Executives
Rocco Commisso – CEO
Mark Stephan – EVP & CFO
John Pascarelli – EVP Operations
Analysts
Michael Pace – JPMorgan
Jason Bazinet - Citi
Richard Greenfield - Pali Research
David Joyce – Miller Tabak
Tuna Amobi – Standard & Poor’s
Brian Craft – Cross Research
Unspecified Analyst – Sandler Capital
Dennis Leibowitz – Act II Partners
Mediacom Communications Corporation (MCCC) Q2 2009 Earnings Call August 7, 2009 10:30 AM ET
Operator
Welcome ladies and gentlemen to the Mediacom Communications Corporation second quarter 2009 conference call. (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 Mr. 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 Stephan
Good morning and welcome to Mediacom's second quarter conference call. This morning we issued a press release detailing our results and you can find that on our website.
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.
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.
Also note that we have presented certain pro forma financial and operating results on a comparable basis to reflect the February, 2009 divestiture of non-strategic cable systems under the previously announced Morris transaction. This transaction was structured as a tax free exchange under which we exchanged the shares of a wholly owned subsidiary that held cable systems serving 25,000 basic subscribers and a total of 51,000 revenue generating units along with $110 million in cash for about 28.3 million shares of our Class A common stock held by affiliates of Morris Communications.
This block of shares represented 30% of our then outstanding stock. When we discuss among other things growth in RGUs, revenues and adjusted OIBDA on this conference call it is based on pro forma results. Please see tables eight, nine, and 10 in our press release to help you understand the pro forma presentation.
With that covered, let's turn it over to Rocco for his opening remarks.
Rocco Commisso
Okay thanks Mark and good morning everyone and thank you for joining us. In one of the most difficult economic environments in decades I am pleased to report that in the second quarter Mediacom continued to deliver solid financial results leading to record setting free cash flow for the first half of 2009 and the lowest debt leverage since the year 2000.
Though disappointed by the weak RGU growth this quarter I am nevertheless pleased with our performance in this tough economy especially when we compare ourselves to the cable industry at large and the major phone companies.
Let me give you the highlights, first our year over year revenues and adjusted OIBDA growth rates of 6% and 6.6% respectively are both higher than the averages of the public cable companies and significantly better than the average of the three large phone companies, AT&T, Verizon, and Quest which register year over year average declines in both revenues and operating cash flow.
Our year over year RGU growth rates of 6% is not only significantly better than the rest of the cable industry but we outperformed the industry in every RGU category; basic, digital, high speed data, and phone customers’ growth rates.
For instance, Mediacom’s basic subscribers declined by 1.1% over the 12 month period but the rest of the public cable company saw an average loss of 2.2%. Our focus on free cash flow generation has led to a five-fold increase to $62 million in the first half of 2009 representing already $0.84 per basic weighted average share.
Because of this performance we are raising our free cash flow per share guidance by 30% to $1.30 for full year 2009. Our success in delivering this dramatic free cash flow growth is due to a daily focus on watching what we spend and on the historical excellent management of our capital structure.
For the first six months, capital expenditures have been reduced by 19% while our cost of debt capital at 6.1% remains one of the lowest in the cable industry despite the fact that we are not an investment grade company.
Our cash flow growth in addition to our debt reduction via our free cash flow generation has permitted us to reduce our debt leverage to levels not seen since the 2000. At 6.0x our leverage is lower than the 6.2x registered in Q2 2008 despite the fact that we borrowed $110 million in the first quarter to fund the Morris transaction.
We continue to enjoy significant liquidity in this tough credit environment, our $611 million of unused and available credit lines in addition to the $69 million in cash on our balance sheet gives us plenty of flexibility as to when we access the debt markets in the next few years.
Even though the stock market [fair value] of Mediacom at the lowest multiple free cash flow then our cable peers and phone companies, just like 2008 our year to date stock performance is among the highest in the telecom, cable, and satellite sectors.
I am confident our business will continue to show its resilience in a very sluggish economy. Until we see real signs recovery we will remain cautious about the second half of 2009. Having said that however, we feel pretty good about delivering a significant increase in free cash flow this year.
And we trust in our ability to demonstrate sustainable growth in free cash flow will lead to greater shareholder value. Before I conclude my remarks I would like to announce to our customers that in September we plan to once again increase the speeds of our internet products.
Our flagship Mediacom online service download speeds will be increased by 50% from 8 to 12 megs, while the upload speeds will double to one meg. Customers with VIP, our Mediacom online service and our triple play bundle will also see a 50% increase in download speeds from 10 megs to 15 megs.
These upgrades ensure that Mediacom’s customers will continue to enjoy the benefits from the most reliable, and fastest internet connections available in their communities. With that I would like to turn the call over to Mark to review in more detail our results and financial position.
Mark Stephan
Thanks Rocco, for the second quarter as Rocco noted we delivered good financial results in a tough environment. Revenues and adjusted OIBDA reflected healthy growth rates of 6% and 6.6% respectively and with the second quarter’s performance behind us, we generated a record free cash flow for the first half of the year.
Given our results, we are raising our full year free cash flow guidance by 30% from $1.00 per share to $1.30 per share. Not surprisingly the negative for the quarter was that poor economic conditions caught up to us and hampered customer growth.
While second quarter is seasonally our weakest time of the year given the college towns we serve RGU adds were much softer then the second quarter last year. This was evident and across all services and this was more of a gross connect problem then a disconnect or downgrade problem.
Having said that its important to note that the growth in our overall customer additions on a year over year basis was among the best in the cable industry. On a pro forma basis we grew 7,000 RGUs compared to 39,000 in the second quarter last year.
Year over year RGU growth was still a healthy 6% and revenue per basic subscriber rose by 6.7% to over $94.00. Pro forma growth in second quarter video revenues was 2.8% mainly due to digital customer growth, however we lost 15,000 basic subs in the second quarter compared to the 5,000 lost in the prior year period.
Our year over year loss was 14,000 representing a 1.1% decline. Our pro forma quarterly digital adds were lower in the second quarter having gained 8,000 compared to 14,000 the prior year period but grew 11.7% on a year over year basis or 69,000 digital adds.
Our high speed data services continued to perform relatively well in this weak economy. Pro forma high speed revenues were up 12% largely fueled by a 9.4% year over year gain of 65,000 HSD customers. However our unit growth slowed in the second quarter as we gained 6,000 HSD customers against the 13,000 gain in the prior year period.
Pro forma phone revenues grew 27.6% mainly driven by a 21.9% year over year growth in phone customers and to a much lesser extent higher unit pricing. We saw unit growth fall from the prior year period with 8,000 phone adds versus a 17,000 gain last year.
Pro forma second quarter ad revenues were down 7.6% and continued to be hit hard by local automotive advertising. Not to overstate our advertising group’s performance but relative to other ad supported businesses, we can say our group is holding its own in this unprecedented downturn in advertising.
We continue to keep a tight rein on expenses in the second quarter. At 37.5% our pro forma adjusted OIBDA margin held steady sequentially and showed improvement over the second quarter of last year despite higher programming costs. Excluding non-cash compensation costs pro forma second quarter total cost and expenses rose 5.6% for the quarter.
We benefited from lower service related expenses and cost efficiencies in our call centers but this was more than offset by a 10.7% increase in programming costs which reflected the impact of big 10 sports programming and additional charges from the latest round of retransmission consent contracts that were completed at the end of 2008.
Our interest expense line showed improvement thanks to lower market rates despite the additional borrowing we incurred in the Morris transaction. Actual interest expense in the second quarter declined 5% from the prior year period. This result produced an interest coverage ratio of adjusted OIBDA to interest expense of 2.7x, which is nearly a record best for us and reflected a cost of debt of about 6.1%.
Now let’s turn to our capital spending, second quarter CapEx fell 23% from the same period last year to $54.4 million. We saw reduced spending on customer activity, mostly CPE equipment, network upgrades and line extensions. This CapEx reduction is a significant benefit to our free cash flow.
Our second quarter spending represented about almost 15% of total revenues, well below the 20% we recorded in the same period last year. And we’re on track to meet our expectations of a 20% to 25% reduction in CapEx spending for the full year.
Our free cash flow story in the second quarter was a replay of the first quarter. We saw a significant jump in free cash flow from the second quarter last year fueled by lower CapEx and adjusted OIBDA growth. At $31.2 million it was up almost six-fold over the prior year period and translated into $0.46 per share for the quarter using weighted average shares outstanding of 67.4 million.
For the six months we generated $62.5 million of free cash flow representing a five-fold increase from the first half of last year and we have used practically all of it to repay debt. For full year 2009 as noted earlier even with the cautious outlook we have raised our free cash flow guidance to at least $1.30 per share.
Now let’s turn to our balance sheet, we finished the quarter with total debt outstanding of about $3.370 billion representing a $30 million reduction from March 31, 2009. Since closing the Morris transaction in February, 2009 for which we incurred about $110 million in debt, we have repaid almost $60 million from free cash flow and expect to continue making principal debt repayments with free cash flow throughout the year.
We also maintained a $69 million cash balance at June 30, 2009. Despite the additional borrowings to close the Morris deal we were able to de-lever our balance sheet relative to the prior year period and as Rocco noted we are at the lowest leverage point since 2000.
Using annualized adjusted OIBDA and net of our balance sheet cash our second quarter debt leverage was 6x compared to 6.2x at June 30, 2008. Rounding out our financial position is that we continue to have an abundance of liquidity with $611 million of available revolving credit facilities and manageable debt maturities over the next two years.
Now turning to our two bond issuers, at the end of the second quarter Mediacom LLC had total debt of about $1.514 billion. Its adjusted OIBDA was $62.6 million inclusive of its quarterly cash income from Mediacom Broadband of $4.5 million.
Interest expense and CapEx for the quarter were $23.3 million and $24.7 million respectively. Its unused lines totaled $301 million all of which was available. Our other bond issuer, Mediacom Broadband LLC had total debt of about $1.856 billion. Its adjusted OIBDA was $78.8 million. Interest expense and CapEx for the quarter were $28.1 million and $27.1 million respectively. Unused bank lines totaled $310 million, all of which was available.
Now that concludes my part, now I’d like to turn it over to John for his remarks.
John Pascarelli
Thanks Mark, good morning. We had another good quarter and I’m pleased with some of the operational improvements we made and particularly our ability to drive free cash flow. Our disciplined approach to cost management and capital investment has proven to be a good strategy during this downturn.
In my remarks this morning I will discuss our performance as if the previously announced Morris transaction had taken place at the beginning of 2008. Unfortunately our cautious view of the economy in the first quarter turned out to be warranted. Unit growth in the second quarter was disappointing but not completely unexpected given the state of the economy and the student transition of our college communities.
The impact of the broadcast digital transition which helped us add 4,000 basic customers and generated healthy growth in the digital, data, and phone customers in the first quarter had much less impact in the second quarter. On June 12 we successfully completed our part of the broadcast digital transition which went about as well as could be expected.
While we are not pleased with the RGU growth, we know that some of it is directly related to the state of the economy and remain optimistic that when the economy returns to more normal levels our ability to add units at more normal levels will return as well.
The decrease in RGU gains in the second quarter is mostly related to our ability to drive new basic sales. Year over year we were down 8% in new basic connect activity. We believe the softness in the connect side is partly due to the lack of new home sales, overall movement in the market, and competitive activity from the satellites.
DBS providers have continued to aggressively promote their HD product and have recently been more aggressive on price with deeply discounted promotional offers. It also appears that student market, many apartments went vacant as students were not able to find summer jobs.
Non-paid disconnects continue to stay flat with prior periods but we did see a 10% increase in average customer balance leading to overall higher bad debt. Against the backdrop of poor economic conditions, our customer retention levels across all product line continues to be relatively stable with only slight increases compared to prior periods.
With 51% of our customer relationships taking at least two products, and 17% taking all three products, bundles continues to be a mainstay of our product line. Bundle customers continue to stay longer and pay more compared to single product customers allowing us to increase our average revenue per customer from $88.27 to $94.22, a 7% increase over the same period last year.
In spite of the increase in seasonal disconnects of highly penetrated double place student households in the quarter our double play households remain flat and our triple play households increased by 4%. Our entire loss came from our single product analog video customer who is mostly vulnerable to the low price promotional offers of satellite.
Bundle customers see value and enjoy the convenience of one phone call for service or questions. I think its important to remember that even with these losses our markets continue to outperform our peers in unit change further demonstrating the resiliency of middle America to this economic change.
Digital penetration is now over 50%. The popularity of our on demand, HDTV, and DVR services make the product very desirable as evident by our sell in rates to new customers to almost 80%. Currently 36% of our digital customers take either HD or DVR service. We continue to improve our HD offering and are on track to have between 45 and 50 HD channels launched by year end.
Our research indicates that with 40 channels we are carrying the HD network feeds representing 80% of the HD content actually watched and at 50, we have 90%. We believe the combination of providing the most widely used channels in HD at no incremental cost to digital households provides our customers with the best overall value.
High speed data with penetrations of home past the 27% has become a product that is essential to the daily lives of our customers. As Rocco mentioned we will be increasing the data speeds of our flagship online and VIP internet services. Online download speeds will increase 50% to 12 meg from 8 meg and the upload speed will double to 1 meg from 512 K.
Customers in the VIP, our online service with triple play bundles will also see a 50% increase in download speeds to 15 meg from 10 meg. These upgrades ensure Mediacom customers will continue to enjoy the benefits of its fastest internet connection available in the communities.
As I stated on our last call we have been preparing our networks for the Docsis 3.0 which as you know allows us to offer products with download speeds in excess of 100 meg. We will be in a position to offer services is approximately 50% of our footprint by year end from a network standpoint but will be actively marketing this service in about half of the available homes [inaudible].
We expect the capital cost for this product to be around $5.00 per home past for the network capabilities and an incremental $70.00 in CPE related costs per transaction. Again, our broadband networks continue to demonstrate their superiority over our competitors allowing us to effectively deliver new services throughout our service areas that they can’t match.
We will be launching our first market in September. Given that we’re in the early stages of development of this technology, we’ll be moving slowly. The results of the launches along with the evaluation of the industry launches, customer demand and competitive landscape will help us better determine the appropriate launch schedule to maintain our market leading position.
Our phone service continues to show steady growth. We believe we are feeling the effects of customers cutting their cord, particularly on the connect side of the business. It appears that some households rather than moving to our low cost alternative, are eliminating their landline altogether.
With our commercial phone product now launched company-wide we expect to continue to growth our commercial revenue base at a healthy level. Being new in the commercial telephone space its taking a little longer to develop the momentum we want but we are focused on accelerating new sales in the second half of this year.
Our enterprise business which we define as a fiber based bandwidth contracts with large customers continues to perform well with annual revenue gross in excess of 35%. Not surprisingly our advertising business has felt the most pain of the economic downturn with a 7.6% decrease in revenues from the same period last year and is off 11% year to date.
Automotive and all categories associated with the home are still down while an increase in healthcare related spending has helped minimize our losses. Now let me turn to the investments we are making in the business.
On the capital side we are on track to meet the commitment to reduce capital expenditures by 20% to 25% compared to 2008 levels. With the first half behind us all of the expected reductions from last year are falling into place. Having said that, we are not in any way neglecting investments we need to make to keep our product set moving forward.
In the first half of 2009 we made significant strides towards complete upgrade of our voice and data provisioning system as well as upgrading the storage capacity and standardizing our VOD platforms. Each of these investments will lead directly to improved customer experience.
Among the issues we are still addressing is the further evolution and migration toward an all digital system. And the equipment needed to ensure all customer televisions can access the program. We continue to see lower pricing on all CPE related equipment and expect the downward trend to continue.
We have begun utilizing DTAs, a low cost digital to analog device costing around $35.00 providing an entry level product to price sensitive customers who have not invested in new digital television sets to get improved pictures.
We have deployed digital simulcast technology to provide significant content in the digital format and are currently over 55% of our digital customers are receiving a digital simulcast lineup and we expect to meet our goal of over 70% by year end.
Let me go into a little more detail on a couple of major projects currently underway, we have finalized our plans to migrate our customer email from our outsourced provider to a platform that we manage internally. We expect the move to be complete by year end and the operating cost reductions to begin in 2010.
We have also taken the first steps to bring in more functionality for the delivery of our residential and commercial phone products in house and plan to continue this evaluation to focus on lowering overall service delivery costs for telephone.
On the operating side we continue to aggressively manage all controllable expenses. As I mentioned on our last call our primary focus for 2009 has been on all customer transaction points to ensure the highest quality of service in the most cost effective manner.
The phone center improvements I discussed in the first quarter call have continued and we are moving towards our ultimate goal of providing a higher level of customer service. Our technical teams are focused on preventative network maintenance plans to ensure maximum network up time and first call resolution at the home.
Through our increased focus on training and development our internal employee productivity has continued to improve allowing us to reduce our need on higher cost contractors. In closing, we have recently modified our marketing strategy to step up our efforts to generate sales by increasing targeted direct mail, adding direct sales representatives, and focusing on retraining our staff to increase our sales close rates.
As we wait for the turnaround in the economy our efforts will be on operational execution. We have made good progress and we will continue to improve customer experience. We will continue to make investments necessary to maintain our competitive edge in all of our markets.
Each of our 4,500 employees understands our goals and are committed to achieving their part on our company’s mission. That concludes my remarks and I’ll turn it back to Mark.
Mark Stephan
Okay, we are now ready for Q&A.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Michael Pace – JPMorgan
Michael Pace – JPMorgan
Some of the other MSOs have given some color on RGUs so far in Q3 or really just the month of July, I’m wondering if you could add some color to that. And then I wanted to focus a little bit on the SG&A line, it was down a little bit in Q1 year over year, call it flat in Q2, what are you doing there specifically on marketing dollars and is that sustainable.
John Pascarelli
On the third quarter results, obviously we’re not going to make forecasts, we’re very early into it. The students are just returning. We are seeing some activity from those levels but its way too early to predict what its going to look like for us. So we’ll wait until deeper into the quarter to give any indications.
As far as SG&A, we’re not cutting back on marketing costs. If I understood your question, is that where you’re going with that?
Michael Pace – JPMorgan
Yes.
John Pascarelli
No we’re not cutting down on marketing costs at all. I mean our marketing expenditures year over year are up actually and we continue to push and will continue to push the marketing of our business. We at this point right now, have accelerated direct mail in a big way trying to drive more sales.
Mark Stephan
And then what’s helping us on the SG&A line, there’s two things. One is telecom costs at our call centers, we’ve brought a lot of traffic on our own network so we’re saving a great deal of money. We continue to drive down say the cost per call to our call centers. So that’s been a huge savings for us.
And secondly our call center group has done a great job in realigning what we do at the call centers and creating a lot of efficiencies so we are now, we’re directing more of our customers, if it’s a service outage, they’re not making a call and contacting a representative, they’re going through the IVR and understanding that we have a network outage that is widespread.
We’re doing all these little things that are creating greater and greater efficiencies in our call centers so we can drive down overall the cost of customer contact. Those are the two areas where we’re seeing a lot of help on SG&A.
Michael Pace – JPMorgan
Can you just remind us on your swaps on your bank debt, I think Rocco earlier gave the average total cost of debt but what are the average rates on your bank debt, when do they expire and I guess I’m getting at, is that a risk or an opportunity in the future given current rates.
Mark Stephan
We’ve already kind of played that out. We’ve got a great deal of swaps expiring this year and continuing to expire as we march into September through December. And those are swaps that were done at a 5% coupon so they’re all expiring and what we did late last year and early this year is that we did a lot of forward starting swaps to replace them and they’ve been replaced in the 3% range.
So we’ve extracted the opportunity, its going to show up when the old swaps expire and these new swaps start to take effect.
Rocco Commisso
On the RGU I don’t want you to think we don’t like to answer questions here, but fair to say that we don’t expect and we’ve been saying this for the last six months, we don’t expect to have the result that we had last year, quarter by quarter. And I’ll leave it at that. In each quarter we expect this year based on what we’re seeing, the economic situation, to have lower RGU growth then we had last year.
Operator
Your next question comes from the line of Jason Bazinet - Citi
Jason Bazinet - Citi
Just had one question regarding HD, do you think that there’ll be a few markets where you sort of experiment with reclaiming the analog spectrum, just to sort of test what the potential lift could be. I understand your point about viewership but—
John Pascarelli
Right now we are, and we’ve got a full court press on realigning all of our networks and we expect, actually this year, to discontinue offering our analog product to new customers coming through the door but given our penetration in the markets right now, we just went over 50% on digital, we’re going to need a little more time to completely discontinue any analog offering.
But we’ve started migrating some analog channels to a digital platform on the basic lineup we’ve expanded that. And we’re going to continue to push to put ourselves in a position to go all digital.
Jason Bazinet - Citi
But even, I think this is right technically, even if you don’t sell analog to a new customer you can’t really reclaim that analog spectrum until all the customers are on that new regime, right, so—
John Pascarelli
Well that’s the challenge. And that’s what we’re going through. I will tell you, we’ve set in motion a plan to gradually pull back enough analog channels to keep us competitive. If we wanted to we could have probably pushed and launched more HD channels, we just don’t think it’s the right strategy right now of throwing all this stuff out there and going after the tonnage.
It sounds great but when you look at it, we think its more important to keep the cost down to consumers and make the transaction as simple as possible for our customers to move to HD.
Operator
Your next question comes from the line of Richard Greenfield - Pali Research
Richard Greenfield - Pali Research
You talked about changes to your marketing specifically in the direct mail campaign, I was wondering what exactly are you doing, is this just purely price, is it different positioning, what are you actually changing and have you actually started to see any type of pick up on those specific mailings or offers that you’re making and you also mentioned something about trying to increase the close rate. I was wondering what you’re actually doing or how is the actual CSR changing their behavior to hopefully get to that increased close rate. And then lastly just in terms of following up on the seasonality you’ve had always a better third quarter then second quarter, is there any way to think about whether the seasonality is still enough to get you into positive basic sub territory or continue to increase your RGUs, would you expect RGUs in Q3 given the normal seasonality or is the economy having so much pressure that it actually could be similar performance to Q2.
Rocco Commisso
On the last part, the same question asked in a different way, but I think traditionally we have done better in the third quarter then the second quarter and we expect to do the same thing this year.
John Pascarelli
On the change in marketing what we’re seeing is that in order to maintain a certain level of connects, we’ve got to have a certain level of direct mail hitting our non-customer households every month and we see that although there is a point of diminishing returns, we are seeing incremental value by using direct mail to generate sales. That is probably the biggest switch. The second piece is we’re going to expand our direct sales teams because really a very high percentage of our non-customers are [wind acts]. You’ve got to get in front of them and you’ve got to convince them why our product is better then satellite.
Particularly where the high percentage of the households that were early satellite adopters that aren’t really receiving an HD lineup today and that transaction is more complex. So we want to get in front of them, we want to make our presentation and show them how easy it is and really try to driver our bundles into the home.
As far as the close rates, we’ve made a number of things, we’ve invested in some technology that allows us to provide up sell information to our customer service reps based on customer history. We’ve made it easier for them to gain access to competitive information and how to deal with objections. We spent a lot of time retraining and spending time in classroom took them off the phone, and sat with them on sales skills.
And I think the biggest thing we’ve done is we’ve centralized our whole sales effort into one facility. And we’ve hired a sales manager type person to manage our customer service transaction from a sales standpoint. And the early results is we are seeing incremental increases in our close rates and we believe that really the big thing for us is when we get somebody on the phone we’ve got to close it.
We can’t let them off the phone and run around and price shop.
Richard Greenfield - Pali Research
And you actually track on these direct mail campaigns, are you tracking specifically what the impact is on those direct mail campaigns versus what you’ve done historically. Is it the exact same offers so its just more of the same offers or are these different offers or different positioning and are you seeing a better call in rate based on that.
John Pascarelli
We’re constantly shifting the positioning of the offers so I don’t want to say that we’re making, we have changed the way we’re positioning it now. But its really about keeping your name in front of those non-subscribing homes and being there when they’re thinking about the service and that’s what the frequency of mail does for you and so, but we track every direct mail piece has a separate tracking mechanism so we track the results, we track the offers.
Our main offer is still the bundle. We’re trying to sell the bundle whether it’s the triple play or double play bundle those are what we focus on and really the big thing for us is the length of the discount, whether we do it over six months or a 12 month period, and how much of the discount is up front versus stretched over 12 months.
Operator
Your next question comes from the line of David Joyce – Miller Tabak
David Joyce – Miller Tabak
I wanted to check in on what sort of timeframe you envisioned for rolling out EBIF and [true 2A] on your boxes. And what sort of appetite you might think in some of your markets like the college markets might have for the widgets like what Fios is coming out with. And then I wanted to get a sense for how many business customers you have, are they are in the phone subscriber line or are they divided up between the different line of products like the residential are.
John Pascarelli
I’ll answer the last question first, on the business side, we’re not going to disclose the numbers. That’s not something we disclose publicly but most of our business customers are in the high speed package right now and what we’re doing is working those accounts to convert them to the phone customers as well.
As far as EBIF and the advanced technologies we still have a long way to go in driving penetration of digital in our markets. We still have significant upside with our existing products, on demand and other things, so we’re going to do what we do which is let that development and technology development happen with the bigger guys and then we’ll come in and use it once all of the bugs are kicked out of it.
But we’re not in a position right now where we want to go and spend a lot of time and energy on deploying that right at this time.
David Joyce – Miller Tabak
Is there any way that you can give us a sort of range of the kind of RPUs that your business customers are currently generating or is it still going to be very [inaudible] just to the high speed data kind of RPU.
John Pascarelli
No, we charge more for business customers. Our business customer average is over $100.00. And it depends, there’s a very high percentage of them that have our video products but it will range, average is probably $150.00.
Operator
Your next question comes from the line of Tuna Amobi – Standard & Poor’s
Tuna Amobi – Standard & Poor’s
I wanted to start by I think Rocco you guys deserve some commendation with the performance in this very difficult environment and I think you might be proving given what we saw from your larger peers that size isn’t everything so, hopefully that’s sustainable. Now to my question, I guess the first thing I wanted to clarify are the numbers that I heard in terms of the CPE and the line extension, I believe that was for your CapEx rollout of the, in the commercial. So first is that both for data and phone and secondly I think the numbers come up to north of $200 million assuming that you decide to rollout to your entire footprint, but again, so what kind of penetration of are you expecting ultimately and how much of your footprint do you expect to roll that out over what time period and how do you see the penetration of that kind of ramping up just to get a sense of how much associated CapEx over what period that you are thinking about there. That’s number one question—
Rocco Commisso
Hold on, first of all thank you for the remarks. You should talk to some of my programming friends, maybe they should reduce the rates to a good company like Rocco as opposed to the larger companies enjoying the benefits of programming costs. But anyway I didn’t understand your first question, I know its long, you want to know exactly what?
Tuna Amobi – Standard & Poor’s
The numbers that I believe in the prepared remarks about the incremental CapEx plans for rolling out I believe commercial—
Rocco Commisso
I think what John was saying is first of all, we’ve done our analysis and to be Docsis 3.0 already its really only about $5.00 per home which is an astronomical low number in relation to what our competitors would have to do to reach the same level of service. Then I think John mentioned another number, $70.00 per CPE.
John Pascarelli
Yes the $70.00 is just the incremental cost from what we’re paying today to do a modem connect to what it would cost for the existing prices, but you have to remember those Docsis 3.0 are in the early development stages and those prices will do just what the other modem prices, is come down over time.
Tuna Amobi – Standard & Poor’s
Just to clarify so those numbers were purely for Docsis 3.0 right, not for any other related—
John Pascarelli
Yes, that was Docsis 3.0 and its $5.00 per home past is the number.
Rocco Commisso
If you multiply, I think what we’re saying here is less than $15 million to, on a company our size, to be able to launch Docsis 3.0. Its just, its an amazing number if you think about it what in relation to for instance our friends at Verizon have to do to bring this level of service into their homes.
Tuna Amobi – Standard & Poor’s
So have you given out any commentary about any other related CapEx for launching commercial phone.
Rocco Commisso
No its all imbedded in that number. We’re pretty comfortable, I think the biggest number that we’re debating right now is whether to the extent that we may, and we’re not ready to give any numbers, to the extent that we’re going to bring the phone in house and we’re debating that right now. It will require a pretty sizable capital investment but the ROIs the returns make up for it.
Tuna Amobi – Standard & Poor’s
And then the last question is on, I wanted to get a sense of some more color by markets especially in the markets where I think your local DBS local HD penetration is now north of 70% as well as the Fios and markets,--
Rocco Commisso
In the Fios market I think we said, we haven’t seen any additional activity.
John Pascarelli
Right now, just so we’re clear, Fios is 35,000 homes in the company.
Rocco Commisso
Out of 2.8 million homes.
John Pascarelli
So Fios is not a big thing. We’ve got some slight activity from AT&T Uverse in a couple of markets but very small. We know they’re constructing in a couple of locations but we’re not seeing a lot of activity.
Tuna Amobi – Standard & Poor’s
Not in Indiana, I think you mentioned the last time.
John Pascarelli
Indiana is just a small piece and we are right now seeing some construction in Missouri from AT&T Uverse.
Operator
Your next question comes from the line of Brian Craft – Cross Research
Brian Craft – Cross Research
I just had a few questions, one just wanted to see if you could quickly comment on how much overlap you have with Quest fiber to the node builds, also wanted to follow up on the last question, you had talked about if you were to bring the phone operations and functionality in house it would require some capital investment, can you just help us understand what areas you would need to invest in, not getting into the numbers, but just what types of things you would have to invest in in order to do that.
John Pascarelli
Let me take the first one, there’s two things, well there’s a number of major things, we’d have to buy switching equipment and the associated components that go with phone switching whether its routers, and other things and a piece of it is constructing network. Its building out to rate centers and building our networks so that they are into the local facilities of the local telephone company.
And as far as the first question which was the, based on what we’re hearing right now they have not announced in our markets in a big way that they’re going to be offering this service. We’ve heard some blips that they may do something in Des Moines and we’ve heard maybe in Cedar Rapids, but we’re not seeing the activity—
Rocco Commisso
He’s talking about fiber nodes, [inaudible] video strategy.
John Pascarelli
Correct, yes, they announced in one article that we read that Des Moines was going to be part of this 40 meg product that they plan to launch but we haven’t seen it, it wasn’t in their press release but we saw it in an article that it was mentioned. So right at this point we don’t have any good indication that they’re going to be there or they’re not going to be there other than what we’ve read.
Rocco Commisso
And on the phone, I just want to make sure we don’t want to offend each other, there’s a direct relationship between the investment that we would have to make and the savings that we would get by making that investment. And we see a tremendous value in that to the extent that we, we have a contract right now with Sprint and once that contract expires clearly we have the ability to move and do the phone business in a different way and we see dramatic savings from what we already pay.
Mark Stephan
I think the savings, we can get back in two years, just to put some meat on the bone so its got a very, very high payback.
Brian Craft – Cross Research
Can you say when the Sprint contract actually ends.
Rocco Commisso
Over time.
John Pascarelli
Rolling beginning in August of next year.
Mark Stephan
Its market by market.
Operator
Your next question comes from the line of Unspecified Analyst – Sandler Capital
Unspecified Analyst – Sandler Capital
Use small questions, I’ll ask them sequentially, how much total debt is due in 2010, 2011, and 2012.
Rocco Commisso
About 80, I don’t have the number in front of me but we got the 125 due in February of 2011, we have some amortization of term loans, but I think its about $300 million, thereabouts between now and 2012.
Mark Stephan
Yes, 2010 is just term loan A amortization and then 2011 we have $125 million note due early in the year and then we’ve got a revolver that’s coming due in September of 2011 and it really depends on how much will be outstanding at that point in time.
Unspecified Analyst – Sandler Capital
Do you think if you did a new bond offering today you could do it at 8%.
Rocco Commisso
I hope.
Unspecified Analyst – Sandler Capital
I own some of your bonds that are yielding actually under 8%.
Rocco Commisso
I don’t know about that.
Unspecified Analyst – Sandler Capital
I own I think, don’t you have some 7 3/4.
Rocco Commisso
Face value, yes, we have some 7 7/8, we have the 8.5 and we have a 9.5. But the 8.5 is trading below par right now so it’s a little higher yield on that but I think you hit it on the nose, I think 8% should be the right number for a company of our quality given, and I’m not laughing here given the fact and as I keep on reminding my friends at the rating agencies that I’ve been involved in borrowing money for now 23 years and I’m one of the few non investment grade companies and not had a default on anything and you know that because you go back with me a long, long time.
Unspecified Analyst – Sandler Capital
I think you’d get a good reception for a few hundred million dollars of bonds. Secondly on retrends, should there be another pretty big bump up in 2010.
Rocco Commisso
No, but we have some contracts that are coming due without announcing them right now.
Unspecified Analyst – Sandler Capital
But not like 2008 or 2009.
Rocco Commisso
Not like 2009, 2008 was not significant but 2009 was pretty big, because we had almost everyone coming due.
Unspecified Analyst – Sandler Capital
What’s the total Telco footprint right now.
Rocco Commisso
What do you mean by that?
Unspecified Analyst – Sandler Capital
As a percentage of your 2.8 million homes past—
Rocco Commisso
We have Telco all over—
Unspecified Analyst – Sandler Capital
I’m talking about in terms of construction or marketing.
John Pascarelli
For marketing for advanced services—
Rocco Commisso
We already announced Verizon and its only 35,000 homes.
Unspecified Analyst – Sandler Capital
That’s 1%.
Rocco Commisso
And what is AT&T?
John Pascarelli
AT&T is probably another 5,000 homes tops right now.
Rocco Commisso
So let’s say 50,000, pick a different number, its really deminimous in relation to our footprint.
John Pascarelli
Just so we’re clear, we do have active over builds with some small independent telephone companies that go beyond that but just when you’re talking about these advanced service companies that’s where its at.
Rocco Commisso
And then just to be clear, these things have been going on for eight years now since we bought, we have knowledge in some markets, we have some municipal in some markets, but that’s been going on for years and we have already dealt with that, all of those.
Unspecified Analyst – Sandler Capital
On CapEx would you be prepared to say that CapEx in 2010 at least will be at a lower percentage of revenue.
Rocco Commisso
Yes, except for one thing, our decision in what we do with the telephone thing. But not dramatically different then the 15%. I think Mark said our CapEx, we’re announcing 20% to 15%, not going to be dramatically different then that 15%. We’re dealing in basis points as opposed to 15% going to 20%, you follow me. We don’t see anywhere near the need to go and spend what we spent in 2008 in CapEx. We’ve already done that work, we already spent that money, and we’re very happy that we did it when we did, so we foresee except for this [telephony] thing which as I said brings tremendous, brings home tremendous value we see the ability to run this company at the level of CapEx that we have spent this year.
Unspecified Analyst – Sandler Capital
On the programming side, programming costs this year are up on per sub basis close to 12%, will that predictably decelerate at any meaningful way in 2010.
Rocco Commisso
It would decelerate, by the way it wasn’t 12%, I think Mark said 10%.
Unspecified Analyst – Sandler Capital
That was the total [inaudible] cost but on a per sub basis—
Rocco Commisso
You’re right, like I said we’re not going to have that big hit from retrends—
Mark Stephan
And what we have here is we’re getting big 10 for the first time, its cycling through our quarters now.
Rocco Commisso
And the other thing, I don’t know if you picked up on what John was saying but by bringing the email service in house is a dramatic savings on that too.
Unspecified Analyst – Sandler Capital
The last question I have, just a nitty gritty number, I’m estimating your corporate overhead runs about $30 million, am I in the ballpark.
Rocco Commisso
Well its in our financial, its 1.9% of revenue, $26 million.
Operator
Your next question is a follow-up from the line of Richard Greenfield - Pali Research
Richard Greenfield - Pali Research
I just wanted to follow-up on this point about telephony because I think you started off by saying I think John was talking about how wireless substitution is definitely beginning to have an impact and as you look out over the next five years, it seems like we’re getting to that point where wireless substitution is going to have an acceleration that’s kind of unstoppable throughout the country and just wondering how you balance the desire to actually put capital into the telephony business versus simply milk what you have in telephony and leverage a third party relationship like why not push Sprint for a far better deal rather then actually commit the capital since it seems like they’ve got enough problems of their own where they might work with you on far better terms versus you actually putting new capital into the ground for what is long-term a potentially a dieing business.
Rocco Commisso
Alright, first of all its not a dieing business for us. We’ve been in the business now for three or four years and each year we grow whereas the phone companies decline. I think you know the numbers better than me whether its Verizon, whether its AT&T, whether its Quest, their losing a 10% per year, 10% 12% per year then the landline business.
Two, I think you will agree with me that if I could pay back my investment in two years, everything thereafter is all gravy right and I don’t see the business dieing in two years and that’s [inaudible] that we’re going to be doing. Don’t think that you’re totally wrong in asking us to reconsider things but short of you being the negotiator it is what it is.
Richard Greenfield - Pali Research
I’ll be happy to negotiate for you, it just seems like you could drive a great deal.
Rocco Commisso
Since you have better relationship with programming community maybe we should put you in charge of that. I think we’ve said enough on that. I think that telephone business for us has been a huge positive given the fact that we’re able to give our customers significant savings over what they used to be paying. And it shows in our numbers and it shows in our customers wanting to go with us as opposed to a traditional phone company.
Operator
Your final question comes from the line of Dennis Leibowitz – Act II Partners
Dennis Leibowitz – Act II Partners
Just a simple one, if the free cash flow is $0.84 for the first half, isn’t $1.30 fairly conservative.
Rocco Commisso
I’d say at least. By the way welcome to our conference call, between you and John [Conrush], I haven’t heard from you guys in 10 years.
Dennis Leibowitz – Act II Partners
They don’t usually let the buy side on.
Rocco Commisso
I’ll leave it up to you guys. We want to be conservative frankly and we want to be cautious. I think increasing it by 30% is already enough. I think your real question should be Rocco, at $1.30 why should our stock be trading at less than 5x free cash flow, right. When the S&P 500 made up of companies that don’t have anywhere near our results in terms of growth and [inaudible] trading at 15x earnings. So maybe you should ask that question. Or maybe you could give us some flavor why we’re trading at less then 5x and everybody else including the phone companies. If you look at Verizon, Time Warner and HNC, they’re losing revenues and cash flow and they’re trading at 11, 12x free cash flow.
Dennis Leibowitz – Act II Partners
Well they have yields and they have lower leverage but I agree that you’re right in your conclusion.
Rocco Commisso
Okay good. We’re very happy. This is a huge turnaround for our company. I hope the market, the smart analysts figure it out rather quickly that once you develop free cash flow even with a 5% growth in revenues, we could de-leverage at a 10% clip, 5% because you’re reducing your debt and 5% you’re increasing your cash flow.
What that means then is that the reduction in leverage all essentially flows to the stockholders so with a 50 basis points reduction in leverage, everything else remaining the same even though we think we’re undervalued here along with the rest of the industry, at 50 basis points reduction in leverage converts for our company with a cash flow of $550 million, to $275 million, now I’ll do the numbers for you.
Just standing still, $275 divided by 67 million shares, that’s $4.00 a share which is almost double what our stock is trading just by standing still and converting that free cash flow into repaying debt.
Dennis Leibowitz – Act II Partners
We’re believers.
Rocco Commisso
Okay, thanks and good luck to you.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Rocco Commisso
No I’m fine, once again I’d like to thank everyone for joining us and our management team as always is trying to do the best in delivering performance and results for our investors both on the debt on the equity side.
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