Mediacom Communications Q3 2008 Earnings Call Transcript

Mediacom Communications Corp. (MCCC)

Q3 2008 Earnings Call

November 6, 2008; 11:00 am ET

Executives

Mark Stephan - Executive Vice President and Chief Financial Officer

Rocco Commisso - Chairman and Chief Executive Officer

John Pascarelli - Executive Vice President of Operations

Joe Young - Senior Vice President, General Counsel

Analysts

Michael Pace - JP Morgan

Jason Bazinet - Citigroup

David Joyce - Miller Tabak

Richard Greenfield - Pali Capital

Tuna Amobi - Standard & Poor’s

Jim Harris - Bislett Capital

Presentation

Operator

Welcome ladies and gentlemen to the Mediacom Communications Corporation third quarter 2008 conference call. For the conference, all of the participant lines are in a listen-only mode. However there will be an opportunity to ask questions. (Operator Instructions)

With us today are Mr. Rocco B. Commisso, the Chairman and Chief Executive Officer; Mr. Mark Stephan, the Executive Vice President and Chief Financial Officer; and John Pascarelli, the Executive Vice President of Operations.

At this time, I’ll turn the call over to Stephan; please go ahead.

Mark Stephan

Thank you, John. Welcome to Mediacom’s third quarter 2008 earnings call. In our call today we will be making statements about expected future events and financial results that are forward-looking and are subject to risks and uncertainties. Please see the reports and documents we file from time-to-time with the SEC, including our Annual Report on Form 10-K, for a description of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

We have made disclosures in our earnings release and will make comments on this call that reference non-GAAP measures. In our earnings release, we provide a discussion regarding our use of non-GAAP financial measures and a reconciliation of such measures to their most directly comparable GAAP measures.

With that done, let’s turn it over to Rocco for his opening remarks.

Rocco Commisso

Thanks Mark. Good morning everyone and thank you for joining us. In the midst of a major economic downturn and the most severe financial crisis I’ve ever experienced, Mediacom is performing well, both operationally and financially.

For the third consecutive quarter, we delivered record RGU growth. The highlight for the quarter for us is that we added 3,000 basic subscribers. Moreover, in the first nine months of this year we have not experienced any basic subscriber losses, another record for Mediacom since we bought the AT&T assets in 2001. In fact, we are exceeding our own growth expectations that were delineated earlier in the year, which is now putting us in a position to raise our external guidance for the third time in 2008.

Mark and John will go over in greater details on our third quarter results. What I want to do instead is to look at our performance from an historical perspective given the extraordinary times.

As some of you may know, I became involved with the nascent cable business exactly 30 years ago as a lending officer at Chase Manhattan Bank. So in these three decades, I’ve witnessed first-hand at least three economic downturns and in each case, the cable business proved to be rather immune to reduced consumer spending and high unemployment rates. Thus, I’m not surprised that our business is holding up well, especially in light of the phenomenal value our customers are seeing with our triple-play bundles.

However, we are taking a cautious stance as to what the future may hold and we are making every effort to reduce unnecessary expenses and manage potentially higher bad debt levels going forward without causing harm to the longer-term financial success of our company.

Having gotten my start in the financial community, I learned many years ago that you raise capital, at reasonable costs when you don’t need it, because you never know when the markets may change on you. We have worked very hard over the years to build a solid and flexible capital structure upon which we could execute our business plan.

We have cultivated strong banking relationships, diversified our funding sources and took prudent measures to structure the appropriate mix of short-term and long-term debt, both minimize borrowing costs and to lay out debt maturities that were manageable. Foremost, we were very disciplined over a long period of time in preserving our used credit commitments for a rainy day.

Today, we have tremendous amounts of liquidity relative to our needs, amounting to over $800 million of available revolving credit commitments. We have low cost of debt capital, which currently stands at less than 7%, and we have manageable debt maturities over the next three years, giving us until at least mid 2011 before we need to access the debt markets.

Lastly, and most importantly, we are funding ourselves internally through free cash flow, even though we invested heavily this year in the digital transition. Next year we expect our capital spending to fall back to historical levels, which taken alone will meaningfully impact our free cash flow generation.

In closing, our business is showing its resilience in challenging economic times. Our financial position is healthy, giving us the opportunity to make continuing investments to better the customer experience and to keep our competitive edge, all aimed at maintaining momentum in our operating performance.

With that, I would like to turn the call over to Mark to review in more detail the results and financial position. Thank you.

Mark Stephan

Thanks Rocco. It was a solid performance. We had record RGU ads for any third quarter in our history and we are on track to beat our best ever RGU adds for any year; our much improved basic subscriber experience certainly helped. Our unit gains drove third quarter revenues higher by 7.4% and adjusted OIBDA by 8.3%.

Our year-to-date results, taken together with our outlook for the balance of the year, give us good reason to raise our external full year 2008 guidance for the third time this year. We are moving revenue growth upward from a range of 7% to 8%, to 7.5% to 8% and adjusted OIBDA upward from a range of 8.5% to 9.5%, to 9% to 10%.

We are also increasing guidance for our 2008 capital spending from about $275 million to $285 million, to accommodate higher than planned RGU adds, including additional purchases of customer premise equipment as well as vehicle purchases for our fleet. With a lot of digital transition spending behind us once we end 2008, we expect 2009 CapEx spending to fall to more historical levels.

We had good control over expenses during the quarter, and consequently our adjusted OIBDA margin increased slightly to 35.9% from 35.6% in the third quarter last year. Note that because of our seasonality, we usually see it decline sequentially in our margin from Q2 to Q3.

Highlights for the quarter were digital, data and phone customer adds and positive growth in basic subscribers, giving us a year-over-year RGU growth rate of 9%, which helped us achieve an 8.6% increase in total monthly revenue per basic subscriber. Growth in third-quarter video revenues was 1.6%, mainly due to growth in advanced video services, partially offset by the effects of promotional activities.

We did a much better job with basic subscribers in the third quarter, having gained 3,000 basic subscribers, compared to a loss of 13,000 in last year’s third quarter. We haven’t added basic subscribers in the third quarter since 2002 and year-to-date we have not lost any basic subscribers, which is a first for us.

Quarterly digital adds were much higher than the third quarter last year. We gained 25,000 compared to 9,000 in the prior year period. As John will know, we continue to have a very impressive sell-in rate on digital. Our high-speed data services continued to perform well, with a 16.9% revenue increase for the quarter, largely fueled by a 14.2% year-over-year gain in data customers. Quarterly high-speed adds were 24,000, a little better than 23,000 in the prior year period.

Phone revenues grew 64.1%, driven by 44.8% year-over-year growth in phone customers and fewer overall customers on promotional discounts. Quarterly units ads were 17,000 compared to 21,000 in the prior year period.

Third quarter advertising revenues were soft and declined 3%, mainly due to automotive and one week less in the advertising calendar. This was partially offset by higher political advertising. So far, our on media division has done reasonably well in holding our revenue decline to low single digits, compared to the performance of broadcast and cable advertising businesses generally. Its concentrated focus on serving the local businesses has made a difference.

We are squarely focused on expense control and operating efficiencies. At the same time, we are committed to bettering quality of service and customer care. Our operations and IT groups have done a great job in significantly lowering costs this year in high-speed data and call center telecom costs and we have been able to reinvest some of that savings into improvements in service and customer care.

Our initials are paying off. Excluding non-cash compensation costs, third quarter total costs and expenses continue to be well controlled, rising 6.9% for the quarter. This was accomplished despite an 8% increase in head count for our technical, customer care and marketing groups and an 8.9% increase in programming costs.

Higher unit programming, phone delivery, vehicle fuel and staffing costs were principally behind this quarterly increase in service costs of 8.2%, offset in part by lower high-speed data delivery costs. Our fuel costs alone were up 39% quarter-over-quarter, but with gas prices coming down recently, we should see benefits in the fourth quarter and beyond.

SG&A expenses were also well contained, particularly in light of higher staffing expenses in marketing and customer care, growing 3.4%, helped by meaningful reductions in call center telecom expenses.

As we expected, interest expense fell 10.6% due to lower market rates on our floating rate debt, offset by higher levels of bank debt. The credit freeze from Labor Day to mid-October drove our floating rate borrowing costs significantly higher, but with the credit markets thawing we are seeing our current borrowings at rates well below what we had seen before the credit freeze.

Our capital spending for the third quarter came in at $82 million versus $71 million for the third quarter last year. This is the high point of our spending this year and we expect to see a reduction in the fourth quarter. Year-to-date, we spent $217 million compared to $183 million last year.

Compared to last year’s third quarter, CapEx spending rose primarily because of customer premise and digital transition investments, including network rebuild and upgrades in digital head-end investments, partially offset by a reduction in regional network spending.

Turning to our balance sheet, we finished the quarter with total debt outstanding of about $3.26 billion and an $11 million increase from second quarter end. This additional borrowing essentially funded our negative free cash for the quarter.

Third quarter debt leverage, using annualized adjusted OIBDA was 6.4 times. At quarter end, we had available revolving credit commitments of about $810 million and to put into perspective, our requirements over the next couple of years, we have $25 million of remaining bank maturities in 2008 and $125 million and $92 million in bank debt maturities in 2009 and 2010 respectively.

We also have the pending Morris transaction to close sometime around year end and that will require $110 million in cash. This transaction was signed in September and structured as a tax-free exchange, involving our receiving 28.3 million Class A common shares from Morris in exchange for this cash amount, together with non-strategic cable systems serving about 25,000 basic subscribers.

Aside from expected free cash flow generation, our revolving credit commitments are more than ample to deal with the Morris deal and the scheduled maturities. We therefore have no need to tap the credit markets in the foreseeable future. We are very comfortable with our balance sheet and liquidity position as it stands today.

While feeling good about what we accomplished year-to-date and how our performance has held up, we must also recognize the economic uncertainties out there, how it’s affecting our customers and what it may mean for our business. We have to be cautious regarding future unit growth and operating performance, but this does not detract from our near-term confidence in achieving 2008 guidance; but in spite of these economic uncertainties, we expect free cash flow in 2009 and beyond to ramp up meaningfully.

We expect the CapEx in 2009 and beyond to go back to pre-2008 measures and that our interest expense will stabilize at current levels. So even with a lower growth rate in operating results, these anticipated levels in CapEx and interest expense, when taken alone, will generate strong free cash flow in 2009.

Now I would like to turn to our two bonds issuers. Mediacom LLC had total debt of about $1.488 billion. Its adjusted OIBDA was $62.1 million, inclusive of its quarterly cash investment income from Mediacom Broadband of $4.5 million. Interest expense and CapEx for the quarter were $25 million and $41.3 million respectively and its unused bank lines totaled $351 million, all of which was available.

Our other bond issuer, Mediacom Broadband LLC, had total debt of about $1.772 billion. Its adjusted OIBDA was $68.8 million. Its interest expense and CapEx for the quarter were $29.7 million and $40.3 million respectively. Unused bank lines totaled $504 million, $459 million of which were available.

Now that concludes my part and I would like to turn it over to John for his remarks.

John Pascarelli

Thanks Mark. Good morning. As Rocco and Mark noted, we just achieved our third straight quarter of significant growth across all product lines. We are on track for record performance for the full year 2008 and believe that each of our products is properly positioned to be extremely competitive in our markets.

We offer a great selection of video products, from analog to advanced HD services. Our HSD products have superior performance at all price points and our telephone service as part of a bundle is a compelling value. It is difficult to predict the future, but we are pleased that our business is performing so well in these tough economic times.

Now let me go into more detail about specific unit gains in each of our product lines, and then I will come back to our overall strategy. For the first time since 2002, we increased video customers in the third quarter and equally as important, we continue to grow advanced service customers. Our increased marketing and customer service spending has led to higher connect levels and lower churn rates versus the same period last year.

As of September 30, we had over 1.4 million customer relationships, with over 47% taking at least two products and over 14% taking all three products, up from 40% and 10% respectively at the same point last year. Bundles are having a meaningful impact on our customer retention, with triple-play customers significantly below our average churn rates.

We added 25,000 digital customers in the third quarter, thanks to a continuing strong selling rate of more than 80% and lower churn. Our overall digital penetration is nearing 50%. Our customers continue to demand our advanced video services with 32% of our 624,000 digital customers taking either HD or DVR services.

VOD activity was strong in the quarter, with our average user accessing our VOD content over 17 times a month. In addition, we will continue to expand the library of VOD HD content with recently released movie titles and popular programs from the leading cable networks.

Mediacom Online also had good results in the quarter, with a net gain of 24,000 customers bringing our HSD customers to 726,000. Our selling rate for HSD averaged nearly 70% for the quarter with the return of the students and our penetration to homes passed is now over 25%.

Our range of broadband offerings, including our highest speed of 20 Meg, keeps us ahead of our competition and well positioned with the right value propositions for consumers in our marketplace. Offering a 3 Meg economy level tier for $19.95 has allowed us to capture some of the dial-up market. More importantly, combining our economy tier with our video product has given us a lower-cost bundle that we can use to convert reception-impaired broadcast-only households, as we move through the digital transition.

Our residential telephone service continues to provide steady growth adding 17,000 customers in the quarter and bringing our total telephone customers to 239,000 or over 9% penetration of homes passed. Our first system to launch phone is now over 15% penetrated to marketable homes, giving us comfort that this product can continue to provide steady growth in both RGUs and system cash flow. We recently changed the way we are offering voicemail and international calling to our customers and expect to see favorable impact in both revenue and expenses.

Medicom Business Phone was introduced in September, with a controlled launch in the Minnesota region. Business Phone, as you may recall, is our multi-line service addressing the small to medium-sized business market. The launch followed several months of successful technical trials in Mediacom office locations and we will be working with initial customers to refine our sales and operations processes in the fourth quarter.

We anticipate launching Business Phone across additional markets beginning early next year. The expansion of the Mediacom Business Phone, combined with continued development of our Enterprise Business Network, gives us significant growth potential in the business services area for 2009.

Throughout 2008, we’ve done a good job controlling costs while at the same time focusing new resources on improving the quality of service to our customers. Our technical teams are utilizing advance monitoring and tracking technologies to measure product performance, allowing us to be more proactive in fixing potential customer-impacting issues.

Operationally, we continue to concentrate on reducing negative activities that drive costs and customer dissatisfaction. This year, we added 60 new network maintenance technicians to troubleshoot and correct network related issues in advance of customer calls.

Our technical service teams have embraced the mission to get it right the first time. These efforts have helped contribute to lower levels of both voluntary and non-pay disconnects, as well as service downgrades on all product lines as compared to previous years and even though historically we experience increases in new service calls during system upgrades and other customer impacting digital conversions, we’re able to lower our service calls per RGU by 2% year-over-year while undertaking a number of these new projects.

We have been able to partially offset our increases in costs by improved field productivity, lower telecom costs in our call centers, lower bandwidth costs in our internet service and lower network management costs for our IP products. Our increased focus on managing the delinquency process has allowed us to hold our bad debt levels flat year-over-year.

We are also preparing for the broadcast digital transition. We are readying our facilities and networks to make the process as seamless as possible for our existing customers and have begun marketing efforts to create new customer relationships in areas where the digital signals may not be easily received by consumers.

By the end of this year, over 95% of all of our networks will either be at a minimum of 750 MHz or will be offering all digital products. The upgrades and rebuilds are on schedule to be completed on time and we launched our first all-digital market in early October and will be launching the remaining all-digital markets by December 31.

Now let me turn to a discussion on how we are preparing the company in the event of a prolonged downturn in the economy. First, on the capital side, most of our network related investments will be complete at the end of 2008 and going forward, the majority of our capital spending will be success based.

Our fleet is in great shape going into 2009 and contractor labor rates are being renegotiated. All new build line extension projects are being re-evaluated based on current conditions and discretionary spending is on hold. We will be deploying our low-cost DTA’s and continue to see more competitive pricing on all CPE-related equipment as new manufacture options materialize.

On the operating side, we recognize that in the sluggish economy there are generally more cost conscious consumers and we are most likely to see a further slowdown in the housing market, which will decrease our opportunities to sell to consumers as they move. The upside to this is we should see a corresponding reduction in disconnect activity associated with moves.

This year, we are able to successfully lower costs in many areas by focusing our teams on specific expense items, driving down both unit cost and the activity levels associated with those cost item. We are expanding this to other areas, using the same approach to help keep cost increases to a minimum level and reduce any unnecessary spending. We will be shifting our marketing dollars towards greater retention efforts, including adding more value to existing packages and generating quality customer relationships with all of our products.

In closing, let me summarize our strategy to continue growing our business. It starts with the digital video products. The world is migrating to all digital video and we need to keep our products current by adding HD and other on-demand content to further enhance our service offerings. Our HSD products represent the best value available in our markets we serve. Our network design gives us a competitive advantage and we need to continue to use that advantage to offer multiple products at compelling price points.

In a world where some of the population is opting to discontinue landline phone service altogether, our phone product needs to provide value relative to other choices in the marketplace. Our success will come from continuing to offer compelling bundles of complimentary services with simplified customer transactions and an overall higher quality of service.

That concludes my remarks and I’ll turn it back to Mark.

Mark Stephan

Okay Jim, let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Pace - JP Morgan.

Michael Pace - JP Morgan

I apologize, I had to jump off a little bit, so if I missed this, again we can follow-up afterwards, but I heard CapEx to historical levels. Can you just clarify whether that’s dollar amount or percentage of revenue if we look back over the last couple of years?

Rocco Commisso

Dollar amount, Mike.

Michael Pace - JP Morgan

Then as it relates to the strength in the base business, and I know you spoke a lot about this, but is it more related to declines in churn or any specific promotions or targets that you had on those levels and then I have a follow-up on the Morris deal for Rocco.

John Pascarelli

It’s really a combination of two things. We’ve got the best of both worlds going on right now. We are seeing increased sales volume and we’ve got lower churn rates. So we are seeing it on both sides. I think on the increased sales, I think we are executing better. I think we’ve got a better mix of products out in the marketplace and we continue to drive our message home about the bundling on the retention side and that’s helping us.

Michael Pace - JP Morgan

Then Rocco, as it relates to the Morris deal, it was structured as a tax-free exchange. I guess what limitations are there as it relates to further stock buy backs to maintain that tax free status, so what limitations are there, and then your comfort level on that as well would be great.

Mark Stephan

I will take the tax question. Mike, if we’re compelled to go out and to use our stock buy back program, we have got significant NOL, so if we do something that upsets the tax-free exchange, it’s all on us and it really makes our part of the transaction taxable. It is really a question of do we want to use our $2.2 billion of NOLs to shelter something that is really a fairly small tax hit relative to that $2.2 billion?

Rocco Commisso

I don’t know if you answered the question. I think the question was whether we’re constrained from buying back stock given the transaction, right? We have Joe Young here on the line. He is our General Counsel of the company.

Joe Young

Right; we’re not constrained in any way; we can buy stock. There is a limitation that if we buy 50% or if 50% moves, then the consequences to Mediacom could be that the transaction turns taxable; however, it does not turn taxable for the Morris interest. So there is no restriction in the documents from our buying stock to the point if we think it’s advisable it becomes taxable to us and using our NOLs to shelter the gain.

Michael Pace - JP Morgan

And Rocco, just your comfort level on future transactions?

Rocco Commisso

What kind of future transactions Mike?

Michael Pace - JP Morgan

I guess buying back stock up to these levels and just your comfort with the balance sheet and credit markets generally, I guess?

Rocco Commisso

Yes look, I mean we are being cautious. We’ve didn’t buy any stock in the third quarter, either because we were in a quiet period because we had the Morris transaction going on. Yes, we are going to play it by ear, that’s the best I’m going to say right now. In light of what is happening in the economy, with the financial community and everything else that is going around. We have the program still in place, but I’m not about to say whether we are going to go into the market or not at this time.

Operator

Your next question comes from Jason Bazinet - Citi.

Jason Bazinet - Citigroup

I think you mentioned, you didn’t see basic subs grow in the third quarter and lets go back to the third quarter of ‘02. You said that bundling is a benefit of that; I would imagine the other key element of that is just the magnitude of fiber investments and like Mike, I had to jump on a little bit late, so I apologize if you touched on this, but can you just give us an update on where the [Uvers] and Verizon overlaps?

Rocco Commisso

You’re talking about the overbuild cases, right?

Jason Bazinet - Citigroup

Yes, correct.

John Pascarelli

We really only have two active areas where we are competing with Verizon and it’s a very small percent of our footprint. It’s one little on the East Coast and one little one on the West Coast. We don’t have any activity from AT&T, particularly on the video side. We see a little more aggressive on some pricing on high-speed internet. We are aware they are pulling fiber in a number of our markets, but we have yet to see any activity on the video side from them.

Rocco Commisso

Our largest telephone telecom competitor in Iowa, Minnesota, South Dakota, hasn’t really done anything to have a land line video strategy.

Jason Bazinet - Citigroup

I think a year ago you said it was about 15,000 in California and 15,000 in Delaware; those haven’t changed materially?

Rocco Commisso

No, we’re talking about homes passed. Effective subscribers, in California it’s much less than that. In lower Delaware, I think it’s higher than that.

John Pascarelli

No, lower Delaware right now, is about 25,000 homes passed.

Rocco Commisso

So think about 40,000 or 50,000; if you want to pick a number, homes passed in relation to our 2.850 million homes.

Operator

Your next question comes from David Joyce - Miller Tabak.

David Joyce - Miller Tabak

Your had very good RGU net adds, obviously. I am wondering if the voice maybe could have been higher. Anecdotally, if there was perhaps less wireless substitutions or are you seeing any wireless-only threats to growing your voice side?

John Pascarelli

I think, we don’t disagree that the phone could have been a little higher. Our issue right now is our ability to drive our existing customers to upgrade and add the service and we are testing a few different things, but what we’ve got to do is be able to accelerate our existing customers to accept it. We’re doing a decent job on selling and churn rates have come down significantly for us. So it’s really about getting our existing customers to accept it at a faster pace that will help us accelerate that.

Operator

Your next question comes from Rich Greenfield - Pali.

Richard Greenfield - Pali Capital

I was just hoping to get an update on programming costs. Some of your peers in the cable industry have talked about the impact or the rising impact of retransmission consent and the burden it’s placing on programming costs sequentially and as you look into next year. I’m wondering, given that this is a typical retrans cycle right now with broadcasters, where you sit in that process and what we could expect?

I think Mark you mentioned that even if operating EBITDA or OCF slows down next year, you still think you’re going to generate meaningful free cash flow; how much of that comment relates to the economy impacting your business next year versus programming costs? Thanks.

Rocco Commisso

I think Rich it’s fair to say not just us, but a lot of cable companies are facing a new round of retransmission consent. We have a few production negotiations to be done and since we’re in the midst of negotiating, I’ll leave it at that. It’s safe to say that a combination of retransmission consent and the Big 10 network, which we introduced in September, would drive programming costs at the same rate of growth as we potentially had this year if not higher. Bear in mind we have done a lot of retransmission consents through the last two years and some of those costs are already embedded in our numbers.

Frankly, from where I sit I don’t expect to generate, given the economic situation, the same type of cash flow growth that we generated this year. Having said that and I want to make sure everybody understands that from a guy who’s been around for a long time, maybe I’m too old for this business, yes we have a great business here. Whichever way you cut the business, and I compare our business not only to other segments of the media business but also to other companies, non-financial companies that operate in an array of service sectors.

We are not cyclical. We are not affected by foreign competition. Our consumers are proven and they are not going to disconnect in economic downturns and I foresee this business generating 20% un-leveraged free cash flow to revenues which is the hallmark of any good business.

Now, I think what Mark was alluding to is that despite what the growth rate and cash flow may be next year, a combination of our interest expense being much reduced from last year and two, a significant reduction in CapEx, I think we’re going to see the highest free cash flow level we’ve ever seen in the company’s history and you take that together with our unused lines and we feel good in the financial position that we are in.

We have not provided numbers for next year, other than to suggest, as we have said more than once, that we’ve reached our high point of CapEx and we expect those numbers to go down dramatically next year.

Richard Greenfield - Pali Capital

But even with the programming cost increases and the overall economy, you would still expect meaningful growth in EBITDA next year, I presume?

Rocco Commisso

I do not say we’re not, but we have not provided any guidance. We are in the midst of our budgeting cycle. We haven’t concluded, as you may have suggested, our retransmission consent negotiations and we haven’t seen what the future may hold in the next two to three months. So there’s a lot of things there that are hedged.

So I’ve given you what is a certainty and the certainty in our case is the significant reduction in CapEx and since you especially have always focused on free cash flow, I want to make you feel good, that you are going to see a significant increase in cash flow despite what may happen operationally.

Operator

(Operator Instructions) Your next question comes from Tuna Amobi - Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

I wanted to get a sense, this may be a question for either Rocco or John I guess; so with regard to all digital rollout as well as digital simulcast, I don’t think I’ve heard you talk about in terms of the markets that you’re actually rolling it out right now? Any trends you see from this market in terms of the potential impact that it has on your subscriber base or the metrics has churned it; RPU or all that kind of stuff and any plans that you have as well related to that, looking ahead to next year in terms of markets, etc, would be helpful. Thanks.

John Pascarelli

I think first, digital simulcast; we’ve given the number in the past. We are projecting to have 50% of our company having an alternative digital simulcast feed available in our markets. So we will have an analog and digital simulcast feed of about 50% of the footprint.

The all-digital conversion is really a small piece of the organization. We’re not talking about a big piece of the footprint. We’re just talking about some small systems, isolated systems, where the economics made more sense to convert them to all digital than to actually rebuild and upgrade and utilize that capacity through digital.

Will it have a meaningful change in the business? No, because there’s just not enough customers to do that, but the early results are good, which I think for us may give us more comfort in converting some of our other systems earlier than we might have done them in the past, based on the accepting rates that we are seeing from our customers.

Tuna Amobi - Standard & Poor’s

Just switching gears, one last question for Rocco. Regarding the Morris transaction, obviously, a lot has happened since in the past, seven weeks or so that the transaction was done and given the overall market volatility Rocco, I’m just kind of wondering in terms of the implied valuations there, I realize it’s a little bit of a sensitive matter, given it’s one of your Directors, but to the extent you can comment with the benefit of what has happened in the last seven weeks, how you feel about that transaction in terms of the overall exchange, the terms, the implied valuation; I think it was like $6.50 for the shares. So just kind of any general comment, as well as any kind of comment related to -

Rocco Commisso

That’s a good question and I am glad you appreciate it. I have to be very careful as to how I respond to this question. First of all, the deal was negotiated over a two-month period of time and it was announced on September 8, I think it a week before the Lehman bankruptcy and you all know, the world has changed for you guys as it has changed for me since then, right?

Having said that, the way we look at this transaction, that’s why it’s so good for Mediacom, is frankly we are buying 28.3 million shares in one block at a cash price of $3.89 and that is important to put that in perspective.

The assets, in some respects you could say yes, we’re also selling the assets, but we have had a phenomenal performance this year and that 25,000 subs that will go along with this transaction, we lost 50,000 subs a year before, so that’s from us and while we never like to loose any assets or any subscribers, they do not require any need to go out and borrow money. That’s the point number one.

Point number two, again taken in perspective and this is in conjunction to returning value to our stockholders, which includes me naturally, we are buying back, you know, a huge chunk of our stock, 30% of our stock by only increasing debt by 3%, okay? Now try to put that in perspective, what it means as a return to the stockholders.

Thirdly, to the extent that this price, if it takes a buyer and a seller to extent it, this price would have been any lower, that doesn’t mean we could have reined it in, right? It takes somebody who wants to sell at the right price and someone to wants to buy at the right price

So in the context of everything, I think it’s still a good transaction for the company. Clearly, if we weren’t in this environment I don’t know what we would have done, but it’s still a good transaction and I’m very pleased to say and let me give you the numbers since you asked. I mean we went public in 2000, when the market value of the company at 18 times cash flow if you remember those days; we then bought the AT&T assets, which I think was a great deal and in both situations, we went out and raised equity at an average price of $16.74.

We have since, including the March transaction, bought back 55 million shares at an average price of $4.76. If I do the math, that’s $12 per share return if you will to the existing stockholders that we contributed as we managed our capital structure over the years; that’s a phenomenal transaction when I look at it, when I look at this and all the other transactions over a long period of time.

We clearly still believe fully in our company as we look at all of the numbers, not just in our industry, in advertising, in any other parts of media sectors and I compare our company and try to develop some valuations around our numbers, un-levered cash flow, or free cash flow, which are the two most important things I believe. I have determined, that we are undervalued in relation to other companies out there.

Tuna Amobi - Standard & Poor’s

That’s very helpful. I think I probably missed that; when is it closing again for this?

Rocco Commisso

It’s closing around year end.

Operator

Your final question comes from Jim Harris - Bislett Capital.

Jim Harris - Bislett Capital

If we could just step back for a minute from all of the guidance and exceeding guidance, the company has $50 a share of debt in front of the common equity owner’s interest and would take something like 30 years to pay it down, if your free cash flow is $100 million a year in the next year or two and then we have an NOL that’s valuable, but we’re not getting any use out of it because we have all this interest expense, so we can’t get to the NOL. So I was just wondering well what are your thoughts on that; how does the common equity -

Rocco Commisso

I think you’re playing it cute.

Jim Harris - Bislett Capital

I’m not playing it cute, I’m playing it… [Multiple Speakers]

Rocco Commisso

Let me give you the answer. First of all, the government has not stepped in to help me and this company. If the government had not stepped in and support the commercial paper rising of the largest commercial company in the world, they would have had major problems than us, okay. You can’t compare our debt to our free cash flow generation. What you have to look at is our performance, our growth, our free cash flow, our un-levered free cash flow and compare it if you will.

Over a long period of time we’ve been straight, granted things are trading very low today in relation to what they used to trade, but if they were trading at the average level of the last 30 years, the stock wouldn’t be at $4, it would be up multiple significantly higher than that. Now I don’t control the markets and where the trading levels are.

Clearly, we put this company in place with a capital structure that we did that helps us ride out a storm that not a lot of other companies have had the luxury to do, but we feel we are in pretty good shape and we’ll continue on executing our operating structure as we have done in the past.

Jim Harris - Bislett Capital

I think you misunderstood the question, but -

Mark Stephan

Hey Jim, let me just add that we’ve got assets that are long-lived assets, okay. So we don’t have a liability structure such as a Verizon, which issues 30 year bonds, okay, where they have plenty of long-term debt. So we don’t have a long-term debt structure that mimics a Verizon.

I also want to add that on the NOL side of things, we do expect to be getting into our NOLs over the next handful of years. I can’t be precise and we fully expect to be using those NOLs well before they expire. So if you want to dismiss that, I think that would be foolish to leave that off the table. Those are my two responses, both on liability and on NOLs.

Rocco Commisso

I think we are finished operator. So with that, I want to thank everyone that’s come to our conference and I look forward to seeing talking to you in a few months.

Operator

Ladies and gentlemen, this conference is available for replay. It starts today at 1:00 p.m. Eastern and will last until November 20 at midnight. You may access the replay at any time by dialing 1800 475 6701. International parties please dial 320 365 3844. The access code is 966193. Those numbers again, 800 475 6701 or 320 365 3844. The access code is 966193.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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