 14%, and $61.9 million or 10.4% compared to the prior year, to reach $171.7 million and $660 million, respectively. The increase in operating costs for the fourth quarter and 2008 year was mainly attributable to the cable sector in servicing additional RGU in Canada and Portugal, the impact of the recent acquisitions on Canadian operating costs as well as the impact of the appreciation of the Euro over the Canadian dollar on European operating costs. In addition, for fiscal 2008, operating costs in the cable sector were impacted by the timing of certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109.
Operating income from continuing operations before amortization
Operating income before amortization grew, essentially by its cable segment, by $20.5 million, or 20.4%, to reach $121.1 million in the fourth quarter of fiscal 2008 and by $77.7 million or 20.9%, to reach $448.9 million in fiscal 2008 compared to the corresponding periods of the prior year. The cable sector contributed to the growth by $18.7 million and $74.7 million during the fourth quarter and fiscal 2008, respectively.
FIXED CHARGES
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
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(unaudited)(unaudited) (audited) (audited)
Amortization 61,775 54,723 12.9 229,724 191,221 20.1
Financial expense 18,182 18,924 (3.9) 70,669 86,056 (17.9)
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2008 fourth-quarter and fiscal year amortization amounted to $61.8 million and $229.7 million compared to $54.7 million and $191.1 million for the same periods the year before. Amortization expense increased for both periods mainly due to the following factors in the cable sector: the completion, in the fourth quarter of fiscal 2007 of the purchase price allocation of the Cabovisao acquisition, which includes the revaluation of tangible and intangible assets for an additional amortization expense of approximately $18.7 million for the fiscal year, and additional capital expenditures arising from the required customer premise equipment to sustain RGU growth and to support the deployment of the Digital Television service in Portugal. The impact of recent acquisitions in the cable sector has also contributed to the increase in the amortization expense for the 2008 fiscal year.
Fourth-quarter and 2008 fiscal year financial expense decreased by $0.7 million and $15.4 million, respectively, compared to the same periods in fiscal 2007. During the year, the Company's cable subsidiary reduced its level of Indebtedness (defined as bank indebtedness, financial derivative instruments and long-term debt) from the net proceeds of subordinate voting shares issued during fiscal 2007 as well as free cash flow generated during those periods, net of the impact of increases in long-term debt in the second half of fiscal 2008 to finance recent acquisitions in the cable sector. During fiscal 2007, Cogeco Cable also recorded a one-time charge of $2.6 million related to the early repayment of its Second Secured Debentures, Series A.
INCOME TAXES
Fiscal 2008 fourth quarter income tax expense amounted to $9.8 million compared to a recovery of $7.5 million in fiscal 2007. The increase is mainly due to the increase in operating income before amortization surpassing that of the fixed charges in the cable sector. In addition, fiscal 2007 income tax expense was reduced by $14.3 million, in the cable sector, due to the recognition of benefits stemming from prior years' income tax losses and minimum income tax paid, and a reduction of Canadian federal enacted income tax rates to take effect in 2011.
For fiscal 2008, income tax expense amounted to $15 million compared to $11.3 million in 2007. Included in the 2008 expense is a recovery of $24.1 million, mainly from the cable sector, related to the reduction in corporate income tax rates announced on October 16, 2007 by the Canadian federal government in its Economic Statement. According to the new tax initiatives, corporate income tax rates have been further reduced from 20.5% to 19.5% effective January 1, 2008, from 20% to 19% effective January 1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to 16.5% effective January 1, 2011, and to 15% effective January 1, 2012. These corporate income tax rates were considered substantively enacted on December 14, 2007. The income tax reductions also resulted from the amortization impact of the revaluation of tangible and intangible assets upon the completion of the Cabovisao purchase price allocation in the fourth quarter of fiscal 2007 in the cable sector. In addition, the 2007 expense in the cable sector was reduced by a non-cash adjustment of $16.2 million due to the recognition of benefits stemming from prior years' income tax losses and minimum income tax paid, and a reduction of Canadian federal enacted income tax rates to take effect in 2011.
Excluding these adjustments, income taxes for the fourth quarter and fiscal 2008 would have amounted to $9.8 million and $39.1 million, respectively, compared to $6.8 million and $27.5 million for the corresponding periods of the prior year. The increase in income taxes is mainly due to the increase in operating income before amortization exceeding the increase in fixed charges.
LOSS (GAIN) ON DILUTION RESULTING FROM SHARES ISSUED BY A SUBSIDIARY
During fiscal 2008, the Company's subsidiary, Cogeco Cable Inc. issued 5,543 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 157,481 subordinate voting shares pursuant to its Employee Stock Option Plan for cash consideration of $221,000 and $3,429,000, respectively. In addition, during fiscal 2007, Cogeco Cable completed two public offerings totalling 8,000,000 subordinate voting shares for gross proceeds of $346 million. The offerings resulted in net proceeds to Cogeco Cable of approximately $331.1 million, which were used to reduce long-term indebtedness and working capital deficiency. Cogeco Cable also issued 7,344 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 348,131 subordinate voting shares pursuant to its Employee Stock Option Plan for cash consideration of $198,000 and $6,816,000, respectively. As a result of these share issuances in 2008 and 2007, COGECO's interest in Cogeco Cable decreased from 39.2% to 32.3% and a loss on dilution of $0.1 million was recorded in fiscal 2008 compared to gains on dilution of $27 million and $57.9 million, respectively, in the fourth quarter and fiscal 2007.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the fourth quarter and 2008 year, the non-controlling interest amounted to $21.6 million and $90.2 million, respectively, due to the cable sector's strong results. The non-controlling interest for the comparable periods of last year amounted to $24.2 million and $54.8 million, respectively.
NET INCOME
Fiscal 2008 fourth-quarter net income amounted to $9.7 million, or $0.58 per share, compared to $30.4 million, or $1.83 per share, for the same period last year. Net income decreased due to the following factors: a gain on dilution of $27 million resulting from shares issued by Cogeco Cable and a reduction of $4.8 million in income taxes, net of non-controlling interest, were recorded in fiscal 2007; partly offset by the loss of $6.7 million from discontinued operations in the fourth quarter of fiscal 2007 and the increase in operating income before amortization in the fourth quarter of fiscal 2008 in the cable sector.
Fiscal 2008 net income amounted to $25.1 million, or $1.50 per share, compared to $74.7 million, or $4.50 per share for the same period last year. Net income decreased due to the following factors: a gain on dilution amounting to $57.9 million was recorded in fiscal 2007, a loss from discontinued operations of $18.1 million was recorded in fiscal 2008 compared to a loss from discontinued operations of $10.9 million in 2007, partially offset by positive income tax adjustments from the cable sector, net of non-controlling interest, of $7.9 million in fiscal 2008 compared to $5.3 million in fiscal 2007.
Excluding the effect of the adjustments described above, net income for the fourth quarter of fiscal 2008 would have amounted to $9.7 million, or $0.58 per share, compared to $5.3 million, or $0.32 per share, for the same period in 2007, improvements of 82.2% and 81.3%, respectively. For fiscal 2008, net income excluding the adjustments described above would have amounted to $35.4 million, or $2.12 per share, compared to $22.4 million, or $1.35 per share, in 2007, an increase of 57.6% and 57%, respectively. The increase in net income, excluding all adjustments described above, is mainly due to the growth in operating income before amortization exceeding those of the fixed charges in the cable sector. Please consult the "Non-GAAP financial measures" section for further details.
CASH FLOW AND LIQUIDITY
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Three months ended Years ended
August 31, August 31,
($000) 2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating activities
Cash flow from
operations(1) 99,969 78,153 362,788 283,565
Changes in non-cash
operating items 46,083 29,002 35,703 (73,003)
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146,052 107,155 398,491 210,562
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Investing activities(2) (289,619) (69,029) (487,106) (248,904)
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Financing activities(2) 99,055 6,559 59,240 32,702
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Effect of exchange rate
changes on cash and cash
equivalents denominated
in foreign currencies 6 (243) 1,271 1,243
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Net change in cash and
cash equivalents from
continuing operations (44,506) 44,442 (28,104) (4,397)
Net change in cash and
cash equivalents from
discontinued operations (703) (840) (703) (840)
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Cash and cash equivalents,
beginning of period 82,681 22,677 66,279 71,516
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Cash and cash equivalents,
end of period 37,472 66,279 37,472 66,279
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(1) Cash flow from operations does not have a standardized definition
prescribed by Canadian Generally Accepted Accounting Principles
("GAAP") and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
(2) Excludes assets acquired under capital leases.
Fiscal 2008 fourth quarter cash flow from operations reached $100 million, 27.9% higher than the comparable period last year, primarily due to the increase in operating income before amortization in the cable sector. 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.
Fiscal 2008 cash flow from operations reached $362.8 million, an increase of 27.9% compared to the same period the year before, primarily due to the growth in operating income before amortization and to a reduction in financial expense partly offset by the growth in current income taxes in the cable sector. Changes in non-cash operating items generated cash inflows of $35.7 million compared to cash outflows of $73 million for the same period last year, due to the cable sector, mainly as a result of increases in accounts payable and accrued liabilities and in income tax liabilities, partly offset by increases in accounts receivable and prepaid expenses. In fiscal 2007, the reduction in accounts payable and accrued liabilities was due to non-recurring payments made by the Portuguese cable subsidiary in accordance with the terms of the acquisition.
Business acquisitions
On March 31, 2008, the Company's subsidiary, Cogeco Cable, completed the acquisition of all the assets of MaXess Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company) for a total consideration of $15.6 million. MaXess Networx(R) operates a broadband network equipped with next generation ATM and Ethernet technology and provides organizations in south-western Ontario with the broadband capacity required for data networking, HSI access, e-business applications, video conferencing and other advanced communications.
On June 30, 2008, Cogeco Cable completed the acquisition of all the assets of FibreWired Burlington Hydro Communications, Burlington Hydro Electric's telecommunications division (City of Burlington's energy company) for a total consideration of $12.6 million. FibreWired Burlington Hydro Communications operates a broadband network equipped with next generation ATM and Ethernet technology, provides Burlington's organizations with the broadband capacity required for data networking, HSI access, hosting services, e-business applications, video conferencing and other advanced communications.
On July 31, 2008, Cogeco Cable completed the acquisition of all of the shares of Toronto Hydro Telecom Inc, the telecommunications subsidiary of Toronto Hydro Corporation (City of Toronto's energy company) for a total consideration of $200 million. In addition, Cogeco Cable assumed a working capital deficiency and certain liabilities of approximately $4 million. Toronto Hydro Telecom Inc., which now operates under the name of Cogeco Data Services Inc., offers data communications and other telecommunications services such as Ethernet, private line, Voice-over-Internet protocol ("VoIP"), HSI access, dark fibre, data storage, data security and co-location to a wide range of business customers and organizations throughout the Greater Toronto Area ("GTA"). This acquisition allows Cogeco Cable to further the development of its business telecommunications activities.
These acquisitions were accounted for using the purchase method. The results have been consolidated as of the acquisition dates.
The allocation of the purchase price of the acquisitions was as follows:
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Cogeco Data
Services Inc.(1) Other Total
($000) $ $ $
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(audited) (audited) (audited)
Consideration paid
Purchase price of shares or
assets 200,000 28,113 228,113
Acquisition costs 1,988 852 2,840
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201,988 28,965 230,953
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Net assets acquired
Cash and cash equivalents 1,230 - 1,230
Accounts receivable 4,575 968 5,543
Prepaid expenses 535 612 1,147
Fixed assets 57,098 19,102 76,200
Deferred charges - 24 24
Customer relationships 33,983 4,220 38,203
Goodwill 112,228 4,662 116,890
Future income tax assets 2,335 - 2,335
Accounts payable and accrued
liabilities assumed (4,380) (361) (4,741)
Deferred and prepaid income and other
liabilities assumed (4,958) (262) (5,220)
Pension plan liabilities and accrued
employee benefits (356) - (356)
Future income tax liabilities (302) - (302)
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201,988 28,965 230,953
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(1) The purchase price allocation of Cogeco Data Services Inc. is
preliminary and will be finalized during the 2009 fiscal year.
In the fourth quarter of fiscal 2008, investing activities, other than for business acquisitions, stood at $76 million mainly due to capital expenditures of $68.9 million and from an increase of $7 million in deferred charges in the cable sector. The capital expenditures stem essentially from the cable sector and increased compared to the same period last year due to the following factors:
- An increase in customer premise equipment capital spending resulting from higher RGU growth fuelled in part by increased interest for HD technology for the Canadian operations combined with the deployment of Digital Television in Portugal, partly offset by a decline in RGU in Portugal;
- An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and the head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services;
- An increase in support capital due to the acquisition of vehicles and to leasehold improvements in the Company's head office.
The appreciation of the Euro over the Canadian dollar also had an impact on the total capital expenditures in the fourth quarter of 2008.
In the 2008 year, investing activities, other than for business acquisitions, stood at $257.8 million mainly due to capital expenditures of $233.9 million and an increase of $27.7 million in deferred charges in the cable sector. The capital expenditures stem mainly from the cable sector and increased compared to the same period last year due to the following factors:
- An increase in customer premise equipment capital spending in Portugal to support RGU growth and the continued deployment of the Digital Television service in the second half of fiscal 2008;
- An increase in support capital due to the improvement in information systems to sustain the business operations, to the acquisition of vehicles, and to leasehold improvements in the Company's head office;
- An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services.
Deferred charges and others are mainly attributable to reconnect costs in the cable sector. Fourth quarter and fiscal 2008 increases in deferred charges amounted to $7 million and $27.5 million compared to $10.8 million and $29.6 million for the same periods the year before. Lower RGU growth in the cable sector explained the lower increases recorded in 2008.
In the fourth quarter and for the 2008 year, the Company generated free cash flow amounting to $21 million and $100.4 million, respectively, compared to $9.1 million and $29.4 million for the same periods of the preceding year. The free cash flow improvements over the same periods last year are mainly due to the cable sector and attributable to an increase in operating income before amortization and a reduction in financial expense net of increases in capital expenditures. The aggregate amount of total capital expenditures and deferred charges increased by $10 million in the 2008 fourth-quarter and by $8.2 million for the 2008 year compared to the corresponding periods of last year due to the factors explained above.
In the fourth quarter of 2008, Indebtedness affecting cash increased by $102.6 million. This increase is primarily due to the increase, in the cable sector, in long-term debt to finance the acquisitions completed in the quarter, for an aggregate amount of $214.8 million and the increase in bank indebtedness, partly offset by the cash inflows of $46.1 million from the changes in non-cash operating items, the free cash flow of $21 million, and the use of $45.2 million of cash and cash equivalents. During the fourth quarter of fiscal 2007, the level of Indebtedness affecting cash decreased by $138.1 million and was essentially due to the repayment of Term Facility in the amount of $146.5 million using the public offering net proceeds of $146.9 million in the cable sector. In addition, dividends of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, were paid by the Company during the fourth quarters of fiscal 2008 and fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $3.3 million during the fourth quarter of fiscal 2008, for consolidated dividend payments of $4.5 million.
During fiscal 2008, the level of Indebtedness affecting cash increased by $72.9 million mainly due to the cable sector and attributable to the recent acquisitions, for an aggregate amount of $231 million offset by the free cash flow of $100.4 million, a reduction of $28.8 million in cash and cash equivalents and from and increase of $35.7 million in non-cash operating items. In addition, on March 5, 2008, Cogeco Cable issued a $100 million Senior Unsecured Debenture by way of a private placement, the proceeds of which were primarily used to finance the recent acquisitions. The debenture bears interest at a fixed rate of 5.936%, is redeemable at the Cogeco Cable's option at any time, in whole or in part, prior to maturity, at 100% of the principal amount plus a make-whole premium and will mature on March 5, 2018.
For fiscal 2007, the level of Indebtedness decreased by $294.8 million, mainly due to the completion by Cogeco Cable, of two public offerings totalling 8,000,000 subordinate voting shares for net proceeds of approximately $331.1 million that were used to reimburse the Second Secured Debentures Series A and a portion of the Term Facility, the free cash flow of $29.4 million and a reduction of $4.4 million in cash and cash equivalents, partly offset by a decline of $73 million in non-cash operating items.
In addition, quarterly dividends of $0.07 per share were paid to the holders of subordinate and multiple voting shares totalling $4.7 million during 2008 compared to quarterly dividends of $0.0625 per share in the first quarter and $0.07 per share in the last three quarters totalling $4.5 million in fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $13.1 million during fiscal 2008, bringing the consolidated dividend payments to $17.8 million.
As at August 31, 2008, the Company had a working capital deficiency of $611.8 million compared to $127.3 million as at August 31, 2007. The increased deficiency is mainly attributable to the cable sector and is due to the following factors: the expiry of Cogeco Cable's US$150 million Senior Secured Notes, Series A and the related derivative financial instruments of $79.8 million on October 31, 2008, the increase in the current portion of long-term debt relating to the $150 million Senior Secured Debentures, Series 1, due on June 4, 2009 and to the EUR 15.7 million ($24.4 million) repayment of the third tranche of the term facility due on July 28, 2009 for an aggregate amount of $413.1 million due within the next fiscal year. As part of the usual conduct of its cable business, COGECO maintains a working capital deficiency due to a low level of accounts receivable since the majority of the cable subsidiary's customers pay before their services are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling Cogeco Cable to use cash and cash equivalents to reduce Indebtedness.
During fiscal 2008, the cable subsidiary repaid Euro 10.5 million, representing 10% of the amount drawn, on the third tranche of its $900 million Term Facility, which was reduced to $885 million accordingly. As at August 31, 2008, Cogeco Cable had used $467.6 million of its $885 million Term Facility for a remaining availability of $417.4 million and the Company had drawn $19 million of its $50 million Term Facility.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the subsidiaries' Board of Directors and may also be restricted under the terms and conditions of certain debt instruments. In accordance with applicable corporate and securities laws, significant transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2007, except for the changes in the presentation of assets and liabilities related to discontinued operations, there have been major changes to the balance of Fixed assets, Cash and cash equivalents, Accounts payable and accrued liabilities, Income tax liabilities, Future income tax assets, Future income tax liabilities, Accounts receivable, Goodwill, Customer relationships, Accumulated other comprehensive income (loss), Non-controlling interest, Derivative financial instruments and Indebtedness.
The $138.3 million increase in fixed assets is mainly related to the cable sector and attributable to increased capital expenditures to sustain RGU growth, the fixed assets acquired through recent acquisitions and to the appreciation of the Euro over the Canadian dollar. The $28.8 million decrease in cash and cash equivalents is mainly due to the reduction of Indebtedness in the cable sector. The $38.6 million increase in accounts payable and accrued liabilities is related to the timing of payments made to suppliers and the impact of the recent acquisitions in the cable sector. The $19.6 million increase in income tax liabilities and the $2.1 million net reduction in future income tax assets are mainly due to the utilization of most of Cogeco Cable's Canadian tax loss carry forwards before fiscal 2008, partly offset by the impact of the recent acquisitions. The $11.3 million future income tax liabilities reduction, also attributable to the cable sector, is mainly due to the corporate income tax rate reductions announced by the Canadian federal government and considered substantively enacted on December 14, 2007. The $12.2 million accounts receivable increase is essentially due to the cable sector and attributable to the revenue growth and its related level of receivables, the recent acquisitions and the appreciation of the Euro over the Canadian dollar. The increases of $145.2 million in Goodwill and $32.6 million in Customer relationships are due to the recent acquisitions as well as the appreciation of the Euro over the Canadian dollar in the cable sector. The $6 million increase in accumulated other comprehensive income (loss) is mainly the result of the appreciation of the Euro over the Canadian dollar, partly offset by the changes in accounting policies related to financial instruments in the cable sector. The $95.4 million increase in non-controlling interest is mainly due to the improved results in the cable sector. Indebtedness has increased by $110.4 million as a result of the unfavourable impact of the appreciation of the Euro over the Canadian dollar in addition to the accounting changes and factors previously discussed in the "Cash Flow and Liquidity" section. Please consult "Accounting policies and estimates" section for further details.
A description of COGECO's share data as at September 30, 2008 is presented in the table below:
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Number of shares Amount
/options ($000)
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Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,897,586 120,037
Options to purchase Subordinate voting shares
Outstanding options 123,758
Exercisable options 123,758
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In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. COGECO's obligations, discussed in the 2007 annual MD&A, have not materially changed since August 31, 2007, except as follows:
The Term Facility and the operating line of credit of the Parent company are secured by a first fixed and floating charge on certain assets of the Company and certain of its subsidiaries except for permitted encumbrances, including funded obligations subject to a maximum amount. The provisions under these facilities provide for restrictions on the operations and activities of the Company. Generally, the most significant restrictions are related to permitted investments, dividends on multiple and subordinate voting shares and reimbursement of long-term debt as well as incurrence and maintenance of certain financial ratios primarily linked to financial expense, total indebtedness and shareholders' equity.
On December 14, 2007, the Company concluded an amended and restated credit agreement with a group of Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The Term Facility of $50 million, including a swingline limit of $5 million, is renewable on an annual basis, subject to lenders' approval, and if not renewed it matures three years after its issuance or the last renewal, as the case may be. The Term Facility is secured by all assets of COGECO Inc. and its subsidiaries, excluding the capital stock of Cogeco Cable Inc. and guaranteed by its subsidiaries Cogeco Radio-Television Inc. and Cogeco Diffusion Inc. ("CDI"). Under the terms and conditions of the amended and restated credit agreement, the Company must comply with certain restrictive covenants, including the requirement to maintain certain financial ratios. The Term Facility bears interest rates based, at the Company's option, on bankers' acceptance, Libor, Euribor, bank prime rate or U.S. base rate plus fees, and commitment fees are payable on the unused portion.
Prior to December 14, 2007, the Company benefited from a Term Facility of $40 million, provided by a syndicate of financial institutions. The Term Facility could be extended for an additional year at each anniversary date of the facility, subject to the lenders' approval.
On October 1, 2008, Cogeco Cable completed, pursuant to a private placement, the issue of US$190 million Senior Secured Notes Series A maturing October 1, 2015, and $55 million Senior Secured Notes Series B maturing October 1, 2018. The Senior Secured Notes Series B bear interest at the coupon rate of 7.60% per annum, payable semi-annually. In addition, the cable subsidiary entered into cross-currency swap agreements to fix the liability for interest and principal payments on US$190 million of its Senior Secured Notes Series A, which bear interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate of the Senior Secured Notes Series A is 7.24% and the exchange rate applicable to the principal portion of the US dollar-denominated debt has been fixed at $1.0625.
DIVIDEND DECLARATION
At its October 29, 2008 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.08 per share for subordinate and multiple voting shares, payable on November 26, 2008, to shareholders of record on November 12, 2008. Continued improvement of the financial results in the cable sector explains the dividend increase of 14% to $0.08 per share from $0.07 per share. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Company based upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is therefore no assurance that dividends will be declared, and if declared, their amount and timing may vary.
FOREIGN EXCHANGE MANAGEMENT
The Company's subsidiary, Cogeco Cable, has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$150 million Senior Secured Notes. These agreements have the effect of converting the U.S. interest coupon rate of 6.83% per annum to an average Canadian dollar fixed interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at $1.5910. Amounts due under the US$150 million Senior Secured Notes, Series A increased by $0.9 million at August 31, 2008 compared to August 31, 2007 due to the Canadian dollar's appreciation. The fair value of cross-currency swap agreements decreased by a net amount of $3.7 million, of which $0.9 million offset the foreign exchange gain on the US$ debt. The difference of $2.8 million was recorded as an increase of other comprehensive income, net of income taxes of $0.9 million and non-controlling interest of $1.3 million. Cogeco Cable has also entered into cross-currency swap agreements to set the liability for interest and principal on its new US$190 million financing closed on October 1, 2008 as previously discussed.
As noted in the MD&A of the 2007 Annual Report, Cogeco Cable's investment in the Portuguese subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the value of the Canadian dollar versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisao was borrowed directly in Euros. This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable realized a foreign exchange gain of $18.8 million in 2008, which is presented net of non-controlling interest of $12.7 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts as at August 31, 2008 was $1.5580 per Euro compared to $1.4390 per Euro as at August 31, 2007. The average exchange rates prevailing during the fourth quarter and 2008 fiscal year used to convert the operating results of the European operations were $1.5837 and $1.5098 per Euro, respectively, compared to $1.4374 and $1.4803 per Euro, respectively, for the same periods last year.
CABLE SECTOR
CUSTOMER STATISTICS
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Net additions (losses) % of
Penetration(1)
Quarters ended Years ended
August 31, August 31, August 31,
2008 2008 2007 2008 2007 2008 2007
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RGU 2,716,874 41,100 49,576 231,209 300,688 - -
Basic Cable
service
customers 1,153,229 (5,932) 2,129 10,069 40,289 - -
HSI service
customers(2) 632,768 3,790 15,299 56,909 96,501 56.7 52.8
Digital
Television
service
customers 466,198 26,132 8,747 86,319 52,515 40.9 33.8
Telephony
service
customers(3) 464,679 17,110 23,401 77,912 111,383 45.7 40.4
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing only to HSI services totalled 83,609 as at August
31, 2008 compared to 75,955 at August 31, 2007.
(3) Customers subscribing only to Telephony services totalled 11,512 as at
August 31, 2008 compared to 8,901 at August 31, 2007
In Canada, fourth-quarter 2008 RGU net additions were higher than for the same period last year but the slower growth rate reflects 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. During the fourth quarter of 2008, HSI customer net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. 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. The lower growth is mostly attributable to the increased penetration in areas where the service is already offered and to fewer new areas where the service was launched. Telephony service coverage, as a percentage of homes passed, has now reached 84% compared to 78% 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 HD 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. Cabovisao chose not to match the competition's intensive advertising programs due to the difficult economic environment. These factors were the main contributors to net customer losses in the Basic Cable, HSI and Telephony services compared to the same period last year. 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. Management considers the current adverse market conditions in Portugal to be transitory. However, management anticipates that the difficult economic and competitive environment will continue throughout the next fiscal year and is currently aligning its marketing strategy to respond to the current market conditions prevailing in Portugal.
OPERATING RESULTS
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Quarters ended Years ended
($000, except August 31, August 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
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(unaudited)(unaudited) (audited) (audited)
Revenue 284,908 244,314 16.6 1,076,787 938,880 14.7
Operating
costs 163,792 141,888 15.4 622,649 559,559 11.3
Management
fees -
COGECO Inc. - - - 8,714 8,568 1.7
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Operating
income from
continuing
operations
before
amorti-
zation 121,116 102,426 18.2 445,424 370,753 20.1
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Operating
margin 42.5% 41.9% 41.4% 39.5%
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Revenue
Fiscal 2008 fourth-quarter consolidated revenue improved by $40.6 million, or 16.6%, to reach $284.9 million, and for the year, by $137.9 million or 14.7% to reach $1,076.8 million. Driven by an increased number of RGU combined with rate increases and the recent acquisitions, 2008 fourth-quarter Canadian operations revenue went up by $32.3 million, or 17.1%, and for the year by $119 million, or 16.7%.
Fiscal 2008 fourth-quarter European operations revenue increased by $8.3 million, or 14.8%, to reach $64.1 million and fiscal 2008 by $18.9 million, or 8.4%, to reach $243.7 million compared to the same periods last year. European operations implemented rate increases, and generated RGU growth for the year despite a decline in RGU in the fourth quarter. 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.
Operating costs
For the fourth quarter and the 2008 year, operating costs, excluding management fees payable to COGECO Inc., increased by $21.9 million or 15.4%, and $63.1 million or 11.3% compared to last year, to reach $163.8 million and $622.7 million, respectively. The increase in operating costs for the fourth quarter and fiscal 2008 was mainly attributable to servicing additional RGU in Canada and Portugal as well as to the impact of recent acquisitions. In addition, for the fiscal year, operating costs were impacted by the additional investment into certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109.
Operating income from continuing operations before amortization
Fourth-quarter and 2008 fiscal year operating income before amortization increased by $18.7 million, or 18.2%, to reach $121.1 million and by $74.7 million, or 20.1%, to reach $445.4 million, respectively, as a result of various rate increases, the recent acquisitions, and RGU growth generating additional revenue which outpaced operating cost increases as well as the impact of the recent acquisitions. Cogeco Cable's 2008 fourth-quarter operating margin increased to 42.5% from 41.9% for the fourth quarter of fiscal 2007. The operating margin in Canada increased slightly for the fourth-quarter of 2008 to 43.6% compared to 43.3% and in Europe improved to 38.8% from 37.3% in the same period of the prior year.
For fiscal 2008, the operating margin improved to 41.4% from 39.5% due to the reasons described above with the Canadian operating margin improving to 42.8% from 41% and the European operating margin to 36.3% from 34.6% when compared to the same period the year before.
FISCAL 2009 FINANCIAL GUIDELINES
Consolidated
The Company has revised its preliminary consolidated projections to take into consideration its revised projections in the cable sector described below. As a result, the Company now expects revenue to increase by $45 million to reach $1,243 million, operating income before amortization should increase by $13 million to reach $513 million and net income and free cash flow should stand at $35 million and $95 million, respectively.
Cable sector
Cogeco Cable has revised its preliminary consolidated projections to take into consideration the acquisition of CDS on July 31, 2008 and the slowdown in the global economy and the current competitive dynamics in the Portuguese market.
For its Canadian operations, management has revised its preliminary projections to reflect the acquisition of CDS and the lower than initially projected RGU growth.
