MONTREAL, QUEBEC--(Marketwire - July 10, 2009) - Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial results for the third quarter and first nine months of fiscal 2009, ended May 31, 2009.
For the third quarter and first nine months of fiscal 2009:
- Consolidated revenue increased by 11.4% to $316.3 million, and by 14.8% to $936.5 million, respectively;
- Consolidated operating income from continuing operations before amortization(1) grew by 10.4% to reach $129.4 million, and by 16.5% to reach $380.8 million;
- In the first nine months of fiscal 2009, the cable subsidiary, Cogeco Cable Inc. ("Cogeco Cable"), recorded a $399.6 million non-cash impairment loss on its investment in Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") as a result of recurring competitive pressure resulting in subscriber losses that were more severe than originally anticipated. Net of related income taxes and non-controlling interest, the impairment loss amounted to $124 million;
- Third quarter consolidated net income amounted to $10.5 million, compared to $9.5 million for the same period of the prior year. Excluding an unfavourable income tax adjustment of $2 million related to the utilization of pre-acquisition tax losses in Cabovisao, net of non-controlling interest, and a $3.5 million favourable reduction of withholding and stamp tax contingent liabilities(1), also in Cabovisao, net of non-controlling interest, consolidated net income would have amounted to $8.9 million, a decrease of $0.6 million, or 6.3%, compared to $9.5 million for the third quarter of fiscal 2008;
- For the first nine months, consolidated net loss amounted to $93.8 million, compared to net income of $15.5 million in the prior year. Excluding the impairment loss described above, the adjustments related to income taxes and withholding and stamp tax contingent liabilities in Cabovisao described above for the current quarter, the $7.9 million income tax adjustment related to the reduction of Canadian federal income tax rates, net of non-controlling interest, and a loss from discontinued operations of $18.1 million in the first nine months of the prior year, consolidated net income would have amounted to $28.6 million for the first nine months of fiscal 2009, compared to $25.6 million in the prior year, an increase of $3 million, or 11.9%;
- Free cash flow(1) reached $32.4 million for the quarter, representing a decrease of 12.6% over the same period of the prior year, and $86.3 million, representing an increase of 8.6%, for the first nine months;
- In the cable sector, revenue-generating units ("RGU")(2) grew by 14,985 net additions in the quarter and 93,325 net additions in the first nine months, for a total of 2,810,199 RGU at May 31, 2009.
"The financial results of our cable sector and of our radio activities in Canada drive COGECO's growth in the third quarter. All of our radio stations have shown improvement in reaching their target audiences. For the nine month period in the cable sector, our Canadian operations are growing at a steady pace with net additions of 140,215 RGU. In our European operations, Digital Television service continues to grow in our markets with the addition of 20,976 new customers. We have recently realigned our short term strategic plan in order to curtail subscriber losses that continue to adversely affect the financial results of our Portuguese operations in the current difficult competitive environment", declared Louis Audet, President and CEO of COGECO.
(1) The indicated terms do not have standard 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
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages and 2009 2008(1) Change 2009 2008(1) Change
per share data) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 316,310 283,878 11.4 936,510 816,027 14.8
Operating income
from continuing
operations
before
amortization(2) 129,404 117,206 10.4 380,771 326,903 16.5
Operating income
from continuing
operations 61,750 58,642 5.3 182,269 158,954 14.7
Impairment of
goodwill and
intangible assets - - - 399,648 - -
Income (loss) from
continuing
operations 10,480 9,538 9.9 (93,758) 33,509 -
Loss from
discontinued
operations - - - - (18,057) -
Net income (loss) 10,480 9,538 9.9 (93,758) 15,452 -
Net income
excluding the
impairment loss,
the tax
adjustments and
the loss from
discontinued
operations(2) 8,933 9,538 (6.3) 28,646 25,600 11.9
--------------------------------------------------------------------------
Cash flow from
operating
activities from
continuing
operations 102,653 112,893 (9.1) 253,603 252,439 0.5
Cash flow from
operations from
continuing
operations(2) 95,498 96,068 (0.6) 291,475 262,819 10.9
Capital
expenditures
and increase
in deferred
charges 63,082 58,961 7.0 205,199 183,364 11.9
Free cash flow(2) 32,416 37,107 (12.6) 86,276 79,455 8.6
--------------------------------------------------------------------------
Earnings (loss)
per share
Basic
Income (loss)
from continuing
operations 0.63 0.57 10.5 (5.60) 2.01 -
Loss from
discontinued
operations - - - - (1.08) -
Net income (loss) 0.63 0.57 10.5 (5.60) 0.93 -
Net income
excluding the
impairment loss,
the income tax
adjustment and
the loss from
discontinued
operations(2) 0.53 0.57 (7.0) 1.71 1.54 11.0
Diluted
Income (loss)
from continuing
operations 0.63 0.57 10.5 (5.60) 2.00 -
Loss from
discontinued
operations - - - - (1.08) -
Net income (loss) 0.63 0.57 10.5 (5.60) 0.92 -
Net income
excluding the
impairment loss,
the tax
adjustments
and the loss
from discontinued
operations(2) 0.53 0.57 (7.0) 1.71 1.53 11.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 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. The Company cautions the reader that the current adverse economic conditions make forward-looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results may significantly differ from the Company's expectations. It is impossible for COGECO to predict with certainty the impact that the current economic downtown may have on future results. 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 revenue and 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 nine months of fiscal 2009, the Company's operating costs
increased over last year by 13.6% compared to a revenue growth of 14.8%;
- During the quarter, the Company's cable subsidiary, Cogeco Cable Inc.
("Cogeco Cable") has implemented new processes and software to track its
home terminal devices from their initial purchase to their return by
customers, and has adjusted the carrying values of the assets
accordingly. The Company has continued its project to improve the
design and implementation of internal controls, and the project is
progressing according to management's plan. Please see the "Controls
and procedures" section for further details.
Cable sector
Sustained corporate growth
Canadian operations
- Digital Television service :
- On July 9, the following High Definition ("HD") Television services
were launched:
- Tele-Quebec HD, Canal Evasion HD, TV5 HD, PBS HD, Mystere HD, The
Score HD, National Geographic HD and Discovery HD in Quebec.
- Telephony service:
- During the third quarter, the Telephony service was launched in the
following cities:
- Brighton, Wyoming, Petrolia, Oil City, Napanee and Deseronto,
Ontario;
- North Hatley, Ayers Cliff, Gaspe, Forestville and St-Etienne-des-
Gres, Quebec.
European operations
- Bundled offers:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") realigned some of
its bundle offers to retain and attract customers.
- Television service:
- Continued deployment of Cabovisao's Digital Television service;
- Launch of Jim Jam, Luxe HD, MVM TV, Telesur, Regioes TV, TVGlobo and
PFC channels.
- High-speed Internet ("HSI") service:
- On July 7, announcement of the launch of Nitro 60 Mbps
and Nitro 120 Mbps Internet services, the fastest available in the
Portuguese market.
Continuous improvement of networks and equipment
- During the first nine months of fiscal 2009, the Company invested
approximately $76.9 million in its cable infrastructure including head-
ends and upgrades and rebuilds.
Other
- Spring'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 and Trois-
Rivieres markets. The other RYTHME FM stations continue to gain market
share. As for the 93.3 station in Quebec City, it registered its highest
numbers ever and has reclaimed the first position in this very
competitive market.
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 flows for the three month period ended November 30, 2007, have been reclassified as discontinued operations.
The results of the discontinued operations were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue - - - 38,499
Operating costs - - - 35,822
--------------------------------------------------------------------------
Operating income
before amortization - - - 2,677
Amortization - - - 1,364
--------------------------------------------------------------------------
Operating income - - - 1,313
Financial expense - - - 291
Impairment of assets - - - 30,298
--------------------------------------------------------------------------
Loss before income
taxes and the
following items - - - (29,276)
Income taxes - - - -
Non-controlling interest - - - (11,219)
--------------------------------------------------------------------------
Loss from discontinued
operations - - - (18,057)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The cash flows of the discontinued operations were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Cash flow from
operating activities - - - (3,973)
Cash flow from
investing activities - - - (133)
Cash flow from
financing activities - - - 4,106
--------------------------------------------------------------------------
Cash flow from
discontinued operations - - - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Continuing Operations
RGU growth in the cable sector
During the first nine months ended May 31, 2009, the consolidated number of RGU increased by 93,325, or 3.4%, to reach 2,810,199 RGU, on target to attain the Company's RGU growth projections of 100,000 net additions issued on October 29, 2008 and revised on April 8, 2009, which represents approximately 3.7%, for the fiscal year ending August 31, 2009. Please consult the fiscal 2009 revised projections in the "Fiscal 2010 preliminary financial guidelines" section for further details.
Revenue and operating income from continuing operations before amortization growth
For the third quarter of fiscal 2009, revenue increased by $32.4 million, or 11.4%, to reach $316.3 million while operating income before amortization from continuing operations grew by $12.2 million, or 10.4%, to reach $129.4 million. For the first nine months of the year, revenue increased by $120.5 million, or 14.8%, to reach $936.5 million while operating income before amortization from continuing operations grew by $53.9 million, or 16.5%, to reach $380.8 million and management expects to attain its revised guidelines of $1,238 million in revenue and $505 million in operating income before amortization from continuing operations for the 2009 fiscal year, as issued on April 8, 2009. Please consult the fiscal 2009 revised projections in the "Fiscal 2010 preliminary financial guidelines" section for further details.
Free cash flow
In the third quarter of fiscal 2009, COGECO generated free cash flow of $32.4 million compared to $37.1 million for the same period last year. For the nine month period ended May 31, 2009, COGECO generated free cash flow of $86.3 million compared to $79.5 million in the prior year. The reduction in free cash flow for the quarter is mainly due to the cable sector and resulted from an increase in capital expenditures and the decrease in cash flow from operations(1), due to the increase in current income taxes. For the first nine months, the growth in free cash flow is essentially from the cable sector and is due to increases in cash flow from operations, resulting primarily from the improvement of Cogeco Cable's operating income before amortization, partly offset by increases in capital expenditures. On April 8, 2009, management revised its guidelines for free cash flow to $85 million for the 2009 fiscal year. Due to the usual higher level of capital expenditures in the last quarter of the year, management expects to meet its free cash flow guidelines. Please consult the fiscal 2009 revised projections in the "Fiscal 2010 preliminary financial guidelines" section for further details.
(1) 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.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
In the second quarter of fiscal 2009, the competitive position of Cogeco Cable's subsidiary Cabovisao in the Iberian Peninsula further deteriorated due to the continuing difficult competitive environment and recurring intense customer promotions and advertising initiatives from competitors in the Portuguese market. Please refer to the "Cable sector" section for further details. In accordance with current accounting standards, management considered that the continued RGU and local currency revenue decline were more severe and persistent than expected, resulting in a decrease in the value of Cogeco Cable's investment in the Portuguese subsidiary. As a result, Cogeco Cable tested goodwill and all long-lived assets for impairment at February 28, 2009.
Goodwill is tested for impairment using a two step approach. The first step consists of determining whether the fair value of the reporting unit exceeds the net carrying amount of that reporting unit, including goodwill. In the event that the net carrying amount exceeds the fair value, a second step is performed in order to determine the amount of the impairment loss. Cogeco Cable completed its impairment tests on goodwill and concluded that goodwill was impaired at February 28, 2009. As a result, a non-cash impairment loss of $339.2 million was recorded in the second quarter. Fair value of the reporting unit was determined using the discounted cash flow method. Future cash flows were based on internal forecasts and consequently, considerable management judgement was necessary to estimate future cash flows. Significant changes in assumptions could result in further impairments of goodwill.
Intangible assets with definite lives, such as customer relationships, must be tested for impairment by comparing the carrying amount of the asset or group of assets to the expected future undiscounted cash flow to be generated by the asset or group of assets. Accordingly, Cogeco Cable completed its impairment test on customer relationships at February 28, 2009, and determined that the carrying value of customer relationships exceeded its fair value. As a result, a non-cash impairment loss of $60.4 million was recorded in the second quarter.
The impairment loss affected the Company's goodwill and customer relationship asset balances as follows at February 28, 2009:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000) $
--------------------------------------------------------------------------
(unaudited)
Goodwill 339,206
Customer relationships 60,442
Future income taxes (16,018)
--------------------------------------------------------------------------
Impairment loss net of related income taxes 383,630
Non-controlling interest (259,679)
--------------------------------------------------------------------------
Impairment loss net of related income taxes
and non-controlling interest 123,951
--------------------------------------------------------------------------
--------------------------------------------------------------------------
OPERATING RESULTS - CONSOLIDATED OVERVIEW
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 316,310 283,878 11.4 936,510 816,027 14.8
Operating costs 186,906 166,672 12.1 555,739 489,124 13.6
--------------------------------------------------------------------------
Operating income
from continuing
operations before
amortization(2) 129,404 117,206 10.4 380,771 326,903 16.5
--------------------------------------------------------------------------
Operating margin(2) 40.9% 41.3% 40.7% 40.1%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 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 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 third-quarter revenue improved, mainly in its cable sector, by $32.4 million, or 11.4%, to reach $316.3 million. Cable revenue, driven by increased 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 in the Canadian operations, partly offset by a net RGU loss in European operations, went up by $30.7 million, or 11.2%, in the third quarter of fiscal 2009.
In the first nine months of the year, revenue improved by $120.5 million, or 14.8%, to reach $936.5 million. The majority of the increase is attributable to the cable sector, with an increase of $118.2 million, or 14.9%, due to an increased number of RGU combined with rate increases and the recent acquisitions in the second half of fiscal 2008 in the Canadian operations, and the strength of the Euro against the Canadian dollar, despite a RGU loss in the first nine months of the year in European operations.
Operating costs
Operating costs increased by $20.2 million, or 12.1%, to reach $186.9 million in the third quarter and by $66.6 million, or 13.6%, to reach $555.7 million in the first nine months of fiscal 2009 compared to the prior year. The increase in operating costs was mainly attributable to the cable sector, due to the servicing of additional RGU and the impact of the recent acquisitions in Canada, and in Europe due to the appreciation of the Euro over the Canadian dollar and an increase in the level of uncollectible customer accounts.
Operating income from continuing operations before amortization
Operating income from continuing operations before amortization grew, essentially in its cable segment, by $12.2 million, or 10.4%, to reach $129.4 million in the third quarter of fiscal 2009 compared to the corresponding period of the prior year, and for the nine month period ended May 31, 2009, by $53.9 million, or 16.5%, to reach $380.8 million. The cable sector contributed to the growth by $11.2 million during the third quarter, and $50.5 million during the first nine months of the fiscal year.
FIXED CHARGES
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Amortization 67,654 58,564 15.5 198,502 167,949 18.2
Financial expense 14,362 17,748 (19.1) 56,168 51,631 8.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Fiscal 2009 third quarter and first nine-month period amortization amounted to $67.7 million and $198.5 million, respectively, compared to $58.6 million and $167.9 million for the corresponding period the year before. The increase in amortization expense was mainly due the cable sector and attributable to additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth, to the recent acquisitions in the Canadian operations and to the appreciation of the Euro currency over the Canadian dollar.
Third-quarter financial expense decreased by $3.4 million compared to the prior year mainly due to a foreign exchange gain on unhedged long-term debt and the reduction of interest rates during the quarter partly offset by the increase in Indebtedness (defined as bank indebtedness, derivative financial instruments and long-term debt). In the first nine months of the year, financial expense increased by $4.5 million due to the rapid appreciation of the US dollar and the Euro over the Canadian dollar and the increase in the level of Indebtedness, partly offset by interest rate reductions. More specifically, financial expense in the cable sector was adversely impacted by foreign exchange losses of $2.7 million in the first nine months of fiscal 2009, despite the favourable impact of foreign exchange gains of $1.7 million in the quarter, mainly on unhedged long-term debt, as the majority of customer premise equipment is purchased and subsequently paid in US dollars. The losses in the first nine months of the year were essentially due to the unusually high US dollar volatility with the Bank of Canada closing rate fluctuating from $1.0620 per US dollar at August 31, 2008 to $1.0917 per US dollar at May 31, 2009, reaching a high of $1.2991 per US dollar on March 9, 2009. For the corresponding periods of the prior year, the cable subsidiary recorded no foreign exchange gains or losses in the quarter and foreign exchange gains of $0.9 million in the first nine months.
REDUCTION OF WITHHOLDING AND STAMP TAX CONTINGENT LIABILITIES
COGECO's indirect Portuguese subsidiary, Cabovisao, had recorded contingent liabilities for withholding and stamp taxes relating to fiscal years prior to its acquisition by Cogeco Cable. At the date of acquisition, the amount accrued represented management's best estimate based on the available information. Management reviews its estimate periodically to take into consideration payments made relating to these contingencies as well as newly available information which would allow the cable subsidiary to improve its previous estimate. During the third quarter of fiscal 2009, Cabovisao received a preliminary report from the Portuguese tax authorities with respect to some of the items included in the contingent liabilities. Accordingly, management has reviewed its estimate of the contingent liabilities to reflect the new information available in this preliminary report, and has determined that a reduction of EUR 7 million, equivalent to $10.9 million, of the amount previously accrued was required at May 31, 2009, in order to reflect management's best estimate.
INCOME TAXES
Fiscal 2009 third-quarter income tax expense amounted to $26.3 million compared to $10.3 million in fiscal 2008. The income tax expense in the cable sector for the third quarter and first nine months was unfavourably impacted by a non-cash income tax expense of $6.1 million resulting from the recognition and subsequent utilization of Cabovisao's pre-acquisition income tax losses following the receipt of preliminary tax audit reports for those fiscal years. Excluding this amount, income tax expense for the quarter would have amounted to $20.2 million compared to $10.3 million in the prior year. For the first nine months of the year, income tax expense amounted to $36.4 million compared to $5.1 million in the prior year. The income tax expense for the first nine months of fiscal 2009 includes a future income tax recovery of $16 million related to the impairment loss recorded in the second quarter and an unfavourable impact of $6.1 million from the utilization of Cabovisao's pre-acquisition tax losses described above, both in the cable sector. The income tax expense for the comparable period of the prior year includes the impact of the reduction in corporate income tax rates announced on October 16, 2007 by the Canadian federal government in its Economic Statement and considered substantively enacted on December 14, 2007 (the "reduction of Canadian federal income tax rates"). The reduction of these corporate income tax rates reduced future income tax expense by $24.1 million in the first nine months of fiscal 2008. Excluding the effects of these items, income tax expense would have amounted to $46.2 million for the first nine months of fiscal 2009, compared to $29.3 million in fiscal 2008. The increases in income tax expense in fiscal 2009 are mainly due to the increase in operating income before amortization surpassing that of the fixed charges in the Canadian operations.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the third quarter of fiscal 2009 the income attributable to non-controlling interest amounted to $21.5 million, and a loss of $205.3 million for the nine months ended May 31, 2009, due to the impairment loss recorded in the cable sector. The income attributable to non-controlling interest for the comparable periods of the prior year amounted to $21.1 million and $68.6 million, respectively.
NET INCOME (LOSS)
Fiscal 2009 third-quarter net income amounted to $10.5 million, or $0.63 per share, compared to $9.5 million, or $0.57 per share, for the same period last year. Net income for the third quarter of fiscal 2009 includes an unfavourable impact of $2 million from the utilization of Cabovisao's pre-acquisition tax losses and a favourable impact from the reduction of withholding and stamp tax contingent liabilities in the amount of $3.5 million described above, also in Cabovisao, both net of non-controlling interest. Excluding the impact of these items(1), net income would have amounted to $8.9 million, or $0.53 per share(1), compared to $9.5 million, or $0.57 per share in the prior year, representing decreases of 6.3% and 7%, respectively. Net income reduction for the quarter is mainly attributable to the cable sector and has resulted from the decline of the financial results of the European operations due to the net RGU loss and the increase in income tax expense described in the "Income taxes" section above, partly offset by the improvement of the Canadian operations and the appreciation of the Euro currency compared to the Canadian dollar during the majority of the quarter. Please consult the "Non-GAAP financial measures" section for further details.
Net loss in the first nine month period of fiscal 2009 amounted to $93.8 million, or $5.60 per share, compared to net income of $15.5 million, or $0.93 per share, for the same period last year. In addition to the impacts described above for the quarter, the net loss in the first nine months of fiscal 2009 was affected by the impairment loss of $399.6 million recorded in the second quarter of the year in the cable sector, as described in the "Impairment of goodwill and intangible assets" section. Net of related income taxes and non-controlling interest, the impairment loss reduced net income for the first nine months by $124 million. The net income amounts of the 2008 fiscal year included an income tax recovery of $24.1 million resulting from the reduction of corporate income tax rates in the second quarter of fiscal 2008 as described in the "Income taxes" section, net of non-controlling interest of $16.2 million, for a net impact on income of $7.9 million, and losses from discontinued operations of $18.1 million for the first nine months of fiscal 2008. Excluding the effect of the above items, net income would have amounted to $28.6 million, or $1.71 per share, for first nine months ended May 31, 2009, compared to $25.6 million, or $1.54 per share, for the first nine months of the 2008 fiscal year, representing increases of 11.9% and 11%, respectively. Net income progression has resulted mainly from the growth in the cable sector of operating income before amortization exceeding that of fixed charges in the Canadian operations, offset by the decline of the financial results in the European operations and the increase in income tax expense described in the "Income taxes" section above.
(1) The indicated terms do not have standardized definitions 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.
CASH FLOW AND LIQUIDITY
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Operating activities
from continuing
operations
Cash flow from
operations(1) 95,498 96,068 291,475 262,819
Changes in non-cash
operating items 7,155 16,825 (37,872) (10,380)
--------------------------------------------------------------------------
102,653 112,893 253,603 252,439
--------------------------------------------------------------------------
Investing activities
from continuing
operations(2) (61,719) (74,415) (202,514) (197,487)
--------------------------------------------------------------------------
Financing activities
from continuing
operations(2) (44,677) 18,771 (42,266) (39,815)
--------------------------------------------------------------------------
Effect of exchange
rate changes on cash
and cash equivalents
denominated in
foreign currencies (1,866) 1,063 (538) 1,265
--------------------------------------------------------------------------
Net change in cash
and cash equivalents
from continuing
operations (5,609) 58,312 8,285 16,402
--------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 51,366 24,369 37,472 66,279
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period 45,757 82,681 45,757 82,681
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) 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.
(2) Excludes assets acquired under capital leases.
Fiscal 2009 third quarter cash flow from operations reached $95.5 million, 0.6% lower than the comparable period last year, primarily due to the increase in current income tax expense, partly offset by the increase in operating income before amortization and the decrease in financial expense. Changes in non-cash operating items generated cash inflows of $7.2 million, mainly as a result of an increase in income tax liabilities, partly offset by a decrease in accounts payable and accrued liabilities in the third quarter of fiscal 2009. In the prior year, the cash inflows of $16.8 million were mainly a result of an increase in accounts payable and accrued liabilities and in income tax liabilities.
In the first nine months of fiscal 2009, cash flow from operations reached $291.5 million, 10.9% higher than the comparable period last year, primarily due to the increase in operating income before amortization, partly offset by the increases in current income tax expense and financial expense. Changes in non-cash operating items generated cash outflows of $37.9 million, mainly as a result of a decrease in accounts payable and accrued liabilities and an increase in income taxes receivable, partly offset by an increase in income tax liabilities. The cash outflows of $10.4 million in the prior year were mainly due to a decrease in accounts payable and accrued liabilities in the first nine months of the year, partly offset by an increase in income tax liabilities.
In the third quarter of fiscal 2009, investing activities from continuing operations including assets acquired under capital leases stood at $62.9 million due primarily to the cable sector, with capital expenditures of $57.7 million and an increase of $5.1 million in deferred charges and others. 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 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;
- An increase in line extensions due to the expansion of the networks in Canada;
- An increase from the appreciation of the Euro and the US dollar over the Canadian dollar;
- A decrease in capital expenditures associated with network upgrades and rebuilds due to the timing of these initiatives;
- A decrease in customer premise equipment spending which reflect lower RGU growth in Canadian operations and net RGU losses in European operations.
In the first nine months of fiscal 2009, investing activities from continuing operations including assets acquired under capital leases stood at $204.9 million due primarily to the cable sector, with capital expenditures of $186.6 million and an increase of $18 million in deferred charges and others. 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 in Canadian operations fuelled in part by continued interest for the HD Television service, combined with the deployment of Digital Television in Portugal, net of RGU losses in the other services in European operations;
- 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;
- An increase in support capital spending due to improvements in the information systems to sustain the business activities and the acquisition of a new facility in the Canadian operations, and to the acquisition of a power generator for Cogeco Data Services;
- An increase in line extensions due to the expansion of the networks in Canada;
- An increase from the appreciation of the Euro and the US dollar over the Canadian dollar;
- A decrease in capital expenditures associated with network upgrades and rebuilds due to the timing of these initiatives.
Deferred charges and others are mainly attributable to reconnect costs in the cable sector. The increase in deferred charges and others for the third quarter amounted to $5.1 million compared to $7.4 million for the same period the year before, and to $18 million compared to $21.1 million for the first nine months of the year. Slower RGU growth explained the lower increases recorded in fiscal 2009.
In the third quarter and first nine months, the Company generated free cash flows amounting to $32.4 million and $86.3 million, respectively, compared to $37.1 million and $79.5 million for the same periods of the preceding year, representing a decrease of 12.6% for the quarter, and an increase of 8.6% for the nine months ended May 31, 2009. The reduction in free cash flow for the quarter is mainly due to the cable sector and resulted from an increase in capital expenditures and the decrease in cash flow from operations. For the first nine months, the growth in free cash flow is essentially from the cable sector and is due to increases in cash flow from operations, partly offset by increases in capital expenditures. The aggregate amount of total capital expenditures and deferred charges and others increased by $3.6 million for the quarter ended May 31, 2009, and by $21.1 million for the first nine months of fiscal 2009 compared to the corresponding periods of the prior year due to the factors explained above.
In the third quarter of 2009, Indebtedness affecting cash decreased by $40.3 million mainly due to the free cash flow of $32.4 million, the increase in non-cash operating items of $7.2 million, and the decrease in cash and cash equivalents of $5.6 million, net of the dividend payment of $5.3 million described below. Indebtedness mainly decreased through the net repayments on Cogeco Cable's revolving loans of $56.5 million, net of an increase of $17 million in bank indebtedness. For the same period of the prior year, Indebtedness affecting cash increased by $22.9 million, primarily due to the issuance by Cogeco Cable on March 5, 2008 of a $100 million senior unsecured debenture by way of a private placement, the proceeds of which were used in part by the cable subsidiary to reimburse its bank indebtedness of $17.7 million and to finance the acquisition of MaXess Networx(R) for $16.1 million, partly offset by repayments on the revolving credit facility of $58.6 million in the cable sector and a reduction of the Company's Term Facility for an amount of $2 million from the free cash flow of $37.1 million and the increase in non-cash operating items of $16.8 million.
During the third quarter of fiscal 2009, dividends of $0.08 per share for subordinate and multiple voting shares, totalling $1.3 million, were paid by the Company, compared to $0.07 per share, totalling $1.2 million in the third quarter of fiscal 2008. Dividends paid by a subsidiary to non-controlling interests amounted to $3.9 million during the third quarter of fiscal 2009, for consolidated dividend payments of $5.3 million.
In the first nine months of fiscal 2009, Indebtedness affecting cash decreased by $28 million due to the free cash flow of $86.3 million, partly offset by the reduction of non-cash operating items of $37.9 million, the payment of dividends totalling $15.8 million described below and the increase in cash and cash equivalents of $8.3 million. Indebtedness decreased through the repayment, in the cable sector, of US$150 million Senior Secured Notes Series A and the related derivative financial instrument of $56.2 million, both maturing on October 31, 2008, for a total of $238.7 million, and of net repayments on Cogeco Cable's revolving loans of $79.5 million, net of the issuance on October 1, 2008 of Senior Secured Notes, Series A and Series B, maturing October 1, 2015 and October 1, 2018, respectively, for net proceeds of approximately $255 million, and by an increase of $45.1 million in bank indebtedness. For the same period of the prior year, Indebtedness affecting cash decreased by $29.7 million mainly due to a net reduction of the amount outstanding on the revolving credit facility of $123.1 million in the cable sector and a reduction of the Company's Term Facility of $6.5 million, partly offset by the issuance of a senior unsecured debenture, as discussed above.
During the first nine months of fiscal 2009, quarterly dividends of $0.08 per share for subordinate and multiple voting shares, totalling $4 million, were paid by the Company, compared to quarterly dividends of $0.07 per share, totalling $3.5 million in the first nine months of the prior year. Dividends paid by a subsidiary to non-controlling interests amounted to $11.8 million, for consolidated dividend payments of $15.8 million in the nine month period ended May 31, 2009.
At May 31, 2009, the Company had a working capital deficiency of $363.7 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.
At May 31, 2009, Cogeco Cable had used $425.4 million of its $885 million Term Facility for a remaining availability of $459.6 million and the Company had drawn $12 million of its $50 million Term Facility, for a remaining availability of $38 million.
On October 1, 2008, the Company's cable subsidiary, Cogeco Cable, completed, pursuant to a private placement, the issuance 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. Cogeco Cable has entered into cross-currency swap agreements to fix the liability for interest and principal payments on the Senior Secured Notes Series A in the amount of US$190 million, which bear interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking into account these agreements, the effective interest rate on 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 per US dollar.
On June 9, 2009, Cogeco Cable completed, pursuant to a public debt offering, the issue of 5.95% Senior Secured Debentures Series 1 for $300 million maturing June 9, 2014. The Debentures were priced at $99.881 per $100 principal amount for an effective yield of 5.98% per annum. The net proceeds of sale of the Debentures were used to reimburse Cogeco Cable's existing indebtedness and for general corporate purposes.
The assumptions used in the actuarial valuations performed for the year ended August 31, 2008 were adjusted to reflect the current rates of return and market conditions, and accordingly, the payments made by the Company to fund the actuarial deficit of its defined benefit pension plans were higher in fiscal 2009 than in fiscal 2008. Based on the August 31, 2008 actuarial valuations, the Company made payments of approximately $1 million in the first nine months of the 2009 fiscal year.
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 balances of "fixed assets", "intangible assets", "goodwill", "accounts payable and accrued liabilities", "future income tax assets" "income taxes receivable", "income tax liabilities", "future income tax liabilities", "cash and cash equivalents", "Indebtedness" and "non-controlling interest".
The $12.3 million increase in fixed assets is mainly related to increases in capital expenditures to sustain RGU growth and to the recent acquisitions in Canada in the cable sector, partly offset by the depreciation of the Euro compared to the Canadian dollar since August 31, 2008. The $67.4 million and $334.1 million reductions in intangible assets and goodwill are due to the impairment loss recorded on Cogeco Cable's investment in Cabovisao in the second quarter of this fiscal year. The $12.8 million decrease in future income tax liabilities is attributable to the cable sector and is mainly due to the impairment loss described above. The $46.5 million decrease in accounts payable and accrued liabilities is related to the timing of payments made to suppliers, the reduction of withholding and stamp tax contingent liabilities, and the fluctuations of the Euro currency over the Canadian dollar in the cable sector. The $6.4 million reduction in future income tax assets is due to the utilization of Ontario minimum tax credits and tax loss carry forwards to reduce current income taxes in the cable subsidiary. The $8 million increase in income taxes receivable is due to income tax payments relating to fiscal 2008 in the cable sector. The $6.8 million increase in income tax liabilities is a result of the increase in operating income before amortization surpassing that of the fixed charges. Indebtedness has decreased by $18.3 million and cash and cash equivalents has increased by $8.3 million as a result of the factors previously discussed in the "Cash Flow and Liquidity" section. The $213.7 million decrease in non-controlling interest is due to the impairment loss recorded on the cable subsidiary's investment in Cabovisao in the second quarter of the year as described in the "Impairment of goodwill and intangible assets" section, net of improvements in the cable subsidiary's operating results excluding the impairment loss.
A description of COGECO's share data as at June 30, 2009 is presented in the table below:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Number of shares/options Amount
($000)
--------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,942,470 120,994
Options to purchase subordinate voting shares
Outstanding options 79,650
Exercisable options 79,650
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 July 10, 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 August 6, 2009, to shareholders of record on July 23, 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 frequency may vary.
FINANCIAL MANAGEMENT
On January 21, 2009, the Company's cable subsidiary, Cogeco Cable, entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to the Euro-denominated Term Loan facilities for a notional amount of EUR 111.5 million. The interest rate swap to hedge the Term Loans has been fixed at 2.08% until their maturity at July 28, 2011. The notional value of the swap will decrease in line with the amortization schedule of the Term Loans. In addition to the interest rate swap of 2.08%, Cogeco Cable will continue to pay the applicable margin on these Term Loans in accordance with its Term Facility. Since the issuance on January 21, 2009, the fair value of interest rate swap decreased by $2 million, which is recorded as a decrease of other comprehensive income net of income taxes of $0.6 million and non-controlling interest of $1 million.
On October 1, 2008, 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 $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 $5.5 million due to the US dollar's appreciation over the Canadian dollar. The fair value of cross-currency swaps decreased by a net amount of $0.3 million, of which an increase of $5.5 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $5.8 million was recorded as a decrease of other comprehensive income, net of income taxes of $0.2 million and non-controlling interest of $3.9 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 $9.6 million in the first nine months of fiscal 2009, which is presented net of non-controlling interest of $6.5 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts at May 31, 2009 was $1.5433 per Euro compared to $1.5580 per Euro at August 31, 2008. The average exchange rates prevailing during the third quarter and first nine months used to convert the operating results of the European operations were $1.6126 per Euro and $1.5951 per Euro, respectively, compared to $1.5694 and $1.4851 per Euro for the same periods of the prior 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 nine months ended May 31, 2009:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Exchange rate
Nine months ended May 31, 2009 As reported impact
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 180,875 18,088
Operating income before amortization 53,617 5,362
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian dollar with regards to purchases of equipment, as the majority of customer premise equipment in the cable sector is purchased and subsequently paid in US dollars. Please consult the "Fixed charges" section of this MD&A and the Foreign Exchange Risk section in note 15 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net additions (losses) % of Penetration(1)
Quarters Nine months
ended May 31, ended May 31, May 31,
May 31, 2009 2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
RGU 2,810,199 14,985 50,889 93,325 190,109 - -
Basic Cable
service
customers 1,130,527 (13,547) (1,589) (22,702) 16,001 - -
HSI service
customers
(2) 651,617 1,519 6,865 18,849 53,119 59.7 56.7
Digital
Television
service
customers 534,152 19,235 26,055 67,954 60,187 47.8 38.5
Telephony
service
customers
(3) 493,903 7,778 19,558 29,224 60,802 47.2 44.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing to the HSI service without the Basic Cable
service totalled 86,887 as at May 31, 2009 compared to 82,780 at May
31, 2008.
(3) Customers subscribing to the Telephony service without the Basic Cable
service totalled 31,774 as at May 31, 2009 compared to 25,301 at May
31, 2008.
In the cable sector, third quarter and first nine months RGU net additions were lower than for the same periods last year and reflect an early sign of maturation in some services for the Canadian operations and the difficult competitive environment in Portugal. The number of net losses for Basic Cable stood at 13,547 customers for the quarter and 22,702 customers for the first nine months, compared to net losses of 1,589 customers and net additions of 16,001 customers, respectively, for the same periods of the prior year. This decrease is due to net customer losses in the European operations reflecting a continuing difficult competitive environment in the Iberian Peninsula, recurring intense customer promotions and advertising initiatives from competitors for their new respective third leg of the triple-play service in the Portuguese market, partly offset by 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 1,519 customers for the quarter and 18,849 customers for the first nine months, compared to 6,865 and 53,119 customers, respectively, for the same periods 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 19,235 and 67,954 customers, for the quarter and nine month period ended May 31, 2009, respectively, compared to 26,055 and 60,187 customers for the same periods 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. In the quarter and first nine months, Telephony customers grew by 7,778 and 29,224 customers to reach 493,903 at May 31, 2009, compared to a growth of 19,558 and 60,802 customers for the same periods of the prior 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 difficult competitive environment. Telephony service coverage in Canada, as a percentage of homes passed, is now above 90% compared to 83% at May 31, 2008. The service is offered in all of the Company's territories in Portugal.
In addition to the launch of new channels and retention strategies during the quarter in the European operations, new marketing and other operating initiatives were implemented, the result of which should help in reducing customer attrition in the upcoming quarters.
OPERATING RESULTS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 305,672 274,944 11.2 910,030 791,879 14.9
Operating costs 176,941 157,452 12.4 527,096 459,713 14.7
Management fees
- COGECO Inc. - - - 9,019 8,714 3.5
-------------------------------------
Operating income
from continuing
operations
before
amortization 128,731 117,492 9.6 373,915 323,452 15.6
-------------------------------------
Operating margin 42.1% 42.7% 41.1% 40.8%
--------------------------------------------------------------------------
(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 presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Revenue
Fiscal 2009 third-quarter consolidated revenue improved by $30.7 million, or 11.2%, to reach $305.7 million, and first nine-month consolidated revenue by $118.2 million, or 14.9%, to reach $910 million, when compared to the prior year. Driven by an increased number of RGU combined with rate increases and the recent acquisitions in the second half of fiscal 2008, third-quarter Canadian operations revenue went up by $37.2 million, or 17.6%, and for the first nine months by $116.8 million, or 19.1%.
Fiscal 2009 third-quarter European operations revenue decreased by $6.4 million, or 10.1%, at $57.6 million, compared to the same period of the prior year, as a result of a net RGU loss in the quarter. First nine month revenue increased by $1.3 million, or 0.7%, to reach $180.9 million, due to the strength of the Euro against the Canadian dollar, despite a RGU loss in the first nine months of the year. Revenue from the European operations in the local currency for the third quarter amounted to EUR 35.7 million, a decrease of EUR 5.1 million, or 12.5%, and to EUR 113.5 million, a decrease of EUR 7.4 million, or 6.1%, for the first nine months.
Operating costs
For the third quarter and first nine months of fiscal 2009, operating costs, excluding management fees payable to COGECO Inc., increased by $19.5 million and $67.4 million to reach $176.9 million and $527.1 million, respectively, increases of 12.4% and 14.7% compared to the prior year. Operating costs increased due to the servicing of additional RGU and the impact of the recent acquisitions in Canada, and in Europe, due to the appreciation of the Euro over the Canadian dollar and an increase in the level of uncollectible customer accounts.
Operating income before amortization
Fiscal 2009 third quarter and first nine-month operating income before amortization increased by $11.2 million, or 9.6%, to reach $128.7 million, and by $50.5 million, or 15.6%, to reach $373.9 million, respectively, as a result of various rate increases, recent acquisitions, and RGU growth generating additional revenues which outpaced operating cost increases in the quarter and first nine months of the year. Cogeco Cable's third quarter operating margin decreased to 42.1% from 42.7% for the same period of the prior year. The operating margin in Canada improved to 45.9% from 44.3% which offset the decrease in the European operating margin to 25.9% from 37.6%.
