Mediacom Communications Q4 2008 Earnings Call Transcript

Mediacom Communications Corp. (MCCC)

Q4 2008 Earnings Call

February 25, 2009 10:30 AM ET

Executives

Mark E. Stephan - Executive Vice President, Chief Financial Officer and Director

Rocco B. Commisso - Chairman and Chief Executive Officer

John G. Pascarelli - Executive Vice President, Operations

John Pascarelli - Executive Vice President of Operations

Analysts

Michael Pace - JPMorgan Chase

Jason Bazinet - Smith Barney

David Joyce - Miller Tabak

Jason Kim - Goldman Sachs

Richard Greenfield - Pali Research

Tuna Amobi - Standard & Poor's Equity Group

Presentation

Operator

Good morning and thank you for standing by. Welcome, ladies and gentlemen, to the Mediacom Communications Corporation's Fourth Quarter 2008 Conference Call.

At this time, all phone lines are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given to you at that time. (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.

I would like at this time to turn the call over to Mr. Stephan. Please go ahead, sir.

Mark E. Stephan

Thank you. Good morning and welcome to Mediacom's 2008 full year and fourth quarter conference call. This morning we issued a press release detailing our results.

Before we being, I'd like to say that 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.

Also we have made disclosures in our press release and will make comments on this call that reference non-GAAP measures. In our press 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 covered, let's turn it over to Rocco for his opening remarks.

Rocco B. Commisso

Thanks Mark. And good morning everyone, and thank you for joining us as always.

In many respects, 2008 was our best year ever despite the worsening macroeconomic condition as the year unfolded. As many of you know, 2007 for us was a sub-par year as we lost 56,000 basic subscribers through our RGUs by only 133,000 generating a year-over-year cash flow growth rate of only 4.2%. But 2008 was different as we delivered excellent results silently executing in all the aspects of our business.

Let me give you the highlights. First, we produced record RGU growth of 222,000 units or 67% higher than 2007. We reduced basic subscriber losses to only 6,000, our best results since 2002. We achieved double-digit growth rate and operating cash flow, again the best performance since 2002 and improved also our cash flow margin.

Our initial financial guidance set forth at the beginning of 2008 was revised upwards three times, and each time we exceeded it including the most recent guidance for the fourth quarter of 2008. We renegotiated our high speed data billing and telecom contracts, which realize for our significant cost reductions. We invested heavily both in our employees and in hard capital to prepare our company for the digital transition and to enhance our customer care operation.

We successfully negotiated dozens of retransmission consent agreements without any of the hundreds of broadcasting stations affected by these contracts going dark in any of our markets. We tapped the credit markets on an opportune time in May of 2008 with $350 million financing.

We significantly increased our used lines of credit and extended the maturity of our debt. In the fourth quarter given the historical low levels of interest rates, we set motions of substantive interest rates swap program to hedge a large percentage of our floating rate debt with 2012.

In large part, because our affective liability management over the year, in 2008, we saw dramatic decrease in interest expense generating a 2.6 times interest converge ratio in the fourth quarter, the highest in our history. We also reduced our financial leverage year-over-year despite an increase in our debt levels.

On our net debt basis of the cash, on our balance sheet, our leverage at the end of 2008 was 6.3 times versus 6.7 times in the fourth quarter, 2007. And we took steps to buyback a substantial portion of our shares outstanding delivering tremendous value to our stockholders.

Including the 28.3 million shares from the Morris transaction, we reduced our total shares outstanding by 33% since the end of 2007. Lastly, we believe the markets recognized our solid results throughout 2008 as our stock was among the best performers in the entire U.S. media and telecom sectors. For the excellent results delivered in 2008, I want at this time to recognize and thank each member of our hardworking and committed Mediacom family.

Now, let me turn to 2009; so I believe that our business will once again show its historical resilience in this economic downturn while being cautious as to what 2009 projects, especially since no one seems to know how big and for how long this recession will last. For this reason, it will be imprudent to provide specific revenue on adjusted OIBDA guidance for 2009 other than our expectations, the both revenues and operating cash flow will grow.

Within this worsening economic environment, however we are proactively taking steps to reduce costs in our operations without sacrificing a long-term health of our company.

For instance, yes, I asked the Board to accept my recommendations to freeze annul salaries to 2008 levels for the entire Senior Management team, including myself. I am confident that the Board will approve my request. We intend to follow through the example set by senior management and implement similar salary decreases on more junior management levels of our organization.

Throughout the reduction and overall capital expenditures in 2009 was already expected, we are nevertheless realizing additional savings as our supplies are being more flexible on price. Consequently, we are comfortable that we can achieve our target reduction of 20 to 25% in capital spending in 2009.

We are also comfortable that given the hedging strategy implemented in the fourth quarter of 2008 that our interest expense will not spike up in 2009 despite higher borrowings.

Consequently, we are confidant that for the first time in our history, we can begin delivering meaningful and sustainable asset tax free cash flow. In fact, we are estimating that our asset tax free cash flow per share will be about $1 in 2009, a 10-fold increase than the per-share amount realized in 2008.

Given the persistently poor conditions in the credit markets, we are grateful that our financial position remains solid. Our discipline approach to build or preserve our unused credit commitments continues to serve us well. Today, even after giving effect to the Morris transaction, we still have tremendous amounts of liquidity relative to our needs amounting to about $650 million of available revolving credit commitment with over $60 million in cash on our balance sheet.

We have manageable debt maturities over the next two to three years giving us into at least mid-2011 before we need to access the debt markets.

In closing, I would like to say there is comparing to be in a business that shows a great deal of resilience thus far in a very challenging economic condition.

At the same time, there is such a great deal of uncertainty out there that with no visibility as to when the economy or the consumer will see better times. So, we are very cautious about the future. What we can say in 2009, however, is the tremendous jump that we will see in free cash flow. And we hope that our ability to grow free cash flow should help us overtime build greater shareholder value.

With that, I'd like to turn the call over to Mark to review more detail our results and financial position.

Mark E. Stephan

Thanks Rocco.

In the face of a tough economy, we turned in a solid performance in 2008. For the full year, we delivered a revenue increase of 8.4 % in growth and adjusted OIBDA of 10.6%. We exceeded our full guidance in both revenue and adjusted OIBDA and this is after we raised guidance three times during the year. And the adjusted OIBDA growth rate was our best since 2002.

We also had record RGU growth for the year with 222,000 adds and we continued with the much improved basic subscriber experience. We achieved this unit growth despite a pronounced slowdown in the fourth quarter, when we gained 33,000 RGUs. November was particularly difficult, but that was countered somewhat by a rebound in December. Now let's turn to the highlights of fourth quarter.

Revenues increased 8.3%; and with reasonably good control over expenses, adjusted OIBDA rose by 8.4%. Year-over-year RGU growth was 8.2%, and it helped us generate an 8.9% increase in total monthly revenue per basic subscriber to over $90. Growth in fourth quarter video revenues was 3.5%, mainly due to rate increases and growth in advanced video services, partially offset by modestly lower basic subscribers.

We launched just 6,000 basic subscribers for the full year, which is our best performance since 2002, and this is the dramatic improvement over our loss of 56,000 for all of 2007.

All of this subscriber loss was taken in the fourth quarter, which is a little better than the 7,000 loss in last years fourth quarter. Our quarterly digital ads was somewhat higher than fourth quarter last year, having gained 19,000, compared to 16,000 in the prior year period.

Our high-speed data services continued to perform well with a 16.3% revenue increase for the quarter, largely fueled by 12% year-over-year unit gain. Fourth quarter high-speed adds however reflected the impact of the weak economy. We gained 11,000 against 22,000 in the prior year period. But our full year adds of 79,000 were inline with last year's 80,000.

Phone revenues grew 47.6%, driven by 34.1% year-over-year growth in phone customers, and less discounting of overall customers, when it comes to promotional discounts. At 9,000 adds versus 20,000 in the same period last year, our phone business clearly felt the affects of a weakening economy.

Fourth quarter advertising revenues were soft and declined slightly, mainly due to a steep decline in national and local automotive, largely offset by an increase in political and other local advertisings. You can say our ad group is doing okay so far, holding our revenue decline to low single digits, compared to the steeper declines most ad-supported businesses are now seeing.

But what we know about 2009 is that it will be very challenging. We are staying vigilant on expense control and operating efficiencies, but none of these spends of improving service quality and customers care. At the same time, what we can't control is continued unit cost increases in programming.

Excluding non-cash compensation costs, fourth quarter total cost and expenses rose 8.2%, impacted by increased programming costs and higher headcount on our technical, customers care, and marketing groups. Helping us on the plus side was a meaningful drop in high-speed data delivery costs, the fed's action to lower market rates drove down our interest expense in the fourth quarter by 14.9%. This result produced an interest rate coverage ratio of 2.6 times, which is our all time best.

In the quarter, we incurred a non-cash loss on derivatives of $58.5 million. This represents the mark-to-market of our interest rate swap portfolio, and reflects impart the significant reduction in market interest rates that took place during the quarter. About 30% of this non-cash loss is tied to our old swap portfolio, most of which is expiring in 2009, and has an average fixed rate approaching 5%.

The balance reflects non-cash losses we incurred during the quarter, on $1.1 billion of new interest rate swaps done during the period. With rates moving down considerably, we took this opportunity to lock in more favorable rates and extend the maturities of our swap portfolio out to the 2011-2012 period. Most of these new swaps will become effective beginning in the second half of 2009, and we're done at an average fixed rate of 3.2%.

As percentage of total debt, we expect to say fixed in the 70% neighborhood. And this rate fixing we have just done will give us more certainty on our interest expense, which will definitely contribute to our free cash-flow. We also recorded an $18.1 million loss on the sales cable systems in connection with the Morris transaction, which I'll discuss later in more detail.

Because this deal did not close before year-end, this is an unrecognized loss and it's based on our year-end share price. As we reported the Morris transaction closed a few weeks ago. We will be resetting the value of the Morris deal based on the closing date share price, and as such expect to report a slight gain on the transaction. This means we will reverse the fourth quarter loss and record about a $17 million gain on the sale in the first quarter.

Now let's turn to our capital spending. In 2008, we invested heavily in digital transition with rebuilds and upgrades, going all digital and making more of our footprint digital simulcast. We also funded other more non-recurring projects, in addition to supporting our record growth in RGUs.

For the full year, we spent almost $290 million, which was slightly above our expectations, and this represented a $62 million increase from 2007 levels. As Rocco noted, in 2009, we expect to dramatically reduce capital spending by about 20 to 25% or in dollar terms 57 million to 72 million. This puts our CapEx spending at between 217 million to $232 million close to what we spend in the 2005 to 2007 period.

Also expressed as a percentage of revenue, we expect to see a sizable decline. The midpoint of our 2009 spending represents 16% of 2008 revenues as compared to 20.7% this past year.

Looking at the CapEx categories, you can see this spending jump in 2008 in scalable infrastructure, upgrades, and rebuilds and CPE. We expect to see in 2009 some serious reductions in all of these categories as well as in line extensions. Beyond 2009, we are comfortable with spending at this year's level to support our business.

Even with much higher CapEx, but helped by lower interest expense as we expected, we generated free cash flow of almost $9 million in 2008 compared to a negative 4 million in 2007.

For 2009, despite our cost outlook, we still expect to produce a significant increase in free cash flow of about $1 a share or about $67 million based on lower CapEx spending. This per share calculation takes into account the reduction in shares outstanding due to the Morris transaction. In comparison, we generated less than $0.10 per share of free cash flow in 2008.

Now, let's turn to our balance sheet. We finished the year with total debt outstanding of about $3.316 billion. This is $101 million increase from year-end 2007.

On a net basis, this additional borrowing funded a $48 million cash build up on our balance sheet and $22 million of stock repurchases that took place in the first half of the year. The balance comprised $11 million and financing costs and reductions in working capital.

Given the instability of the banking system and the credit markets, we decided in the fourth quarter to add to our balance sheet cash position. Normally, we managed the lean cash position, but today we carry about 50 to $60 million and expect a sizable cash balances for the foreseeable future.

Despite our additional borrowings, we were able to de-lever our balance sheet, and we are near our lowest leverage point in 7 years. Using annualized adjusted OIBDA and net of our balance sheet cash, our fourth quarter debt leverage was 6.3 times compared to 6.7 times in the prior year period.

We continue to maintain a very secure liquidity position. At year-end, we had available revolving credit commitments of about $760 million.

As I mentioned, we close the Morris transaction earlier this month. This deal involved contributing $110 million in cash and its non-strategic cable system serving 25,000 subscribers in a tax free exchange for about 28.3 million of Mediacom Class A common stock held by Morris. These shares represented about 30% of our total shares outstanding.

After giving effect to closing the Morris deal, as of year-end 2008, we have about 65.5 million shares outstanding. Overall, we are comfortable with our balance sheet and liquidity position. Having drawn down our revolving credit facilities to fund the Morris deal, we now have more than $650 million of available revolving credit facilities.

We have a 125 million and $92 million respectively in bank debt maturities in 2009 and 2010, and expect to fund debt repayment substantially with internally generated cash flow. So, we can stay away from the capital markets for the foreseeable future.

Now, I'd like turn to our two bond issuers. Mediacom LLC had total debt of about $1.520 billion, its adjusted OIBDA was 60.2 million, inclusive of the quarterly cash investment income from Mediacom broadband of $4.5 million. Interest expense and CapEx for the quarter were 22.5 million and $41.6 million respectively. And its unused bank lines totaled 312 million, all of which was available.

Our other bond issuer, Mediacom Broadband had total debt of about $1.796 billion. Its adjusted OIBDA was $73.9 million. Its interest expense and CapEx for the quarter were 27.6 million and $31 million respectively. Unused bank loans totaled $450 million, all of which was available.

In closing, from my part, we had a solid performance in '08. But it goes without saying, that we are very cautious regarding future unit growth and operating performance. For 2009 and beyond, our focus is delivering on sustainable free cash-flow growth. We are confidant we can control our capital spending, and that our interest expense will be well behaved. So, we believe we are in the good position to deliver on free cash-flow.

Now that concludes my part. I'll turn it over to John.

John G. Pascarelli

Thanks Mark, good morning.

We had a good year and a lot of momentum going into the fourth quarter. It's too bad the economy gotten away of having a really strong finish. But even with the slowdown in the unit growth, we achieved record RGUs growth for the full year. Let me touch on what was seen in our markets and what changes we are making.

As others have mentioned, overall activity slowed in the fourth quarter, but it's important to break it down to understand the impact. We did a much better job in 2008 in driving more incremental sales and given us a steady flow of new connect activity. Through the first three quarters, we were consistently running 10% higher across all RGU categories other than phone. In the fourth quarter, our incremental sales fell flat and our growth slowed.

It's about the gross connects. But what we haven't seen is any significant move in customers disconnecting or downgrading the service or big increases in bad debt levels. It's not surprising that we are seeing consumers, who are increasing price sensitive and slower to pull the trigger on purchasing, which has resulted in less upgrade activity and slightly lower retention rates from customers with expiring promotional offers.

What are we going to do now? We are shaping promotional activity to account for the change in consumer priorities including more value oriented and more HD related offerings emphasizing a low cost entry for digital customers. We are getting our consumers to focus on our triple play offering. It's still the best deal in town.

We are doing more to promote single product relationships with data and phone, and we are staying close to disconnects and bad debt activity, and we're working hard in our retention centers to save customer relationships where possible.

Overall, we have a great base of business with over 1.4 million customer relationships. Over 48% of them are taking at least two products and over 15% are taking three products. Our customers see the value in our discounted bundle package strategy, and we see greater retention in higher monthly revenues.

We had a good basic customer story in 2008. We had positive growth through the third quarter and lost just 6,000 in the fourth quarter. Digital also had a good showing. We added 19,000 digital customers this past quarter bringing our total annual gain to 86,000.

This is our best add rate since 2005, and we were helped by the combination of strong selling to new connects in the popularity of our own demand HDTV and DVR services. We now have over 33% of our digital customers taking either HD or DVR service.

High-speed data is doing fine. Our adds in the fourth quarter slowed, but for full year adds of 79,000 would nearly equal to 2007. We're still the fastest game in town; and our rage of broadband offering include our highest speed of 20 Meg keep us ahead of our competition and well positioned, so we can give consumers the right value proposition.

No matter, what you favor, we have a price and speed to figure needs. And we are not sitting still. We're getting ready for Docsis 3.0 by upgrading our network components and we plan the capabilities of having service of... we plan to have the capabilities to provide the service in almost 50% of our footprint by year-end 2009.

We are currently testing a 108 service in employee homes, and we are evaluating custom demand and the competitive landscape to determine the appropriate launch schedule.

Phone was a steady grower, as in the fourth quarter of 9,000 slowed a lot, and we could be seeing the impact of some wireless substitution. Also heard in phone is a lower gross connect, which gives a fewer opportunities to up sell new customers. For the full year, we gained 63,000 units, down from 80,000 in 2007. Given the economy, we believe the value of this product will become clearer to our customers going forward.

Commercial phone is now ready for a company-wide deployment. We anticipate launching this service across our regions by mid-year. Having voice data, video product sets for small and midsized businesses in tandem with our regional and local fiber network puts us in good position in the business service market and compliments our enterprise network service offering.

On media, our advertising division had a second consecutive year of challenging marketing conditions due to troubled state of the traditional core advertisement economy. Advertising revenues declined 1.5% to $66 million. The year began with two business sectors, primarily effected by the current recession automotives and housing changing their ad spends. Automotive was 13% of our ad revenues in 2008 compared to 24% in 2007.

By fourth quarter 2008, every business category had been affected by the recession. 2009 will be a challenging year for local advertising with no elections or Olympics. Now I'd like to share some details regarding our capital spending plans in our expectations for reducing CapEx by up to 25% compared to 2008 levels.

First, as we have discussed in the past, we have several projects that we undertook in 2008. They were onetime in nature and will not be reoccurring. We completed 4,800 miles of plan upgrade to at least 750 mega hertz, and converted a number of small individual systems through all digital lineups. This puts our network capacity in great shape by eliminating any of the bandwidth constraint systems.

We also invested in a one net infrastructure, creating network capacity to cost effectively add new HD programming services. Second, prices for consumer premise equipment across all product lines continues to fall and therefore while ultimately depending on customer activity, it's reasonable to assume an overall decrease in spending.

We will need to continue to make network capacity and other investment to maintain and expand our capabilities, but much of our capital spend going forward will be success base. Third, we invested in significant capitals to prepare for the broadcast digital transition. This event, which are originally scheduled to occur on February 17 has now been postponed until June 12th for some stations.

Due to the late change in the law in that many of the stations in our markets actually change on the original date, our facilities were ready. As of today, 60% of our markets have at least one major station broadcast in a digital only format. Marketing efforts have been geared up to create new customer relations in areas with the digital signal may not be easily received or by consumers caught in the confusion.

On the operating side, we will continue to monitor or manage our all expenses. In 2008, we had a primary focus on three major cost drivers telecom, customer billing, and high-speed data, and we are able to make significant improvements in reducing each.

We also wanted to have several customer service initiatives and we'll continue to look for opportunities to improve efficiencies while maintaining or improving experiences for our customers.

In 2009, we will focus on all customer transaction points to improve productivity and reduce overall costs associated with each. Better route management, lower contract costs, and higher completion rate should provide lower operating costs while an increased focus on on-time arrival and first call resolution will improve overall customer satisfaction.

We are currently evaluating our entire collection process and expecting to introduce best practice throughout the company targeting increased customer contacts and improved recoveries. With an eye towards creating additional bandwidth capacity necessary for our plans to increase HD product in Docsis 3.0, we are aggressively pursuing analog bandwidth reclamation, and we will continue to pursue opportunities throughout the year.

We have a project underway to ready our networks to become all digital when the opportunity is right to make the switch. We are exploring ways to improve our residential phone service cost to delivery costs, and finally our programming team completed the 2008 retransmission consent cycle without losing any signals and at a cost, which is within the framework we anticipated.

In closing, let me summarize our priorities for 2009. It all starts with continuing offer of compelling bundles of complementary services with simplified customer transactions and an overall higher quality of service. To accomplish this, we need to continue to make prudent investments, both operating and capital related and to maintain the highest quality product and service at a competitive pricing.

We also need some modifier offerings as appropriate to respond to consumers as we go through this economic downturn, and increased marketing spend for the right opportunity.

That concludes my remarks. And I will turn it back to Mark.

Mark E. Stephan

Okay operator. We'll take questions now.

Question-and-Answer Session

Operator

Very good. (Operator Instructions). Our first question comes from the line of Michael Pace representing JPMorgan. Please go ahead.

Michael Pace - JPMorgan Chase

Hi, great, thanks a lot. First two questions I guess for Rocco or for Mark. Just wondering your latest view in light of, I guess, the free cash flow profile changing positively. Your latest view on stock buybacks and versus debt pay down, that's number one. Number two for you guys: the EBITDA for 2008 came in at 512, and just pro forma for the Morris transaction, what does that look like? and then I have a follow-up for John.

Rocco Commisso

Okay. We didn't buy any stock in the fourth quarter. We have a program that remains available about $47 million authorized by the Board. And we're going to wait and see what happens out there both in performance and our ability to raise more capital with their markets. And the opportunities that presented both in the stock market, and I'll leave it at that.

Michael, on the stock buybacks, what was the other question?

Mark Stephan

It was pro forma for Morris. We have 512 cash flow. And the Morris transaction is about 7 to 8 million of cash flow. So, you could say a 504 is our '08 number.

Michael Pace - JPMorgan Chase

Okay, great. And then for John, or anyone for that matter: I am just wondering if you can give us maybe a little as we headed into the first six to eight weeks of 2009. Are you seeing any change to the consumer in your markets, and any change to what the competitors are doing, whether it's DBS or the telcos. Thanks.

John Pascarelli

I mean, I'll take the first one first. We're not seeing any huge change in the DBS or telco activity. I mean most of the activity and promotions on what you've been seeing nationally, we are not really seeing a big change in activity. I mean, as far as 2009, it's quite too early to tell what's going on. And we are encouraged with what we see, but we are not ready to make a call on any changes or any activity levels based on consumer behavior.

Michael Pace - JPMorgan Chase

Great, thank you.

Operator

Our next question is from the line of Jason Bazinet with Citi. Please go ahead.

Jason Bazinet - Smith Barney

Thanks so much. Just two questions, I think Rocco, you said that you don't expect interest expense to spike up in '09 due to some of the hedging activities. Just directionally, as we sort of think about the interest line given the Morris transaction and the hedging you've done, do you think that essentially means flat interest or it's up?

Rocco Commisso

I think it's probably up.

Jason Bazinet - Smith Barney

Okay.

Rocco Commisso

Spike up, I mean, now I'm going to back to 2007 levels.

Jason Bazinet - Smith Barney

Okay.

Rocco Commisso

So, I think we generated $430 million in the 2008. So based on what I know, I can't forecast what overall interest rate is about.

Jason Bazinet - Smith Barney

Sure.

Rocco Commisso

And we do have some slotting rate that out there. But like a number, Jason, it's not going to be 204 (ph), it's not going to be 210; some number in between.

Jason Bazinet - Smith Barney

Okay. And then I have a second sort of odd question. And I don't really understand the legal flexibility you have on this front. But are there opportunities to holding M&A aside? But just opportunities to cooperate with inside either in purchasing agreements or programming or interconnecting your ad platforms? Can you just elaborate on that a bit?

Rocco Commisso

Yeah, look, I mean it's not a tricky question, but it's a tough answer for me to give. But we have at various times gone through the MCCC for instance, which is the programming corporative to try to get better costs on some of our products.

We didn't do anything in 2008, but I think you hit on a important point, and the best I could say Jason is wait and see as to whether we are able as an industry to implement some of the things that I've been talking about for a number years that somewhere along the line we've got put a stop or find a way of reducing this ever-increasing cost in our programming line.

It seems that that cost goes up whether people watch it or not, and it's just not fair to the consumer and not fair to our company. And having to subsidize for these major media firms their business through our consumers. It's a known fact that on the last seven years, our margin on the video side has come down while our margins on both the phone and data is going up. So I would hope that me and the rest of the industry be more proactive in 2009 in trying to realize a different way of doing business with our friends in the programming community.

Jason Bazinet - Smith Barney

Do you think that's likely or just possible?

Rocco Commisso

We are trying dealing with re-trends, which I mean we completed our deals, but that doesn't mean that I was very happy with how those negotiations were conducted. But we are as an industry want to try to change the region basic regime as the REVA Act (ph) gets reviewed by Congress this coming year.

Jason Bazinet - Smith Barney

Interesting. Okay, thank you very much.

Rocco Commisso

Thanks Jason.

Operator

Our next question is from the line of David Joyce with Miller Tabak & Company.

David Joyce - Miller Tabak

Thanks. Couple of questions; what percent of your footprint is covered by U-verse at this point? I imagine still pretty small. And secondly, if you could give some color on...

Rocco Commisso

U-verse meaning AT&T, right?

David Joyce - Miller Tabak

Yes.

Rocco Commisso

Okay, as opposed to FiOS.

David Joyce - Miller Tabak

Right.

Rocco Commisso

Yeah. I think U-verse, we don't see any activity.

Mark Stephan

We have very little activity. Sort of one little system in Indiana that activated, but very little activity from AT&T. We do hear that they're potentially considering an Alabama introduction or even maybe in Georgia, but we have not seen any activity yet.

David Joyce - Miller Tabak

And nothing from FiOS, correct?

Rocco Commisso

FiOS, we already said that...

Mark Stephan

We have less than 50,000.

Rocco Commisso

...we have less than 50,000 homes and that remains stable over the last 12 months.

David Joyce - Miller Tabak

Okay, sorry, I missed that.

Rocco Commisso

50,000 out of 2.8 million homes; I just want to put it in perspective.

David Joyce - Miller Tabak

Right. And did you comment if I missed it on the tendency of the tiers that customers will take on digital video and on data. Are you seeing because of the economy customers taking some lower end tiers for now or reducing?

Rocco Commisso

I think what we are seeing, it's fully expected if I were the consumer. People trying to reduce their price whichever way they can. So our strategy and that's why we're being very cautious of why our revenues and cash flow may go. Our strategy is to retain as many customers as possible, and deal with the discount as we see appropriate to retain those customers in 2009. So, we are very, very comfortable as I mentioned earlier. The CapEx will go down, interest rate will not spike up. And those two components along will give us the ability to generate pretty significant cash flow in relation to what we have done in past years.

David Joyce - Miller Tabak

Thanks.

Rocco Commisso

Thank you.

Operator

(Operator Instructions). Our next question from Jason Kim with Goldman Sachs. Please go ahead.

Jason Kim - Goldman Sachs

Thank you, good morning. Just a couple of questions if I may. If you can just provide a little bit more color in terms of your subscriber trend so far in the first quarter. I think you had mentioned in the call that the November was a tough month, but the December had rebounded somewhat from November. And just want to get similar color of what you have been seeing in January and February, and...

Rocco Commisso

Let me answer that question. I don't know if it's appropriate, but let me go on like as saying, it's not has been as it was in the fourth quarter, but maybe not as good as it was in the first quarter of last year; how is that?

Jason Kim - Goldman Sachs

Okay, thank you. And on the phone side, right now your penetration rate is about 9.5%, and the net adds have been slowing, it looks like because of the impact from the weakening economy. But ultimately, what do you think the penetration rate could be for this product? There is some other operators, who have said in the past that they may see something in the range of 20 to 25% penetration rate over the three to five year timeframe. But I don't know if you have a different take on that or not.

Rocco Commisso

No, I think based on what I know to that, I'm comfortable with that number. But that three of the five years down the road, and you know how things change, change in numbers; they could change in numbers, right?

Jason Kim - Goldman Sachs

That's right.

Rocco Commisso

Okay. I don't want to get into your business right now. But I do want to emphasize, Jason that in relation to any other business out there, let me say most of the business out there, I am very happy to be in our business, okay? I mean we are showing growth, showing if anything so far... the recession has had a huge... positive impact on us on interest expense, right?

And on a year, where corporate America has been destroyed, and people's jobs have been destroyed, right? Major lay offs being announced throughout the country, I am proud to say that we increased our employee base in 2008. I am also proud to say that we achieved everything that we have done without any help from the government. Now, for those people that are receiving help from the government, I just hope they go out and do the right thing by us, and began... lending money, while I used to lend, because we do have a solid business, all our trends have been positive in last three or four years.

We have delivered, we'll be generating free cash flow. And if still looking, I've done a lot of this work in our analysis. When we say that we are going to generate about $1 free cash flow per share after tax. I just hope the rest of the world wakes up and say; it's why is that $1 any different than the 1,000 other companies, other industries maybe generating. And when you apply the right multiples for that $1, the way that way that multiple is being applied to other industry, you would have to come to the conclusion. A multiple three or four times doesn't do justice, to this business to our company and to our industry.

Jason Kim - Goldman Sachs

And just lastly, how much of revenue did you get from political during 2008?

Mark Stephan

It was not more than 4 million. But the ad sales business is above $4 million, combination.

Jason Kim - Goldman Sachs

Okay.

Rocco Commisso

Jason, part of our concern, we're not being able to provide more specific guidance is, we don't what advertising is going to do. I mean we are not seeing at this quarter and the first quarter thus far. And we feel for that... we're going to... our revenues will reduce along what everybody else in that sector of the business. Luckily for us, it only represents less than 5% of our business.

Jason Bazinet - Smith Barney

Okay, thank you very much.

Operator

Our next question is from Rich Greenfield with Pali Capital.

Richard Greenfield - Pali Research

Hi. Few questions, one; Mark, when you were talking about EBITDA growth, I assume you are talking off of the 504 base, not the 511 basis. I want you to kind of clarify how you are thinking about EBITDA growth in 2009. Then on ad revenue, Rocco, your comment about it getting substantially worse so far in '09. Can we take that since the organic was down low single digits in Q4, should we assume that that means we are tracking at a double-digit, maybe mid teens type decline so far in 2009.

And then just lastly on capital expenditures. It seems like your CapEx is going to be down far more than your peer group. I'm wondering whether you are taking a far more conservative RGU approach or whether there is a truly one time spending that you just don't see repeated in some of the other areas, non-CPE-related categories in '08 that benefits '09. Thanks.

Rocco Commisso

Good question, Rich. Let me start with the last one. I think if you track Mediacom, and I think you should do that over the last five years. For whatever reasons, I would like to think, we watch... look, my headquarters... I don't know, somebody mentioned that a guy from Merrill Lynch spent $1.5 million on their office primarily (ph). You should note, our corporate building, I could pay rents in our corporate building for four years with that kind of money, okay?

So if you want to make a comparison on how we go about doing business, and maybe you should, somebody should come over to see how we operate as a company. We are very, very careful on how we spend our money. And it's similar what we are spending in 2009, it's not whatever we do subscriber base, it's not any different than what we spend on average in 2005, 2006, 2007. So, our CapEx per stock on average has been lower than the rest of the industry. I don't know how they spend their money, but I know how I'm spending my money and that is very carefully. Two...

Mark Stephan

And Rich, I want to add that we had some chunky spend in 2008 for rebuild and upgrade. And I really can't speak to the other MSOs. I think they may have been done with the traditional upgrades, but we had some systems that were 550 and less that we had to address. So that represents a big slug of change that we won't be spending.

Richard Greenfield - Pali Research

What's (ph) that number?

Mark Stephan

What was the... was it at... call it $20 million number, where we build upgrade and we also ought to be spending less on line extensions.

John Pascarelli

And you also had the digital transition impact as well. I mean one of the things that we have is we have a lot of stations that we have to get ready for. A lot of the other companies, they were in bigger markets and they have fewer stations. We have I think was 1,250 different television stations that we had to ready our markets for.

Mark Stephan

And that's heading here (ph).

John Pascarelli

That's heading here, that's disappearing. We don't have it in '09.

Rocco Commisso

Okay. And Rich, what was the other part of the question whether the...

Richard Greenfield - Pali Research

EBITDA whether the basis 504 or 511 or 512 and then on add revenue whether mid teen is kind of where you think it's tracking in Q1, just giving your comment that is... it sounds like it's substantially worse than the low single digit declines in Q4.

Rocco Commisso

Yeah. I think the mid teens is a good... well, I think double digits, I don't know if it's mid teens.

Mark Stephan

It's no mid, it's low teens, I think is a reasonable target for reduction and for ad sales.

Richard Greenfield - Pali Research

Okay. And then on the cash flow...

Mark Stephan

The cash flow, Rich, 5.04 is our pro forma for the Morris transaction. So that's really our start point when you look at...

Rocco Commisso

So, we're definitely going to be over that. And our question is are we going to be over the 512. And the press release speaks what's up, but I think so, we don't how much.

Richard Greenfield - Pali Research

And then Rocco, maybe just a big question if I may.

Rocco Commisso

Yeah.

Richard Greenfield - Pali Research

When you think about the... one of the questions people have is the sustainability of your customer base. You are in areas, where the demographics just income wise are lower. When you look at what's happening to the country, I know you've made the comment that you're not seeing increased disconnects or bad debt expense. How worried are you? What are you looking forward to feel comfortable that isn't going to be a big issue in 2009, because I think that's one of the investor's big concerns right now, just looking at the demographics?

Rocco Commisso

That's a good question, I think. In the past, we haven't gotten the benefit of being in a hub market like Las Vegas, Phoenix, and Charlotte. Luckily for us, today we are not suffering the same consequences. The factors are occurring in some of those markets with respect to housing activity and high unemployment rate. Iowa is our largest stake by far, just one-third of our customers. It's got one of the lowest, thank God, unemployment rate in the nation. So, we feel good in relation to the rest of the U.S. We're not in Michigan, we're in Ohio. We have some assets in Indiana. But we feel pretty good in relation to the rest of the economy, the unemployment rate, whenever it peaks, it would be lower than the overall economy if you will. In this days, we operate too.

If you look at our revenue per sub, our ARPU, we are not charging on average as much everybody else. On the... ARPU has room for growth in relation to, where Comcast, Cablevision, Time Warner, Charter, maybe in terms... and Cox. So, that's the best way I know to answer of that question, Rich.

Mark Stephan

And Rich, one of the key thing, I think you've got to keep in mind is the competitive footprint. I mean, we are not going to have the Verizons knocking on the door as our customers, like some of our brother end. So I mean, when you... people look at, I mean, I think it's fair to say that consumers are going to want products, television, phone, and Internet, and the question is what's going to happen as far as the competitor standpoint and pricing.

Richard Greenfield - Pali Research

Thanks guys.

Rocco Commisso

Let me just add also that... while we are being cautious, I hope we don't come out pessimistic here, all right? I think, as I mentioned, it will be a imprudent for us to be overly optimistic in an environment that nobody knows what may happen. So, we feel very, very good about our business. As I've said earlier, I'd rather be in my... lending out the business in America right now. And I've been involved in this business now for 30 years, and I'm happy to be here today as opposed to any of those other media sectors that are not performing as well as we are performing.

Mark Stephan

Okay. Any other question?

Rocco Commisso

One more question, I think operator.

Operator

Very good. Then our final question today comes from the line of Tuna Amobi with Standard & Poor's Equity Group.

Tuna Amobi - Standard & Poor's Equity Group

Thanks a lot, I have as few as well. Just so on the wireless front, I wonder if you are any closer to announcing any initiative there on the broadband side. Is that 2009 event or potentially 2010?

Rocco Commisso

We're going to play that by year, Tuna. Look, again I don't want to deliver the point. But we've been very, very cautious as to what kind of investments we make over the years, okay? You know that, although we have not been invited, it's been a significant write down of the Clearwire investment made by the cable company as appearances. Two: we were given opportunities over the last two years to get involved, and then we decided not to. And widely saw, because when everybody else was liking what lawyers to sign agreements, we decided to pay rents, and that deal we're not paying.

Three: it's not by accident, and I want to make sure that I say that it's not by accident, we are one of the few companies in our industry... probably the only one in our industry never taken a write down over the last 10 years, okay? While it did grow through the list of companies, just in our sector, we don't really have to worry about the broadcasting companies or look at the newspaper companies and seeing what has taken place. But we've been operating now for 14 years. We've never taken a major asset write down in any of our assets, which says whatever we have done, we invested well. And based on our analysis, there has not been any reason to write down in a significant way any of our assets. So I'm very pleased with that.

Tuna Amobi - Standard & Poor's Equity Group

Okay, that's understood. So let me switch gears on the basic subscriber losses, right? So you were on some kind of streak for most of the year, and then same like the streak got broken in the fourth quarter?

Rocco Commisso

Let's put it in relative terms, our streak got broken. But I think we lost only less than half a point of or subs, and although public cable companies have announced, they lost significantly more on a percentage basis in the fourth quarter than we did.

Tuna Amobi - Standard & Poor's Equity Group

That's well taken. So, what I was just getting to...

Rocco Commisso

Let me just say a few things, because I don't usually speak here, right? I only do once every three months. I mean there were times since 2004 and 2005, we were looking a lot of subjects. You remember that, right?

We launched them through satellites. We had some over building activity that we inherited. We only bought the AT&T assets. But now it seems that the rule has been revered. While the major companies may not be seeing launches to the satellites companies, they are seeing losses potentially to the phone industry, which is for good or bad, it's not in our markets yet.

Tuna Amobi - Standard & Poor's Equity Group

Okay. Can you provide some color additional and what markets those losses arose from particularly in the context of markets that had perhaps double digit phone penetration? Any particular trends there that offset in some of the losses in other markets or by regions as well?

Mark Stephan

As far as where we lost, I mean, the losses themselves were clear across the Board. It was a slowdown in sales activity, connect activity from non-customers. That's where we lost our ability to grow basic customers. We did not a huge deflection of existing customers disconnecting the service.

Tuna Amobi - Standard & Poor's Equity Group

Okay, great. And then lastly some housekeeping financial questions, I suspect for Mark. So can you comment on your NOLs, where that kind of stood in your expectations with that as well as '09 deferred tax expense? Are you expecting the trends there to mirror the run rate for last year?

Mark Stephan

Yeah, we won't be able to turn that tax provisions that we've been making on a quarterly basis for the past couple of years. We won't be able to turn that until we get into 2010. We have to prove that we can book pretax profitable for several quarters.

Our NOL is north of $2.2 billion. And as far as expectations on drawing that down, we are looking at a 2010-2011 timeframe when we begin to tap, utilize the NOL.

Tuna Amobi - Standard & Poor's Equity Group

Great. That answers my questions. Thank you very much.

Rocco Commisso

Okay. Do we have anything else? All right. Let me just have few words, operator.

Look, I mean, all kinds of things are happening in Washington. And unfortunately things that... all kinds of industries and companies are being helped directly or indirectly, and very little is coming in the way of Mediacom. I would hope that levers our stockholders, our employees, our investors, our friends in the financial community. Whenever you go to Washington, you speak up on behalf of companies like Mediacom that I've never received anything, but we also don't want to get hurt directly or indirectly.

For instance, it's just not fair that investment grade companies have been supported in their actions in the financial markets by government guarantees and so on, so they could preserve their dividend. And Mediacom has its budget in its own way. In a way, I am thankful that that's the way we always behave; and the result of that is that today we don't need any help frankly, at least for next two or three years in which time we do believe the markets during the period of time will change.

So I just hope that whatever is done in Washington doesn't come to home then as it was (ph). And the government will look at our employees, our company, our investors and what we have done to close the digital by and bring phenomenal services and products to the consumers in our awards for smaller markets, and use it favorably, so that we don't get left behind whenever money is being rolled out to all kinds of companies.

With that operator, I am finished, and thank you for listening to our story, and look forward to seeing you in the couple of months.

Operator

Ladies and gentlemen, this conference will be available for replay beginning today at 1:00 PM. It will be available until March 11. You may access the replay of this conference by dialing one 1-800-475-6701. Again, the number to listen to the replay recording of this call will be 1-800-475-6701. You will use the access code of 986310. Again the access code for listening to the replay recording will be 986310.

That does conclude our conference for today. Thank you for using the AT&T Executive Teleconference service. You may now disconnect.

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