MONTREAL, QUEBEC--(Marketwire - Jan. 14, 2009) - Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial results for the first quarter of 2009, ended November 30, 2008.
For the first quarter of fiscal 2009:
- Consolidated revenue increased by 18.5% to $308.4 million;
- Consolidated operating income from continuing operations before amortization(1) grew by 24.5% to reach $124.7 million;
- Consolidated net income amounted to $11.1 million compared to a net loss of $10 million;
- Free cash flow(1) reached $21.8 million, a decrease of 5.2% compared to $23 million the year before;
- Operating margin(1) grew to 40.4% from 38.5%, in the first quarter of fiscal 2009;
- In the cable sector, revenue-generating units ("RGU")(2) grew by 52,714 net additions, for a total of 2,769,588 RGU at November 30, 2008.
"Both the radio and the cable sector reported solid financial performance for the first quarter. All of COGECO's key performance indicators increased compared to the prior year with the exception of a decrease in free cash flow caused by the increases in capital expenditures required in the cable sector to support the enhanced demand for the HD Television service in Canada and the deployment of Digital Television in Portugal. Our Canadian cable operations are benefiting from continued organic growth despite the early signs of maturation in some services. In the cable sector's commercial activities, Cogeco Data Services successfully bid on a long term contract to provide innovative and cost-efficient solutions for the telecommunications needs of the Toronto District School Board. In our European cable operations, the continuing unfavorable economic environment and highly competitive dynamics negatively impacted the RGU growth in all of our services, with the exception of the Digital Television service which has contributed steady increases in subscriptions to the service since its launch in the second half of fiscal 2008. We are pleased with our financial results to date and will continue to strive to be the first choice for telecommunications services to the customers in all of our territories. On the radio side, the fall BBM Canada survey conducted with the new Portable People Meter showed that the RYTHME FM network continues to be the preferred choice of audiences in the adult and female categories in the Montreal market," 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) Represents the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
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($000, except percentages Quarters ended November 30,
and per share data) 2008 2007(1) Change
$ $ %
-------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 308,375 260,255 18.5
Operating income from continuing
operations before amortization(2) 124,704 100,174 24.5
Operating income from continuing
operations 60,641 47,135 28.7
Income from continuing operations 11,053 7,656 44.4
Loss from discontinued operations - (17,632) -
Net income (loss) 11,053 (9,976) -
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Cash flow from operating activities
from continuing operations 30,470 46,604 (34.6)
Cash flow from operations from
continuing operations(2) 95,626 81,377 17.5
Capital expenditures and increase
in deferred charges 73,855 58,403 26.5
Free cash flow(2) 21,771 22,974 (5.2)
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Earnings (loss) per share
Basic
Income from continuing
operations 0.66 0.46 43.5
Loss from discontinued
operations - (1.06) -
Net income 0.66 (0.60) -
Diluted
Income from continuing
operations 0.66 0.46 43.5
Loss from discontinued
operations - (1.06) -
Net income 0.66 (0.60) -
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the termination of our investment in
the TQS Group, which is no longer consolidated since December 18, 2007
(see note 14 to the consolidated financial statement), and to reflect
the presentation of foreign exchange gains or losses as financial
expense instead of operating costs.
(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 2008 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 2008 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 controls over costs 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) Represents the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
Tight control over costs and business processes
- For the first quarter of 2009, the Company's operating costs increased over last year by 14.7% compared to a revenue growth of 18.5%;
- The design of internal controls over financial reporting as per National Instrument 52-109 is still ongoing. As discussed in the 2008 annual MD&A, the Company identified certain material weaknesses in the design of internal controls over financial reporting and has been working to improve the design and efficiency of internal controls on some significant processes during the quarter. The documentation and remediation of key internal controls are progressing normally.
Cable sector
Sustained corporate growth
Canadian operations
- Digital Television service:
- On December 4, launch of TSN2 HD, TELETOON Retro and Canal Indigo HD on
the High Definition ("HD") Television service in Quebec;
- During the first quarter, the following Digital and HD Television
services were launched:
- TELETOON On Demand and TSN2 in Ontario and Quebec;
- TELETOON Jr. On Demand and TSN HD in Quebec;
- CBS College Sports, Speed HD, Raptors HD, TSN2 HD and Super Channel
HD in Ontario.
- Telephony service:
- During the first quarter, the Telephony service was launched in the
following cities:
- Vineland, Stevensville, Port Robinson, Tecumseh and LaSalle, Ontario;
- Bromptonville, Richmond and Windsor, Quebec.
- Customer service;
- On November 20, the Cogeco Cable Quebec call centre won a Fleche d'or -
Contact Centre of the Year, Best Employer Award from the Quebec
Relationship Marketing Association (RMA);
- On November 18, for a second consecutive year, Cogeco Cable's call
centres, located in Trois-Rivieres, Quebec, and in Burlington, Ontario,
received from the Service Quality Measurement Group ("SQM") the Highest
Customer Satisfaction Award as well as the First Call resolution Merit
Award which recognizes the best improvement in first call resolution.
- Cogeco Data Services
- On December 15, announcement of a 10-year, $39 million contract with
the Toronto District School Board ("TDSB").
European operations
- Digital Television service:
- Continued deployment of Cabovisao - Televisao por Cabo, S.A.
("Cabovisao")'s Digital Television service;
- Launch of Sony AXN, Disney and Benfica channels;
- Launch of a new PVR box.
Continuous improvement of networks and equipment
- During the first quarter of fiscal 2009, the Company invested
approximately $23 million in its cable infrastructure including head-ends
and upgrades and rebuilds.
Other
- Fall's BBM Canada survey conducted with the Portable People Meter ("PPM")
shows that RYTHME FM has maintained its leadership position with
audiences in the adult and female categories in the Montreal market. The
other RYTHME FM stations and the 93.3 station in the Quebec City continue
to expand their audiences.
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. 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. On June 26, 2008, the Canadian Radio-television and Telecommunications Commission ("CRTC") approved the proposed transfer of ownership and control of TQS to Remstar Corporation Inc. ("Remstar") and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed, which allowed the 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 results of operations and cash flow for the three month period ended November 30, 2007, has been reclassified as discontinued operations.
The results of the discontinued operations were as follows:
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Quarters ended November 30,
($000) 2008 2007
$ $
-------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue - 32,758
Operating costs - 29,957
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Operating income before amortization - 2,801
Amortization - 1,116
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Operating income - 1,685
Financial expense - 238
Impairment of assets - 30,298
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Loss before income taxes and the following items - (28,851)
Income taxes - -
Non-controlling interest - 11,219
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Loss from discontinued operations - (17,632)
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The cash flows of the discontinued operations were as follows:
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Quarters ended November 30,
($000) 2008 2007
$ $
-------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operating activities - (5,743)
Cash flow from investing activities - (85)
Cash flow from financing activities - 5,828
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Cash flow from discontinued operations - -
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Continuing Operations
RGU growth in the cable sector
During the quarter ended November 30, 2008, the consolidated number of RGU increased by 52,714, or 1.9% to reach 2,769,588 RGU, on target to attain the Company's annual RGU growth projections of 100,000 net additions issued on October 29, 2008, which represents approximately 3.7%, for the fiscal year ending August 31, 2009.
Revenue and operating income from continuing operations before amortization growth
For the first quarter of fiscal 2009, revenue increased by $48.1 million, or 18.5%, to reach $308.4 million while operating income before amortization grew by $24.5 million, or 24.5%, to reach $124.7 million.
Free cash flow
In the first quarter of fiscal 2009, COGECO generated free cash flow of $21.8 million compared to $23 million for the same period last year. This decrease results mainly from the cable sector and is attributable to an increase in capital expenditures and deferred charges to support HD and Digital Television services as well as to acquire a power generator for the newly acquired Canadian data communications subsidiary, and by the impact of the rapid appreciation of the US dollar over the Canadian dollar. This increase was partly offset by the increase in cash flow from operations resulting primarily from the improvement of the Company's operating income before amortization.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended November 30,
($000, except percentages) 2008 2007(1) Change
$ $ %
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(unaudited) (unaudited)
Revenue 308,375 260,255 18.5
Operating costs 183,671 160,081 14.7
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Operating income from continuing
operations before amortization 124,704 100,174 24.5
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Operating margin(2) 40.4% 38.5%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the termination of our investment in
the TQS Group, which is no longer consolidated since December 18, 2007
(see note 14 to the consolidated financial statement), and to reflect
the presentation of foreign exchange gains or losses as financial
expense instead of operating costs.
(2) Operating margin does not have a standardized definition prescribed by
Canadian 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 2009 first-quarter revenue improved, mainly in its cable sector, by $48.1 million, or 18.5%, to reach $308.4 million. Cable revenue, driven by an increased number of RGU combined with rate increases and the acquisition of MaXess Networx(R), FibreWired Burlington Hydro Communications and Cogeco Data Services (the "recent acquisitions") in the second half of fiscal 2008, went up by $47.6 million, or 18.9%, in the first quarter of the 2009 fiscal year.
Operating costs
For the first quarter, operating costs increased by $23.6 million, or 14.7%, compared to the prior year, to reach $183.7 million. The increase in operating costs was mainly attributable to the cable sector in servicing additional RGU and to the impact of the recent acquisitions in Canada in the cable sector.
Operating income from continuing operations before amortization
Operating income from continuing operations before amortization grew, essentially by its cable segment, by $24.5 million, or 24.5%, to reach $124.7 million in the first quarter of fiscal 2009 compared to the corresponding period of the prior year. The cable sector contributed to the growth by $22.4 million during the first quarter.
FIXED CHARGES
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Quarters ended November 30,
($000, except percentages) 2008 2007(1) Change
$ $ %
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(unaudited) (unaudited)
Amortization 64,063 53,039 20.8
Financial expense 23,778 16,333 45.6
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the termination of our investment in
the TQS Group, which is no longer consolidated since December 18, 2007
(see note 14 to the consolidated financial statement), and to reflect
the presentation of foreign exchange gains or losses as financial
expense instead of operating costs.
For the quarter ended November 30, 2008, amortization amounted to $64.1 million compared to $53 million for the corresponding period the year before. The increase in amortization expense was mainly due to the following factors in the cable sector: additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth in Canada and the deployment of the Digital Television service in Portugal, and to the recent acquisitions.
First-quarter financial expense increased by $7.4 million compared to the same period in fiscal 2008 due to the rapid appreciation of the US dollar and the Euro over the Canadian dollar, the increase in the level of Indebtedness (defined as bank indebtedness, derivative financial instruments and long-term debt) and by an increase in the average cost of Indebtedness. More specifically, financial expense in the cable sector was adversely impacted by foreign exchange losses amounting to $3.8 million in the first quarter of fiscal 2009 as the majority of customer premise equipment is purchased and subsequently paid in US dollars. These losses were essentially due to the unusually high US dollar volatility, with the Bank of Canada closing rate fluctuating from CA$1.0620 per US dollar at August 31, 2008 to CA$1.2370 per US dollar at November 30, 2008, reaching a maximum of CA$1.2935 per US dollar on November 20, 2008. For the corresponding period of the prior year, the cable subsidiary recorded a foreign exchange gain of $1 million.
INCOME TAXES
Fiscal 2009 first-quarter income tax expense amounted to $9.8 million compared to $9.3 million in fiscal 2008. The increase is mainly due to the increase in operating income before amortization surpassing that of the fixed charges in the cable sector.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the first quarter of fiscal 2009 the non-controlling interest amounted to $15.9 million due to the cable sector's strong results. The non-controlling interest for the comparable period of last year amounted to $13.8 million.
NET INCOME
Fiscal 2009 first-quarter net income amounted to $11.1 million, or $0.66 per share, compared to a net loss of $10 million, or $0.60 per share, for the same period last year. The net loss in the prior year was due to a loss from discontinued operations of $17.6 million, or $1.06 per share. Income from continuing operations for the first quarter of fiscal 2009 amounted to $11.1 million, or $0.66 per share, compared to $7.7 million, or $0.46 per share the year before. Income from continuing operations increased due to the increase in operating income before amortization in the cable sector.
CASH FLOW AND LIQUIDITY
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Quarters ended November 30,
($000) 2008 2007(1)
$ $
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(unaudited) (unaudited)
Operating activities from continuing operations
Cash flow from operations(2) 95,626 81,377
Changes in non-cash operating items (65,156) (34,773)
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30,470 46,604
Investing activities from continuing operations(3) (72,900) (58,329)
Financing activities from continuing operations(3) 38,776 (36,257)
Effect of exchange rate changes on cash and cash
equivalents denominated in foreign currencies 687 (153)
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Net change in cash and cash equivalents from
continuing operations (2,967) (48,135)
Net change in cash and cash equivalents from
discontinued operations - -
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Cash and cash equivalents, beginning of period 37,472 66,279
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Cash and cash equivalents, end of period 34,505 18,144
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the termination of our investment in
the TQS Group, which is no longer consolidated since December 18, 2007
(see note 14 to the consolidated financial statement).
(2) Cash flow from operations does not have a standardized definition
prescribed by Canadian 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.
(3) Excludes assets acquired under capital leases.
Fiscal 2009 first quarter cash flow from operations reached $95.6 million, 17.5% 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 greater cash outflows compared to the same period last year, mainly as a result of a decrease in accounts payable and accrued liabilities and in income tax liabilities. The significant decrease in income tax liabilities is due to payments made during the first quarter of 2009 related to the 2008 fiscal year.
In the first quarter of fiscal 2009, investing activities from continuing operations including assets acquired under capital leases stood at $73.8 million due to capital expenditures of $66.6 million and from an increase of $7.2 million in deferred charges in the cable sector. The capital expenditures, stemming essentially from the cable sector, increased compared to the same period last year due to the following factors:
- An increase in customer premise equipment capital spending resulting from RGU growth fuelled in part by increased interest for the HD Television service for the Canadian operations combined with the deployment of Digital Television in Portugal;
- An increase in support capital spending due to the acquisition of a power generator for the newly acquired Canadian data communications subsidiary;
- 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 in Canada;
- The appreciation of the US dollar and the Euro over the Canadian dollar also had a significant impact on the total capital expenditures in the first quarter of 2009.
Deferred charges and others are mainly attributable to reconnect costs in the cable sector. The increase in deferred charge for the first quarter amounted to $7.2 million compared to $7.5 million for the same period the year before. Slower RGU growth explained the lower increase recorded in fiscal 2009.
In the first quarter, the Company generated free cash flow amounting to $21.8 million compared to $23 million for the same period of the preceding year. The lower free cash flow is mainly due to the cable sector and attributable to an increase in capital expenditures, partly offset by an increase in operating income before amortization net of financial expense. The aggregate amount of total capital expenditures and deferred charges increased by $15.4 million for the quarter ended November 30, 2008 compared to the corresponding period of last year due to the factors explained above.
In the first quarter of 2009, Indebtedness affecting cash increased by $43.8 million due to the reduction of non-cash operating items of $65.2 million, partly offset by the free cash flow of $21.8 million. Indebtedness was increased through the issuance on October 1, 2008, in the cable sector, of Senior Secured Notes, Series A and B, maturing October 1, 2015 and October 1, 2018, respectively, for net proceeds of approximately $255 million, net of the repayment of US$150 million Senior Secured Notes Series A and the related derivative financial instrument of $88.7 million, both maturing on October 31, 2008, for a total of $238.7 million, and by an increase of $23.5 million in bank indebtedness. For the same period of the prior year, Indebtedness affecting cash decreased by $34.4 million due to the use of cash and cash equivalents of $48.1 million and generated free cash flow of $23 million partly offset by the net disbursement of $34.8 million arising from changes in non-cash operating items. In addition, dividends of $0.08 per share for subordinate and multiple voting shares, totalling $1.3 million, were paid by the Company during the first quarter of fiscal 2009, compared to $0.07 per share, totalling $1.2 million in the first quarter of fiscal 2008. Dividends paid by a subsidiary to non-controlling interests amounted to $3.9 million during the first quarter of fiscal 2009, for consolidated dividend payments of $5.3 million.
As at November 30, 2008, the Company had a working capital deficiency of $337.2 million compared to $611.8 million as at August 31, 2008. The decrease in the deficiency is mainly attributable to the cable sector and is due to the repayment of the US$150 million Senior Secured Notes, Series A and the related derivative financial instrument for a total of $238.7 million on October 31, 2008 using the proceeds of issuance of the Senior Secured Notes, Series A and B. As part of the usual conduct of its cable business, COGECO maintains a working capital deficiency due to a low level of accounts receivable as a large portion 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.
As at November 30, 2008, Cogeco Cable had used $513.7 million of its $885 million Term Facility for a remaining availability of $371.3 million and the Company had drawn $16.4 million of its $50 million Term Facility, for a remaining availability of $33.6 million.
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, 2008, there have been major changes to the balance of "fixed assets", "accounts payable and accrued liabilities", "income tax liabilities", "Indebtedness" and "non-controlling interest".
The $14.5 million increase in fixed assets is mainly related to the cable sector and attributable to increased capital expenditures to sustain RGU growth, to the recent acquisitions in Canada and to the appreciation of the Euro and the US dollar over the Canadian dollar. The $43.9 million decrease in accounts payable and accrued liabilities is related to the timing of payments made to suppliers net of the impact of the recent acquisitions in the cable sector. The $17 million decrease in income tax liabilities is mainly due to income tax payments relating to fiscal 2008 that were made in the first quarter of fiscal 2009. Indebtedness has increased by $51,9 million as a result of the unfavourable impact of the appreciation of the US dollar and the Euro over the Canadian dollar and to the factors previously discussed in the "Cash Flow and Liquidity" section, partly offset by the increase of $29.2 million in the fair value of the cross-currency swaps related to the Senior Secured Notes Series A issued on October 1, 2008. The $12.5 million increase in non-controlling interest is mainly due to the improved results in the cable sector.
A description of COGECO's share data as at December 31, 2008 is presented in the table below:
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Number of shares/options Amount
($000)
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Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,898,762 120,058
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 2008 annual MD&A, have not materially changed since August 31, 2008, except for the new financing in the cable sector discussed in the "Cash Flow and Liquidity" section.
DIVIDEND DECLARATION
At its January 13, 2009 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 February 10, 2009, to shareholders of record on January 27, 2009. 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 periodicity may vary.
FINANCIAL MANAGEMENT
The Company's subsidiary, Cogeco Cable entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million Senior Secured Notes, Series A maturing in October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at CA$1.0625 per US dollar. Since the issuance on October 1, 2008, amounts due under the US$190 million Senior Secured Notes Series A increased by $33.2 million due to the US dollar's appreciation over the Canadian dollar. The fair value of cross-currency swaps increased by a net amount of $29.2 million, which offsets the foreign exchange loss of $33.2 million on the US dollar denominated debt. The difference of $4 million was recorded as a decrease of other comprehensive income, net of income taxes of $1.1 million and non-controlling interest of $2 million.
Cogeco Cable's net investment in the self-sustaining foreign 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 $2.7 million in the first quarter of fiscal 2009, which is presented net of non-controlling interest of $1.8 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts as at November 30, 2008 was $1.5711 per Euro compared to $1.5580 per Euro as at August 31, 2008. The average exchange rates prevailing during the first quarter used to convert the operating results of the European operations was $1.5462 per Euro, compared to $1.4119 per Euro for the same period last year.
The following table shows the Canadian dollar impact of a 10% change in the average exchange rate of the Euro currency into Canadian dollars on European operating results in the cable sector for the first quarter ended November 30, 2008:
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Exchange rate
Quarter ended November 30, 2008 As reported impact
($000) $ $
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(unaudited) (unaudited)
Revenue 62,064 6,206
Operating income before amortization 20,857 2,086
Net income 1,754 175
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CABLE SECTOR
CUSTOMER STATISTICS
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Net additions % of
Quarters ended Penetration(1)
November 30, November 30, November 30,
2008 2008 2007 2008 2007
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RGU 2,769,588 52,714 83,024 - -
Basic Cable service customers 1,154,027 798 12,997 - -
HSI service customers(2) 647,068 14,300 29,100 58.1 54.8
Digital Television service
customers 489,815 23,617 16,253 43.0 47.3
Telephony service customers(3) 478,678 13,999 24,674 45.9 42.5
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing only to the HSI service totalled 84,730 as at
November 30, 2008 compared to 79,499 at November 30, 2007.
(3) Customers subscribing only to the Telephony service totalled 11,141 as
at November 30, 2008 compared to 9,640 at November 30, 2007
In the cable sector, first-quarter RGU net additions were lower than for the same period last year and reflect an early sign of maturation in some services. The number of net additions for Basic Cable stood at 798 customers compared to 12,997 customers for the same period last year. This decrease is primarily due to net customer losses in the European operations reflecting a continuing unfavourable economic environment in the Iberian Peninsula, aggressive advertising campaigns by competitors and the emergence of multiple triple-play service providers in the Portuguese market, net of increases in Canadian operations stemming from continuous improvements to the service offering, targeted marketing activities and an upswing in subscription activity in border markets due to the impending over-the-air digital conversion in the United States. The number of net additions to HSI service stood at 14,300 customers compared to 29,100 customers for the same period last year. The growth in HSI customer net additions continues 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 in Canadian operations offset by net customer losses in European operations due to the factors mentioned above. The Digital Television service net additions stood at 23,617 customers compared to 16,253 customers for the same period in the prior year due to targeted marketing initiatives in the second half of fiscal 2008 and in 2009 to improve market penetration and to the continuing strong interest for the HD Television service in Canadian operations, as well as the launch of the Digital Television service in Portugal in the third quarter of fiscal 2008. Telephony customers grew by 13,999 to reach 478,678 compared to a growth of 24,674 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 in Canadian operations offset by net customer losses in European operations due to the unfavourable economic environment. Telephony service coverage in Canada, as a percentage of homes passed, has now reached 87% compared to 78% at November 30, 2007. The service is offered in all of the Company's territories in Portugal.
OPERATING RESULTS
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Quarters ended November 30,
($000, except percentages) 2008 2007(1) Change
$ $ %
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(unaudited) (unaudited)
Revenue 299,438 251,833 18.9
Operating costs 173,734 149,496 16.2
Management fees - COGECO Inc. 5,981 5,035 18.8
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Operating income from continuing
operations before amortization 119,723 97,302 23.0
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Operating margin 40.0% 38.6%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the termination of our investment in
the TQS Group, which is no longer consolidated since December 18, 2007
(see note 14 to the consolidated financial statement), and to reflect
the presentation of foreign exchange gains or losses as financial
expense instead of operating costs.
Revenue
Fiscal 2009 first-quarter consolidated revenue improved by $47.6 million, or 18.9%, to reach $299.4 million. Driven by an increased number of RGU combined with rate increases and the recent acquisitions in the second half to fiscal 2008, 2009 first-quarter Canadian operations revenue went up by $41.1 million, or 21%.
Fiscal 2009 first-quarter European operations revenue increased by $6.5 million, or 11.6%, to reach $62.1 million compared to the same period last year. The increase is essentially due to the strength of the Euro against the Canadian dollar. Rate increases also generated higher revenue despite a RGU loss in the first quarter.
Operating costs
For the first quarter of fiscal 2009, operating costs, excluding management fees payable to COGECO Inc., increased by $24.2 million, or 16.2% compared to the prior year, to reach $173.7 million. Operating costs increased due to the servicing of additional RGU and the impact of the recent acquisitions in Canada.
Operating income before amortization
Operating income before amortization increased by $22.4 million, or 23%, to reach $119.7 million in the first quarter of fiscal 2009, as a result of various rate increases, recent acquisitions, and RGU growth generating additional revenues which outpaced operating cost increases. Cogeco Cable's 2009 first-quarter operating margin increased to 40% from 38.6% for the same period of fiscal 2008. The operating margin in Canada increased for the first quarter of 2009 to 41.6% compared to 40.7% and in Europe improved to 33.6% from 31.3% in the same period of the prior year.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors faced by the Company since August 31, 2008, except as described below.
