Knology Inc. Q4 2007 Earnings Call Transcript

Feb.25.08 | About: Knology, Inc. (KNOL)

Knology Inc. (NASDAQ:KNOL)

Q4 2007 Earnings Call

February 22, 2008 8:30 am ET

Executives

Todd Holt - CFO

Rodger Johnson - President and CEO

Brett McCants - SVP of Operations

Analysts

Frank Louthan - Raymond James

Lucas Binder - UBS

Tavis McCourt - Morgan Keegan

Hamed Khorsand - BWS Financial

David Joyce - Miller Tabak and Company

Romeo Reyes - Jefferies & Co.

Andrew Morey - Tartan Partners

Operator

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to Knology Inc. fourth quarter 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) I will now like to turn the call over to Mr. Todd Holt, Knology's Chief Financial Officer. Please go ahead sir.

Todd Holt

Thank you Brent and good morning to everyone, and welcome to the Knology conference call. With me this morning is Rodger Johnson, our President and CEO; and Brett McCants, our Senior Vice-President of Operations. As usual, Rodger will provide his state of the business review as well as cover some of the company's highlights and accomplishments achieved during the fourth quarter and the full year 2007. Rodger will also comment on our 2008 outlook. I will follow Rodger with a more detailed review of the quarterly and annual financial performance of the business and then provide more color regarding our 2008 guidance.

Before Rodger gets started, let me offer a cautionary note regarding forward-looking statements. Some of the information we provide and discuss in this call is forward-looking information and is given in reliance on the Safe Harbor provided by the Private Securities Litigation Reform Act. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from these forward-looking statements due to certain factors, including the risks and uncertainties discussed in Knology's annual report on Form 10-K for the fiscal year ended December 31, 2006, and our other reports filed with the Securities and Exchange Commission. Rodger?

Rodger Johnson

Thanks, Todd, and thanks to everybody for joining us today. The fourth quarter of 2007 was another strong quarter for Knology particularly on the financial front. We set all time highs for both revenue and EBITDA, benefiting from our organic growth and legacy Knology markets, as well as our acquisition earlier in the year of PrairieWave Communications.

Our growth rates for revenue and EBITDA for both fourth quarter and for the entirety of 2007 were outstanding. This is the third year in a row that our EBITDA growth has exceeded 40%. Our EBITDA margin for the year expanded to 31% and represents a nicely lift when compare to the 26% EBITDA margin we recorded in 2006.

We are confident our silent revenue generating efforts couple with tight operating controls will allow us to get the mid 30% EBITDA margin in the very near future. Capital expenditures for the year came in a little higher than we expected. To a larger extent we were a victim of our own success here. We saw a digital penetration increase to 49.5% at the end of 2007 versus 35.3% at the end of 2006. This 40% increase in our digital video subscriber base drove an unprecedented demand for high definition each day and digital video recorder or DVR set top boxes.

As a result our capital expenditures associated with CPE were greater than planned. Todd will amplify on the HD, DVR growth in his comments. In spite of the increased CPE our overall discipline capital management program combined with good operating performance and a very attractive capital structure. Especially in todays difficult debt markets allowed us to generate almost $30 million in free cash flow in 2007 compared to only $9.7 million in 2006.

Additionally for those of you who track leverage ratios we ended up below 4.5 times levered at the end of fourth quarter '07. This supports as a capital structure we're very comfortable with.

From a net RGU perspective, we added more than 180,000 connections during the year with increases in all three services, video, voice and data. Obviously, the bulk of this growth came from the PrairieWave acquisition. We generated fewer RGUs in the legacy Knology environment during '07 and we had hoped but most of the shortfall came in the second quarter when we experienced the response to an ill-advised credit policy change, and also we experienced abnormally high military deployment.

These issues were documented in our previous earnings calls and just to offer you a little more insight, if we look at the other three quarters of '07, absent the second quarter, we saw an increase of about 5% more net RGUs in total than the other three comparable quarters absent second quarter of '06. Our overall RGU penetration has grown from 60.9% at the end of fourth quarter '06 to 72.4% at the end of fourth quarter '07. This includes the under penetrated Pinellas market.

We clearly benefit from the PrairieWave acquisition, but it's important to note that no Knology market other than Pinellas is less than 60% penetrated, and we have one market with more than a 100% penetration one with more than 90% penetration, and several more that are at or approaching the 80% threshold. This does not include our ILEC's, which reflect greater than 100% penetration.

Our triple play customers now represent 49% of our residential customer base and our double play customers now represent 31%. This means 80% of our customers buy more than one service from us.

Business and commercial sales continue to represent a solid growth opportunity for our company we're now up to about 90,000 business connections on our network and this represents about 14% of all of our connections. As we place more emphasis on business and commercial sales we're actually now encountering some months where the net business RGU growth actually exceeds the net residential RGU growth.

I'll remind you once again that most of our business sales activity revolves around telephone and data services, but we do pick up a reasonable number of video connections with our triple crown bundle. This offer resonates well with small businesses who want television for their lobbies, their break rooms, their conference rooms and so forth. We remain bullish on this sector of our business and have added headcount and marketing dollars to further stimulate our success.

The large key automotive manufacturing facility that I have mentioned earlier that's being built in West Point Georgia appears to stay beyond schedule for the first car to roll off the assembly line in 2009. We've actually seen a slight up tick in the RGU growth in our West Point ILEC territory as a result of the construction and other ancillary activity as a function of the markets reaction to the Kia Plant. This is particularly welcome news for the local economy in the face of the textile industries departure.

On another front much of the integration of the PrairieWave has been completed. The call center that we established in Sioux Falls now gives us some level of redundancy and disaster protection in our network. We've also benefited from many of the synergies that we projected when we put the two companies together.

Based on our December '07 run rate we feel we've achieved what will be an expense reduction of at least $4 million in 2008 versus the expense at the time of the acquisition and I believe that there is more to come on top of that.

I told you on our last call that I anticipated completing our billing system conversion by the end of February and we are now revising that date to the end of April. We feel that a little bit more testing is in order and we wanted to parallel run between the old and the new systems before we actually cut over.

Also this week and next week we are doing our name change from PrairieWave to Knology in Rapid City and Sioux Falls. This is important because we will now begin to mirror some of our legacy Knology marketing programs in the Dakotas. We've invested very few marketing dollars to-date in this acquisition and we are now in a position to invest and grow these markets.

Also while I am talking about integration efforts I should mentioned that on January 4th, 2008 subsequent quarter end we closed the Graceba Total Communications acquisition. If you recall this is the ILEC competitive broadband provider and in Dothan, Alabama that we purchased. We are aggressively moving forward with brand Graceba into the Knology family, we've already named our general manager and we've mapped the exiting jobs to new jobs.

We anticipate that we will go ahead and implement the Knology name change in this market as earlier as second quarter of '08. We feel that we can move a little quicker with Graceba and derive some of the marketing benefits earlier based on what we've learned at PrairieWave.

One final thing in my comments and then I'll shift to 2008 guidance. I promise you an update on our $99 triple play offer when we had our last call. As you'll recollect we saw strong RGU growth in the third quarter of '07 as a result of the $99 offer, along with our $66 double play offer. All of our enhanced offers will expire either at the end of March or at the end of June this year, and obviously, no one yet knows how customers will behave at the end of the promotion when the prices go back up.

The package we had out there originally had a high cost of goods sold, because of the premium that we included and in mid-November, we offered the composition of the package to better align the cost of good sold with the revenue generation capability of the package. Actually what we did is we pulled that premium out.

This brought our gross margin and enhanced our EBITDA back to a better place. There is no doubt that the $99 offer was the right thing to do. When you consider the added revenue opportunities; arriving from greater digital penetration, more high-def TV sales, more RGUs and so forth. The $99 offer is here to stay, but with a slightly different composition of elements than when we first began.

Also, we track every single customer that signs up for a $99 triple play or $66 double play service according to whether they are new customers, existing customer upgrades, existing customer side grades or downgrades. All new customers that sign up, and all existing customer upgrades are positive revenue events for us, while side grades may or may not be positive and down grades are always negative.

Currently 85% of our $99 triple play customers are either new or existing customer upgrades and 92.6% of our $66 double play customers are either new or existing upgrades. Clearly this is the good thing and all we've done is adjust the composition of the package to yield a lower cost of goods served and a better gross margin as we've got a little bit more data upon which to base our decisions.

Now for the punch line, while we have little control over the macroeconomic environment and how that plays out in the stock market, which as you're all too familiar with can be frustrating at times. Knology anticipates continued growth in 2008. We still like our focus on secondary and tertiary markets and our strong commitment to excellent customer service.

Our financial outlook including a full twelve months of the Graceba acquisition calls for revenue to come in between $410 million and $420 million and this will be about a 20% growth year-over-year. Our EBITDA should be in the $140 million to $144 million range that's about a 33% growth and capital expenditures will be at about $50 million.

You stick all that in a pot and stir it up and we should deliver about $50 million in free cash flow for the year. And best of all, although I am not providing guidance right now because it depends on the final accounting for the Graceba transaction we've got a shot at being a net income producer in 2008. On that high note, I'll turn it over to Todd.

Todd Holt

Thanks Rodger, I will begin by reviewing the connections churn and ARPU numbers. We ended the year with over 642,000 total connections, that's a 39% increase compared to the last year. We added 3,261 connections during the fourth quarter including 2,328 business connections which represent 71% of the Q4 net adds. The holiday seasonality does not impact the business customers in the same manner as the residential customers.

We lost a modest 151 video connections during the fourth quarter and added 394 voice connections and 3018 high-speed internet connections during the quarter. We actually added video connections in October, November and then experienced the typical holiday season slowdown in December.

As a point of reference regarding the December seasonality we experienced the modest decrease about 100 connections in the fourth quarter of last year with the same dynamic, growth in October and November and a loss in December.

We believe it is also important to know that the vast majority of the modest decrease in video connections is driven by the activity in the ala carte video customers. As we have stated in the past we did not slice a big emphasis on the ala carte cable customers due to the higher churn and the lower gross margin economics of these customers.

Our digital penetration although not included in the connection counts, continue to increase, going to 49.5% at year end from 46.3% as of the end of the third quarter and from 35.3% at the end of 2006. Average monthly connection churn for the quarter was down to 2.5%, which compares favorably to 2.8% last quarter and 2.6% in the fourth quarter of 2006.

Our average monthly revenue per connection for the fourth quarter on a combined product basis was $49.17. This compares the $48.42 in the same period one year ago and $48.90 in the previous quarter. The consumer take rates on the advance video applications remained strong, as Rodger said these are the HDTV and DVR services. In fact we ended the year with almost 52,000 high end boxes deployed that represents a 79% increase year-over-year. The lift in digital and advanced video penetration continues to positively impact our ARPU.

Moving onto the income statement, our reported fourth quarter revenue was $94.8 million representing a 41.6% increase compared to the fourth quarter last year, and a sequential quarterly increase from $92.3 million in the third quarter of this year. The 2007 full year revenue was $347.7 million that represents 34.2% year-over-year increase.

EBITDA for the fourth quarter was $29.8 million, a 65.8% increase compared to the same period last year. And EBITDA for the full year was $106.3 million or a 58% increase year-over-year. Our EBITDA margin for 2007 was 30.6% that represents a very significant lift from the 26% EBITDA margin posted for 2006. And if you didn't note the income from operations in the earnings release, the GAAP operating income for 2007 were $16.3 million. That compares with a loss of $4.5 million in 2006.

Our bottom line for the fourth quarter was a net loss of $6 million or $0.17 per share. The net loss for the full year 2007 was $43.9 million and included a loss on the extinguishment of debt of $27.4 million, which related to the financing of the PrairieWave transaction, and it included a gain of $8.3 million on the sale of the non-core directory business.

Excluding these two significant non-recurring transactions, the net loss would have been $24.8 million, or $0.71 per share. The net loss for 2006 was $39.5 million, or $1.41 per share. We'll comment on net income again when we discuss the outlook for 2008.

On the balance sheet side of things, we ended the year with almost $48 million in cash that is up from about $39 million of cash at the end of the third quarter. We also have the $25 million revolver none of which is currently drawn and there are no plans to utilize this facility it continues to serve as liquidity cushion for the business.

From a leverage perspective we are at about 4.4 times calculated on a LQA EBITDA basis using the gross debt. The same calculation on a net debt basis yields a leverage ratio slightly under four times. Our interest coverage is about three times. So with this leverage ratio and interest coverage we feel very good about where we are from a balance sheet perspective.

Our CapEx for the year came in at $45.8 million and net cash interest was $31.9 million that resulted in free cash flow for the year of $28.7 million almost a 200% increase compared to the last year. The level of capital expenditures were driven largely by the increased demand for digital and advanced video service. Remember the comments made earlier, digital penetration increased over 40% and the advanced video applications VHD and DVR applications increased about 79%.

So all things considered 2007 was a very positive year. We experienced record revenue and EBITDA growth performance. We closed a very accretive acquisition with the PrairieWave transaction that helped us create a very simple and efficient capital structure with a fair cost of debt. We delivered robust free cash flow and positioned the business for continued growth into 2008 and beyond. That leads us to 2008 and Rodger provide our outlook numbers for 2008 and explained how these numbers reflect a full-year of the Graceba transaction.

We've nice revenue growth expected around 20% for 2008, very healthy EBITDA growth above 30%. A continued efficient and largely success based capital spending requirements. And the fixed cost of debt, where it is today we can certainly see the business delivering approximately $50 million in free cash flow during 2008. This represents a free cash flow yield of about 12%.

A couple of other interesting points regarding the 2008 outlook. If you use the midpoints of revenue and EBITDA that reflects an EBITDA margin of 34%. That's a nice lift from the 2007 EBITDA margin of 30.6%. And depending on the final purchase price allocation of the Graceba transaction, which would mean the related depreciation charge regarding the assets acquired, we believe the business may very well deliver GAAP net income and EPS for the full year of 2008.

So we are very happy with the efforts of our employees during 2007 and in particular the focus that has been maintained on the customer while at the same time integrating the acquisition and delivering solid organic growth. We look forward to 2008 and to the continued growth in all of the key operating and financial metrics of the business, which should drive increased shareholder value.

Brett that concludes our prepared remarks this morning, we would now be happy to address any questions from the call participants.

Question-and-Answer Session

Operator

(Operator Instructions) and sir your first question comes from the line of Frank Louthan

Rodger Johnson

Hello Frank.

Frank Louthan - Raymond James

Yes, hello are you there.

Rodger Johnson

Yeah we are here.

Frank Louthan - Raymond James

Sorry, okay. If you can, just wanted to elaborate a little bit on the add weakness which was little bit weaker than what we were looking for. And can you give us an idea from in your guidance, what sort of assumptions you are making there, where is some of the EBITDA growth coming from, what's some part of the market. and then lastly what are you seeing sort of post-holiday for the trends in digital adds and HD upgrades.

Rodger Johnson

Okay, let me just the softness in RGUs, it may have been a little bit less than what you are looking for, but it was not that far off the mark. In terms of what we've seen in the past, our fourth quarter is typically our second lowest quarter only to the second quarter. When we go through all the military moves and for what have you. For whatever reasons it seems like a pattern has evolved in the last two or three years that we get we get pretty good growth in October and November and then we give it back a little bit in the month of December.

And it appears and I don't know whether it's an economic issue or whatever, but it always come from the cable-only subscriber base. That's where the biggest piece of it is, and I can't tell you why, but it's just a phenomenon that appears to be a pattern that is evolved in the last few years.

The other thing is, what we're seeing on the post-holiday basis. Actually, we are seeing a little bit of a slowdown in terms of the digital. I think people that we're going about those high-def TVs that you know have pretty much already about their high-def TVs.

Obviously the $99 promotion that we had out there helped a lot in the third quarter and had some carryover effect early in the fourth quarter, but I would say, just as a little softness right now compared to what it was I didn't mean it's soft, but just relative to the 40% growth rate that we saw last year. Todd, anything to add to that?

Todd Holt

Yeah, I think compared to the fourth quarter we obviously see the up tick you know in going into the first quarter where for that fourth quarter is where we experience some of the holiday seasonality and you know we're certainly out of that and we see the up tick going into the first quarter of '08.

Rodger Johnson

And Frank your other comment is where do we expect the EBITDA growth to come from in '08? Todd, do you want to comment?

Todd Holt

Sure, it's actually a very, very nice balance between the effect of the accretive acquisitions remember PrairieWave was in nine months of the numbers last year, it will be in 12 months of the numbers this year and Graceba acquisition closed at the beginning of January. So that's full 12 months of Graceba reflected in our numbers, but that's just part of the growth. The other part of the growth is just the continued penetration in our existing network.

As you know we don't do any significant amount of building new network. We're continuing to leverage the investment that has already been made in the legacy Knology network and we're continuing to see and continuing to plan for a very solid enterprise customer growth in that network.

So the EBITDA growth is good healthy top of the line growth and we maintain those very high 70% type gross margins and we've been able to leverage and control our SG&A and we'll continue to that and that drives very good flow through down to EBITDA.

So kind of in a nutshell, Frank, it's good balance between organic and the accretive acquisitions maintain our focus on penetration in the existing network, controlling the SG&A and that all delivers, really, really solid EBITDA growth in the business.

Rodger Johnson.

Matter of fact Frank one other comment that I was going to throw in here some place because I didn't want to get too long winded in opening comments, is we're actually being pretty aggressive going into '08 with our price adjustments. We had huge success last year stimulating the triple and the double play bundles and for the most part we are embodying price increases on those bundles that are in the double digit range this year. Probably not that much on the ala carte customers, because we are already pretty high there, but we believe there is a lot of upside in the price points of the bundles.

We just are not inclined right now want to play in this game of driving price points low, low, low. Because it just doesn't make sense, so and early returns or just looking at January and what have you. The market has responded about like what we thought it would respond of those price increases. We will have all those out in the marketplace by the end of March. Brett said all our price increases will be in place. So we will get much of the years benefited there. Does that give you enough.

Frank Louthan - Raymond James

That's great thank you very much.

Rodger Johnson

Okay now.

Operator

Your next question comes from the line of Lucas Binder.

Lucas Binder - UBS

Hi guys, couple of questions here. Can you talk about -- you mentioned you expect to get some cost savings from Graceba pretty quickly. Can you talk about what your expected synergies are on an annualized basis for that acquisition and what's the latest in competitive environment for you guys as far as AT&T and the U-verse and FiOS in the Pinellas County markets.

Roger Johnson

Alright. Let me deal with the Graceba thing, and now I'm going to ask Brett to comment on the competitive environment.

When I said we're starting to see some synergies. The synergies that I was referring to were the synergies that we've already begun to extract out of the PrairieWave acquisition. We have put a general manager in. We don't think we'll get the billing system converted in the Graceba world till the end of '08. So we don't see on the scale there magnanimous amount of synergies that come out of that. That was just a very, very accretive, highly efficient cash flow generating engine that we added into the loop.

We will get some, but it's a little bit too early to quantify that Lucas on the Graceba side of this thing, but we are feeling good about getting the $4 million that we said in expense reductions at PrairieWave, and we will still see more come out of that when we actually get the billing system converted.

And then I'm going to ask Brett, because he is the guy that kind of touches it more on a day-to-day basis to talk about what we are seeing in competitive landscape Brett, and you've mentioned AT&T, U-verse any of those things.

Brett McCants

Well, what we're seeing Roger is not more aggressive competition just a broader. All of our cable competitors have now launched a phone product in all of our markets except for our rural ILEC. We're seeing the $99 offer in virtually everyone of our markets. Some offers are a little over that when you talk about Charter or Mediacom. But we continue to be competitive in those markets and the competition has not seen any great inroads with our telephone product in any of our markets.

Roger Johnson

We also haven't seen anything at AT&T to speak out with the U-verse product.

Brett McCants

We have not see U-verse at all and we still have a limited amount of competition in Pinellas with the phone company there.

Lucas Binder - UBS

Okay and if I can ask just one follow-up for Todd. The acquisition for Graceba was $16 million in cash $59 million in debt. So if we take that off it's off about $30 million in cash on your balance sheet a little bit more debt. You talk a little bit about and then add another $50 million in free cash flow throughout this year. What do you do with cash you build up a hoard? Do you maybe manage the debt levels a little bit more so you have that, however should there be another acquisition can you talk about what type of opportunities you see in the market for other potential acquisitions over time as well?

Todd Holt

Lucas it will actually be a balance of those type items. Now the first point is to understand what we're required to do with our cash. And our credit agreement requires that we use 50% of our excess free cash flow, that definition is a little bit different than the definition we use for free cash flow, but you get to a pretty large number when you're generating $50 million of free cash flow that's a pretty large number that would used to pay down principal on the debt. So there will be good portion of cash that is used to deliver and we also want to have a healthy balance sheet with some dry powder with some liquidity.

In case we do find another very accretive acquisition and based on where the capital markets are today and based on what we have on our play at this point I mean that would be the type of transaction that would make the most sense for our shareholders at this point, another type of Graceba transaction. Something that where the markets are today, it could be financed rather efficiently, but that would also be immediately accretive on valuation EBITDA and free cash flow.

So when you think about the use of cash. The first thing to consider is the amount of cash that would be used to pay down debt and then also we think we can get the highest return on investment on a tuck-in type acquisition that's accretive.

Lucas Binder - UBS

Great thank you very much.

Rodger Johnson

Yeah, I think in these quarterly economic markets, I would kind of like the idea of having little bit of cash, around if you want to know the truth.

Todd Holt

And Lucas but before you jump of also, just to add to Rodgers comments on the Graceba and that's exactly right. I mean its not the type of magnitude of synergies as we experience in PrairieWave for the largest reason being its just a smaller transaction. On a percentage basis there is a fair amount of synergies to be extracted but we have not built those types of synergies into our model and into our guys and that type of stuff. The way when we do acquisitions we leave the synergies as icing on the cake so to speak.

Lucas Binder – UBS

Okay.

Operator

Your next question comes from the line of Tavis McCourt

Tavis McCourt - Morgan Keegan

Hi guys, couple of questions first Todd some house keeping. What was the GAAP cash from operations in Q4 and also the CapEx number in Q4?

Todd Holt

The Q4 GAAP net cash flow from operations was $21.7 million, which you got all the previous quarter that would take it to $57.5 million for the year.

Tavis McCourt - Morgan Keegan

Okay.

Todd Holt

And then the CapEx number for the fourth quarter, I believe that came in at $12.7 million that got us to the $45.8 million for the year.

Tavis McCourt - Morgan Keegan

Okay, and then on the gross margin was nice rebound from last year quarter. I don't know if you refer to direct cost before. Was there any accounting change in there removed some of the pivotal cost back to SG&A or is that just the up lift from the better pricing on that triple play?

Todd Holt

There was no change in the accounting. So the way the pole rental, when we changed that last year at some point, it's been a consistent accounting so it's the latter it's the third quarter when we introduced the lower margin of bundle packages and we cut that off, so you see some lift in the gross margin due to that change.

Tavis McCourt - Morgan Keegan

Got you and then can you guys give us some details on Graceba now that it's a done deal, what the margins are on that, kind of the revenue levels you expect this years or maybe that the mix of business there between voice, video and data even if this is kind of qualitative and not exact?

Rodger Johnson

We can share some information. Again, their books and audit and everything is not closed for the year of '07, and then also we want to respect the competitive environment in the Dothan area, so we that won't give up, just like we treat all of our markets. We don't give a lot of granularity a lot of detail to the market level numbers, but we're really excited about Dothan for many, many reasons just outside of the accretive nature of it and the way it's responding that is all great. But when you dig down into the operations, and you understand that it's the same type of network the HFC, that the ILEC foundation, it is in our sweet spot. Its right in the middle of Columbus, Montgomery, Panama City.

It is in that heart of our Southeast footprint. So we love the secondary and tertiary nature of it. You know what we can say about the numbers is '07 numbers would reflect about a $19.5 million revenue and somewhere around $10 million on EBITDA obviously that's north of 50% from an EBITDA margin perspective, very, very bundled.

Without speaking about the specific numbers when you think it is business from a penetration level and from a customer bundle perspective it fits that Knology mode, so very good penetration and very good bundles and we probably just leave it at that for the Graceba information at this point.

Tavis McCourt - Morgan Keegan

Great and in terms of the RGU growth this year would you expect any change in kind of a seasonality of how you have experienced our growth in the previous years given some of the promotions you did back in Q3?

Rodger Johnson

No I don't think we would expect any fundamental change in the seasonality. The one thing that Brett and I spend a good amount of time talking about and trying to prepare for is how do we think the market is going to behave at the end of March and at the end of July when we see the promotional stuff roll off. If in fact the vast majority of those customers stay with us then that's going to be a very, very good thing. It's just going to depend on the dynamics of what competitors do and how they behave at that point in time, but I still think you're going to see a better first quarter, a challenging second quarter, a better third quarter, and a little bit of a challenging fourth quarter, but not like second quarter.

Tavis McCourt - Morgan Keegan

Okay thanks a lot.

Rodger Johnson

You're welcome

Operator

Your next question comes from the line of Hamed Khorsand.

Hamed Khorsand - BWS Financial

Hi good morning thanks for taking my call. Two questions first one could you provide some color on what kind of price increase you are talking about going to the March, June promotions roll off?

Rodger Johnson

Well the price increases on that we've already put in place. Those won't happen in the March or July roll off. I guess Brett it was probably in the mid November time frame decided to alter the price point on our $99 package, by taking a premium an expensive premium that we have included in there, out. So, in essence we kept the $99 price point took the premium out, which improved our gross margin and our EBITDA output from that. And then as we laid out our pricing for these packages for '08 we actually did institute a price increase on these packages and our goal is to keep our margin level that are at a certain level of these packages. And as I've said a while ago, I think what you are going to do is, you are going to see the relative price increases on the triple and the double play enhanced packages go up in the kind of the low double digit range. And you are going to see the price increases for the ala carte, the cable only, the cable only, the voice on products go up kind of in the 5% or 6% range.

Hamed Khorsand - BWS Financial

Okay, my second question was regarding the Graceba acquisition, but previously it tells penetration rate was about 100%. How much CapEx will you be dedicating to Graceba in '08 and what kind of penetration growth are you expecting?

Todd Holt

You are correct on the penetration and that's driven to some degree by the ILEC foundation of the business. So as Rodger commented in his script. The ILEC businesses have very high penetration, so that is normal and that is a great dynamic for that business.

From a CapEx perspective, we ought to be looking to spend and our $50 million guidance number $2 million to $3 million of that would be for Graceba. So again, very solid network, it's the hybrid fiber coax, network is in good shape, there is a not a lot of network maintenance involved. It's primarily success based capital, just like in the legacy Knology environment.

Hamed Khorsand - BWS Financial

Okay, thank you.

Rodger Johnson

As Todd suggests 100% is pretty good penetration. So we're not looking for just radical movement above that number. We are going to have to get in there and see where we feel the opportunity is.

I believe our operating folks feel like there are some good opportunity on the business side down there. They don't have products like our PON our passive optical network or our MATRIX product which is our IP-centrics type products and things like that. So we feel like there is some opportunity there.

Todd Holt

And it's a growth market and a growth operation, it doesn't compare to the legacy Knology growth, but it's very accretive transaction that has growth aspects of it, so obviously we're excited with that transaction.

Hamed Khorsand - BWS Financial

Alright. Good luck in '08.

Todd Holt

Thank you.

Operator

Your next question comes from the line of David Joyce.

David Joyce - Miller Tabak and Company

Thanks and I apologize for my voice upfront. Could you talk about the increase or the expansion of your footprint of marketable homes passed, what the plan in fact going forward and also can you discuss commercial net connection adds when on the seasonality kind of basis. When do you expect those to be on performing residential and vice-versa?

Rodger Johnson

Okay repeat what was the first part of the question?

David Joyce - Miller Tabak and Company

Expansion of the footprint.

Rodger Johnson

Oh expansion of footprint, okay. I think well I may ask Brett to jump in here with me on the expansion of the footprint. Typically we're not doing a whole lot of – matter of fact we're not doing any new construction in terms of building out new neighborhoods and what have you unless we can get some kind of an exclusive arrangement in there. And we've talked about that many, many times before. We're also on the commercial side Brett we go through the same process for commercial expansion as well right?

Brett McCants

That's right. And every project is evaluated from a minimum of 40% rate of return.

Rodger Johnson

That's good point. We don't do any of these things unless we generate at least a 40% IRR on in it David. And we plan to maintain that, but lastly in 2008 that's why we're optimizing a return on the footprint, we're not looking for this big age out philosophy or anything of that nature. The seasonality I honestly don't think we see as much seasonality in the business world as we see in the residential world. Businesses tend not to be as attuned towards relocations and college kids moving out and military moves and things like that, like we see in the second quarter and they tend not to make their buying decisions based on a holiday buying cycle, is that consistent Brett with what you were saying.

Brett McCants

Yeah. They typically make their buying decision on their existing contract with their providers come up, so that's any time during the year.

Todd Holt

Okay.

Brett McCants

So, David, that's kind of the way we see those.

David Joyce - Tabak and Company

Okay. Great. And just finally, if you can comment on anything else you're hearing on the Grande Communications auction? Is that still out there, would that be of interest?

Brett McCants

Yes, that's out there. We've had conversations with various and sundry bankers who have presented that to us its way too early for us to any make kind of comment on whether that's one, we do or don't have interest in. Obviously, we will look at it, just like we're going to look at any other opportunity that we think is meaningful. But we just don't have an opinion right now David.

David Joyce - Tabak and Company

Thank you

Operator

Your next question comes from the line of Romeo Reyes

Romeo Reyes - Jefferies & Co.

Hello. Can you hear me.

Brett McCants

Yes.

Todd Holt

Yes.

Romeo Reyes - Jefferies & Co.

Okay. I have a couple of quick questions for you. Todd, first can you give us a same-store revenue growth that you experienced for the year and also for the quarter, I missed that and if you went through that I apologize. Second question is with respect to I guess the stimulus packages out there, based on your '02 experience, the last time we had a stimulus packages like this, did you see an up tick in your RGUs or customer growth in '02 that you would expect in '08?

And then just question on the ARPU lift from the promotional discounts that are rolling off, can you give us, perhaps the percentage of your base, your customer base? Either your basic subs or promotional packages right now and sort of what's the average discount there?

And then the last one just goes back to your free cash flow, it seems like based on our reading of the credit agreement, at the end of this year, you would almost enough cash to probably about 20% of your stock, if you chose to do that, have you guys been approached at all by private equity community about potential taking that company private.

Todd Holt

Romeo, I will take your first question and your last question, and make sure I remember all these and Roger and/or Brad may fill in, in between. On your first question which was the same-store sales type question, you did not miss that. We do not disclose the same-store sale or the organic growth numbers. I can give you some color on that however, and if you had looked at our business just the legacy Knology organic part of the business, the numbers are very good.

We're certainly experiencing high single-digit top of the line growth and 20% or slightly north of 20% on EBITDA growth and that would be fair to look at on a year-over-year and quarter-over-quarter basis. So we feel very good about where we are from the old legacy Knology business and this really has been great balance between that organic growth and being able to compliment that organic growth with some accretive growth from the acquisition. So we feel good about that.

Your last question on the cash, you're right the credit agreement actually dictates that by March 31st of '09 that we payout 50% of excess free cash flow from the numbers generate in calendar '08. And the definition of excess free cash flow from the credit agreement perspective is a little different than ours. If there was any debt financing or any other acquisitions, the cost related with those transactions would be deducted from the excess free cash flow but let's just say there is none of that activity.

So we'd be looking to pay down about $25 million by no later than the end of March from a delevering perspective. As far as the stock buyback, I mean, obviously, we feel like from evaluation perspective, that could be a good return based on where the stock price is. However, our credit agreement does not allow us to buyback stock. There are certain restrictions on investments and payment that can be made and the agreement does not allow us to buyback stock you know better than I do where the credit markets are today.

You could always go back to the lenders and negotiate a waiver or an amendment to be able to do that. But based on where debt is trading, you'd spend all of your capital but you wanted to use to buyback stock, you'd spend all that capital, obtaining an amendment or waiver, so that just doesn't make sense at this point in time. And then I think that covers first and last questions

Rodger Johnson

The other things, I'll be honest with you. I haven't had any experience with what a stimulus package does in this marketplace. So I don't know if the economic stimulus package that has been put forth by the government really will change any behavior out there or not. I'll tell from a forecasting standpoint, we haven't baked anything in that would imply that would have an effect. And from a promo rollout standpoint, we have in the range right now between 20,000 and 25,000 customers that are on the triple-play packages, the $99 packages, and we have a like number that are on the double play packages.

So that's one of the reasons we'll look at. We don't think a lot of these customers go away. When its all over and done with, it's just how do we put the right program together when those roll off -- Brett, correct me I think the price point on a lot of the $99 step goes to $119, which is still below the $139 price point that some of the competitors have when their packages that are rolling off.

Remember now, in some of our markets, particularly Comcast markets, they went out and had a triple-play package as well. So they're seeing roll off just like we will see roll off a little bit later on. So it's going to be an instinct dynamic. I think your last comment about going private, people talk to us all the time about all different kind of things. I don't -- there is nothing meaningful or real out there or nothing that, we really sunk our teeth in that's got any depth to it. So I think Romeo that covers all your questions.

Operator

And sir you next question comes from the line Andrew Morey

Andrew Morey - Tartan Partners

Yes. Hi. I hope I didn't miss this earlier but did you mention the number of percent of your subscribers in either double or triple-play bundles?

Rodger Johnson

Yes, I did. Andrew, the triple-play bundle right now is at 49%, the double-play bundles are at 31% bringing us to 80% of our customer base that takes more than one service and this is the first time that we've actually crack the 80% threshold in terms of multiple services with our customer base. And that's of our residential customers obviously.

Andrew Morey - Tartan Partners

And the data adds being stronger, how for do you think, how much further do you think that can go as far as the high-speed data penetration?

Rodger Johnson

High-speed data, I think we still got a lot of room to grow as far as far as that's concerned. As a matter of fact, when we originally made our projections years ago about what we thought the level of maturity was, we though that, we would kind of see 35% video penetration and 35% voice penetration and about 20% high-speed data penetration. And our results say that we were in air on our projections for the 20% high-speed data penetration. The high-speed Internet product is much in demand right now. I'm not really sure where it caps out.

Todd Holt

Yeah. I agree, Rodger. I think there is a long runway ahead of us for continued penetration in high-speed data and that includes the residential penetration, but also largely available because businesses just have a very, very strong appetite for data at this point in addition to the residential community. So yeah, there is long runway there.

Andrew Morey - Tartan Partners

And it looks like stock-based comp picked up slightly. Did you mention what that would be roughly speaking for '08?

Todd Holt

Yeah. For '08, it's fair to think of non-cash stock compensation to $2 million to $2.5 million for the year.

Rodger Johnson

And part of that up tick was a function of the PrairieWave management people coming in the equation.

Andrew Morey - Tartan Partners

Okay. Thank you. And last question you mentioned talking about Dothan, who is your competitors again in Dothan, Alabama?

Rodger Johnson

Brett?

Brett McCants

Comcast, a little bit of Time Warner and AT&T -- CenturyTel.

Todd Holt

CenturyTel.

Brett McCants

CenturyTel, sorry.

Andrew Morey - Tartan Partners

Great. Thank you very much..

Todd Holt

You're welcome and Brian if there is any other questions, we have time for one more.

Operator

Okay. And that was the last question, sir.

Todd Holt

Okay. Very good.

Rodger Johnson

Well, guys and ladies thank you very, very much for your participation with us. We appreciate your interest in Knology and Todd and I will be available if anybody has got any one-on-one follow-up questions that you want to address with us. Thank you for time. Bye.

Operator

This concludes today's conference call. You may now disconnect.

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