Mediacom Communications Corp. Q4 2007 Earnings Call Transcript

Executives

Rocco Commisso – Chairman and Chief Executive Officer

Mark Stephan – Executive Vice President and Chief Financial Officer

John Pascarelli – Executive Vice President of Operations

Analysts

Matthew Englehart – [Sanctity?]

Richard Greenfield - Pali Capital

Tuna Amobi - Standard & Poor’s

Ethan Lacy - Merrill Lynch

Jason Bazinet - Citi

Bryan Kraft - Credit Suisse

Michael Pace – JP Morgan

Mediacom Communications Corp. (MCCC) Q4 2007 Earnings Call February 26, 2008 10:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Mediacom Communications Corporation Fourth Quarter 2007 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.

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

I would like at this time to turn the conference over to Mr. Stephan.

Mark E. Stephan

Thank you Dave. Welcome to Mediacom’s fourth quarter and year-end 2007 conference call. In our call today we will be making statements about expected future events and financial results that are forward-looking and are subject to risks and uncertainties.

Please see the reports and documents we file from time to time with the SEC, including our Form 10-K, for description of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

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

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

Rocco B. Commisso

Thanks Mark and good morning everyone and thank you for joining us as always. I would like to provide some perspective on the year-end fourth quarter results and what we expect in 2008. Mark and John will review our results and plans in more detail.

2007 was surely more difficult than we had expected. We had to overcome our retransmission consent dispute earlier in the year which greatly disrupted our operating momentum, but we finished the year with solid results.

In the fourth quarter we generated cash flow growth of 7.7% and net RGU gains of 51,000. Both metrics were the highest of any quarterly period, made possible in part by dramatic reduction in basic subscriber losses.

Our product mix continues to diversify away from our traditional video service and toward our advanced broadband services, Mediacom Online and Mediacom Phone, which together generated 27% of our revenues in the fourth quarter compared to just 8% in 2002.

In 2007, our efforts to drive more bundled households worked, with 41% of our customers taking two or more products from us, up from 35% in 2006. Moreover, we grew our installed DVR and HDTV customer base by more than 50% and expect this trend to continue.

Our high-speed data and phone services turned in good results, and given our current penetration levels, as we look forward we see plenty of market share gains for us.

We’re also seeing positive results from investments we have made over the past couple of years to raise customer satisfaction and improve network reliability. While we still have room to drive customer satisfaction levels higher, we’re moving in the right direction as we’re seeing meaningful reductions in voluntary churn rates across our products and services.

As we move into 2008 we are going to take an even more aggressive stance in marketing and sales including satisfying the built-in demands for our DVRs and HD services and devote more resources to customer care. At the same time, we will be making additional network investments under our plans for a digital transition including increasing HD channel capacity.

We expect to increase our 2008 CapEx spending by about $30 million or from about 18% to 19% of our revenue, driven substantially by expenditures related to the digital transition.

This increased capital spending is directed on a lot more digital simulcasting; upgrading bandwidth capacity in several lower capacity cable systems; going all digital in some systems beginning our switched digital video initiatives and FCC mandated requirements.

We also expect to be level this year with 2007 on our success day spending as demands for HD set top boxes and DVRs remain very small.

Despite our plan to increase capital expenditures in 2008, we expect a positive swing of $18 million in free-cash flow in relation to 2007. The increased capital expenditures will be funded by our anticipated growth in operating cash flow and an expected decline of $20 million in interest expense.

Please note that 2008 is a heavy CapEx year for us and we expect spending to trend downwards in 2009 and thereafter. So, our expectation is that free cash flow will grow in a faster pace beyond 2008.

I will like now to take a moment to discuss Mediacom’s solid financial position against the backdrop of what seems to be a total meltdown in the credit market. As you know, beginning in the fourth quarter of 2007 the high-yield and bank loan market have experienced significant turmoil.

Most non-investment grade issuers have had limited or no ability to raise capital and those that have done so, the terms and conditions have been very costly. Given that there is no visibility in the market, it is important that I reinforce the solid financial position we enjoy today.

As you know, at Mediacom we’ve always attempted to maintain a strong liquidity position and our strategy strongly serves us well today. At year end 2007 we had $645 million of unused and available revolving credit lines. We have no significant debt maturities before 2011 and our overall cost of debt is currently below 7%.

So, not only are we well positioned to weather this credit storm from a refinancing perspective, but the recent dramatic drop in the price of our debt securities is giving us the opportunity to revisit our liability management strategy to see whether it’ll be more advantageous to buy back debt versus our common stock, while preserving (ample?) unused credit lines well into the future.

With that, I would like to turn the call over to Mark to review in more details our fourth quarter and full year results and financial position. Thank you.

Mark E. Stephan

Thanks, Rocco. RGU growth, together with some ARPU improvement throw fourth quarter revenues higher by 6.2%. Fourth quarter adjusted OIBDA rose 7.6% as costs were better controlled, with the margin coming in at 36%, up from 35.6% sequentially and from 35.5% in the fourth quarter last year.

Full year revenues came in at 6.9% higher than last year compared to our guidance of 6.5% to 7%. Full year adjusted OIBDA rose 4.2% over 2006 and this too was within our guidance of 4% to 5%.

Highlights for the quarter were data and phone customer adds and an 11% increase in total monthly revenue per basic customer to $83.49. Our total monthly revenue per RGU was up nearly 1% to $41.07.

Growth in fourth quarter video revenues was 1.5% mainly due to unit growth in our advanced video services and to a lesser extent annual video rate increases offset in part by a reduction in basic subscribers.

We lost 7,000 subscribers during the quarter but this was half the amount we lost in the prior year period. We gained 12,000 digital customers, ending the year with a 42% penetration.

Our data services continue to perform well with a 16.1% revenue increase for the quarter, largely fueled by a 13.8% year-over-year gain in data customers. Our penetration of homes passed was 23.2% up from 20.4% in the prior year period.

Fourth quarter phone revenues grew 71.4% with quarterly unit adds of 20,000 which was close to what we added sequentially and in the prior year period. While adding some 250,000 new marketable phone homes during the year, we pushed phone penetration higher to 7.3% from 4.6% at the end of 2006.

Fourth quarter advertising revenues fell 5.2% in large part due to much weaker political advertising, compared to the prior year period when we had significant political spending.

Excluding non-cash compensation costs, fourth quarter total costs and expenses were better controlled, particularly SG&A expense, rising 5.4% for the quarter. Higher programming and product delivery costs to accommodate high speed data and phone customer growth were principally behind the quarterly increase in service costs of 9.5%.

A 1.6% decrease in quarterly SG&A and corporate expenses was primarily driven by lower call center telecom and advertising sales expenses, partly offset by higher marketing, bad debt, and third party call center customer support.

Our interest expense rose 2.2% for the quarter primarily due to higher levels of debt. We recorded a $14.5 million non-cash tax provision in the fourth quarter, and the full year provision came in at about $58 million to account for the ongoing differences in GAAP versus tax accounting in our indefinite live to assets.

The real takeaway here is that we currently have a net operating loss carry-forward of $2.2 billion to shelter future taxable income.

Our capital spending for the third quarter came in at $44.6 million, and for the full year, we spent $227.4 million which is slightly above our 2007 guidance of $225 million. Our spending in 2007 represented 18% of revenues.

For the full year, the big items in CapEx were greater usage of outside contractor for customer installations, more spending on DVR and HD set-tops, and more investments in network performance, which includes spending for high-speed and phone customer growth, and capacity additions for the Mediacom One network, which carries high-speed data and phone traffic in our digital video transport system, including VOD and HDTV channels.

Overall, as we look at it, success-based CapEx was 60% in 2007, up from 62% in 2006. With much lower CapEx, fourth quarter free cash flow was $16 million, compared to near break-even in the prior year period.

With annual CapEx and interest expense higher in 2007 by a combined total of $29 million, free cash flow for the full year was a negative $3.6 million against free cash flow of $6.6 million in 2006.

During the fourth quarter, we purchased 6.5 million shares for a total price of $30 million. For the year, we bought back about 11.2 million shares or about 10% of total shares outstanding for $69 million.

We finished the year with total debt outstanding of about $3.215 billion, a $71 million increase from the fiscal year-end 2006. Together with $32 million of net proceeds from the sale of Cable Systems, this additional borrowing during the year funded our $69 million in stock buybacks, a small cable system purchase costing $7.3 million, and a reduction in working capital liabilities.

As Rocco noted, against the backdrop of this terrible credit environment, our financial position is solid. At year-end, we had available to us unused bank lines of about $645 million. Equally important, we have very manageable debt maturities over the next three to four years, which we can fund through a combination of free cash flow in our unused revolvers.

Therefore, we have no need to go to markets today anytime soon and we can be opportunistic when it comes to using our liquidity and free cash flow.

69% of our debt is now fixed and the current cost of debt is now below 7%, which is very favorable, particularly given the current market conditions.

Holding interest rates where they are today, this cost of debt will permit us to see a reduction in annual interest expense of around $20 million which will certainly help in our free cash flow story. So overall, we will remain in good shape from a balance sheet standpoint.

Our guidance for 2008 calls for a 6% to 7% growth in both revenues and adjusted OIBDA with the highest growth rate anticipated in the first quarter. Consequently, we expect first quarter debt leverage to be 6.5 times, down sequentially, from 6.7 times.

We also expect to spend $255 million to $265 million on CapEx, or 19% of our revenues, as compared to 18% in 2007. As Rocco noted, this higher spending will fund investments in the digital transition, including more systems with digital simulcasting, upgrading our lower bandwidth in smaller systems, going all digital in other systems, and beginning to push towards switched digital video and rolling out additional HD channels.

As well, we will spend money on FCC mandate requirements like separable security and digital must-carry. These investments account for substantially all of the increase in CapEx spending from 2006. Our spending also covers expected growth in RGUs including DVRs and HD set-tops.

We believe 2008 will be a peak year in cap spending. So looking beyond, we expect CapEx to trend lower both in dollar terms and expressed as a percentage of revenue.

Based on our expectations and even with higher CapEx spending, free cash flow is expected to swing from a negative $4 million in 2007 to a positive $14 million in 2008. Another way of looking at 2008 is that we expect our $20 million in annual interest savings to cover most of the increase in CapEx spend.

Now turning to our bond issuers, Mediacom, LLC had total debt of about $1.505 billion. Its adjusted OIBDA was $56.4 million, inclusive of its quarterly cash investment income from Mediacom Broadband of $4.5 million. Its interest expense and CapEx for the quarter were $28.9 million and $18.9 million, respectively. Its unused bank lines totaled $345 million, all of which was available.

Mediacom Broadband had total debt of about $1.710 billion. Its adjusted OIBDA was $67.7 million. Interest expense and CapEx for the quarter were $30.2 million and $24.4 million, respectively. Its unused bank lines totaled $300 million, all of which was available.

Now, I’d like to turn it over to John for his remarks.

John G. Pascarelli

Thanks, Mark. We finished 2007 on a much better note than we started the year. The RGU additions in the fourth quarter were 51,000 was the best quarter for the year. For the full year, we added 133,000 RGUs representing a 5.1% growth rate over 2006.

Basic subscriber loss in the fourth quarter was 7,000 compared to 14,000 for the same period in 2006. This improvement came as a result of a much lower disconnects compared to the prior year when we had a retransmission consent dispute.

Digital additions of 16,000 for the quarter were our best during the year and we finished at 42% penetration, up from 38% in 2006. But within the digital, it’s the DVR and HD services that are delivering a significant portion of our overall revenue growth.

Together DVR and our HD customers grew over 50% in 2007 and at year-end represented about 29% of our digital customers. We recently added at no charge to our digital customers several popular HD programming services, and we are adding more, and by year-end, giving our digital customers up to 25 free quality HD channels to choose from.

So we’re getting our competitive ducks in a row on the video front, and you should know that with DVS most recently announced market additions of local broadcast HD, they are still only 30% of our footprint.

Mediacom on-demand is making a difference with over 4,000 titles to choose from. The on-demand household is averaging 17 visits to the Mediacom on-demand a month. We are only going to make it better with the roll out of HD movies on-demand, and we expect to continue to expand that offering throughout the year.

Now, let me talk about the digital transition and what it means to us. We are going to stay competitive, and we are going to make enhancements like digital simulcast, rebuilds and upgrades of our smaller systems, all-digital convergence and adding switched digital platform.

Digital simulcast is now available to 25% of our customers, and we expect to increase this to 50% by year-end 2008, improving reception quality in all channels, allowing us to buy lower cost boxes.

Our network enhancements like the all-digital roll out and our push to get local broadcast HD on our networks has positioned us well to minimize our costs associated with the changes in most of the company.

However, we will have to upgrade a number of small 550 megahertz systems, and we will be taking some of our smaller systems all-digital as well by year-end to comply with the new FCC rules. The side benefit of this is it will help us expedite the delivery of more HD channels to those systems, building a more competitive product.

Our switched digital launch plan has begun, and we expect to be providing a good portion of our HD channels and standard digital channels on switched platform in three systems by year-end. With the planned activity of our networks, we have the capacity required to provide a full competitive lineup in today’s environment as well as into the foreseeable future.

Mediacom Online turned in another solid quarter with 22,000 new customers, bringing our data penetration to over 23% of homes passed. We started testing our Mediacom Powerboost product in January, which allows our customers to double their speeds when capacity is available. We are planning a full launch to the VIP customers in Q2.

The re-launch of our HSD Light service is scheduled for the first quarter, targeting the more discriminate uses of Internet with a fixed long-term pricing strategy of $19.95 a month with a competitive speed. We believe that we are winning the high-end user battle, but DSL has focused on the low price point and with this product we can capture market share.

We are planning a Docsis 3.0 lab test and we are closely monitoring the live trials through our relationships with CableLabs. We feel good with our current competitive product speeds of 15, 10, and 8 megs and we are still the most robust networks available in our markets.

We had a nice quarter in our phone business, generating a net gain of 20,000 new customers, bringing our phone penetration to 7.3% of marketable homes passed, and phone is now available to 90% our footprint.

We have made good progress in lowering churn through tighter service quality monitoring and better credit screening of our new customers.

In Q2 2008, we will introduce an International rate plan priced to add value to our service and to attract new customers.

Our commercial telephone product test is going well. We expect to be fully active in the commercial market in the second half of 2008, opening up a large new revenue opportunity. This will be a nice compliment to our Enterprise business which we expect to perform well in 2008.

Our Advertising business was hurt by comparison to 2006 over a much stronger political ad market from local campaigns. Overall 2008 had some political activity, but we are concerned with some large categories like automotive and real estate. In 2008 we are looking to increase our activity in both the on-demand and Internet advertising space.

Our overall average revenue per customer increased $8.25 in the quarter-over-quarter and in December we reached $83.50. Our triple-play household’s average revenue per customer is $140.00 a month and we continue to see customers with multiple products paying higher rates and staying with us longer.

We currently have 12% of our customers in the triple-play bundle, up from 6% a year ago, and double-play bundles increased to 41% from 35% a year ago. Our strategy of selling bundled services is resonating with customers, offering them the best value, ultimately leading to higher retention.

We re-evaluate all of our product and delivery costs to find more cost effective solutions. For example, we are doing more with our own in-house network management and we expect to see meaningful savings in our overall IP network costs in 2008.

We have lowered our telecom costs related to our call centers through better network routing and management of our call activity. We have decreased the delinquency windows in some markets and we are disconnecting customers early to keep balances lower. We have intensified our field collection efforts with a greater level of personal field contacts to maximize our saves.

In summary, the consumer proposition for both greater free HD channels, multiple speeds with lower entry level price points in HD, combined with the cost savings in our VIP bundled package, position us well with the best value for these bundled services in our markets.

Building on the improvements made in 2007 we will continue with our focus of quality of service to ensure customer satisfaction with all of our products and services helping to build solid long term customer relationships.

We are refining our marketing, pricing, bundling tactics all designed to target households with our greatest selection in attractive price points. We have transitioned our CSR group into sales specialists and we have increased our direct door-to-door sales force by 25%, which should provide overall greater sales from our two primary sales channels.

In addition, we anticipate increasing our overall selling of bundled packages through better sales supervision. We have increased our overall marketing spend to provide for more direct marketing tactics, heavier use of targeted direct mail combined with a greater mix of support media like telemarketing, e-mail, broadcast TV and other traditional media should provide a more consistent flow of sales.

The entire team is committed to maximizing every transaction in 2008 increasing market share of every product line with the emphasis of selling bundles wherever possible.

Now that concludes my remarks, let me turn it back to Mark.

Mark E. Stephan

I think we can open it up now for Q&A.

Question-and-Answer Session

Operator

Our first question comes from the line of Michael Pace – JP Morgan.

Michael Pace – JP Morgan

Thank you, couple of questions. The first is on CapEx; you did a good job laying out for us why CapEx will be higher, but as you look beyond 2008 some of your remarks were going all digital in some systems, beginning to push switched digital, simulcasting and upgrading. Why wouldn’t those continue beyond 2008?

Rocco Commisso

We said in our comments that we foresee 2008 as being our peak year and then with reduction, we’re going to have much less upgrades to be done. Whatever one-time investments we have to make in our network for our digital transition would have been done. And frankly, we see a reduction in the flip-top boxes going forward. Combination of those, plus an additional investment we might have to make, we frankly see a reduction in CapEx beyond 2008.

Michael Pace – JP Morgan

Then just any more color on how many systems, and I know for competitive reasons you don’t want to give which ones, but what percentage of your systems in ‘08, you may consider going all digital or switched digital and just to give us a sense of what might be left, going forward?

John Pascarelli

I don’t want to confuse the point. We’re talking about some small systems that are not what we consider our One network, the main platform. So it’s not a significant portion, these systems actually have high digital penetration and we could expedite delivery of HD services as well as comply with this by converting it to digital, but it’s not a huge percentage of our customers.

Michael Pace – JP Morgan

Since you brought up liability management in your prepared remarks, I’ll ask a question on that one. You’ve always had a surplus of liquidity. Obviously, in markets like this, this is a wise decision. Now that the company is turning free cash flow positive, where would you take that liquidity in the context of your view of free cash flow over the next few years?

Obviously, bank amortization, but where do you feel comfortable bringing that liquidity down now that we’ve seen you turn the corner on free cash flow?

Rocco Commisso

As we stated in our remarks, Michael, again, we have almost no visibility as to when the refinancing windows will open up. So first, our highest priority is to conserve as much as possible whatever the liquidity we’ve been able to raise in the last five years.

Within the context what we think the liquidity’s appropriate, whatever the appropriate liquidity should be, we’re already looking, giving the price of the bonds prices have dramatically come down, as to whether, to the extent that we have the want, the need to buy back some of our securities, whether it should be bonds more than stock.

I can tell you that in the first quarter we had dramatically reduced the stock buyback program. I’ll leave it at that because to say anything different would not be appropriate right now; you’re aware, maybe some other people are not, but we have seen a dramatic reduction in the price of our bonds, so that may be a better investment today than our stock.

Michael Pace – JP Morgan

Great, thank you.

Operator

We now have a question from the line of Bryan Kraft - Credit Suisse.

Bryan Kraft - Credit Suisse

Thank you. I just wanted to actually follow-up on the last question. I was wondering if you wouldn’t mind, if you could be a little more specific in terms of quantifying where you’ll be at the end of the year in terms of percentage of homes with switched digital available, percentage of homes upgraded to at least 750 megahertz and also, just how extensively you plan to deploy Docsis 3.0?

And then just a quick second question, I wanted to just ask what are your expectations for programming expense increases this year? Thank you.

Rocco Commisso

On the programming side, they are coming down a little bit, but unfortunately we have a new line item that we have to deal with going forward, which is retransmission consent. So part of the reason why our growth rate, cash flow is what we’re saying it is in our guidance, is to make room for some incremental costs we will have on the retransmission consent.

So on the non-growth cash side, the per unit cost should be similar to what we have experienced in the prior years. Which is in the 7% to 9% neighborhood; we haven’t seen those type of growth rates because we have all subs. But those are the numbers on the programming side.

With respect to the switched digital, let me get back to look at the data but anyway we’re not going to identify right now exactly what we’re going to be doing there. For a variety of reasons, including we have a filing at the FCC, we don’t know what’s going to happen there. Whether they’re going to give us the okay to go and do what we asked them to do, but we’d rather not identify exactly what we’re going to be doing.

But over 80% to 90% of our network is 750 and above. We do have some 550 and the lower systems, but a very small part of that. And our strategy depending on the system, depending on the location, depending on the density, depending on the penetration rate, in some areas we’re going to go all digital and some other areas we’re going to do an upgrade. And it’s an investment decision that we will undertake based on the numbers that we see.

John Pascarelli

And one thing that you can keep in mind about the way we’re going to rollout switched and throughout the order, we have built two networks and we’re pushing digital out of two networks servicing over 80% of our customer base and we’re going to be able to overlay switched within those networks when it’s appropriate.

We’re doing some testing and other things to build that knowledge to understand the impact of it all, but we will be rolling out through the One net, allowing switched to be able to be distributed throughout the entire network.

Bryan Kraft - Credit Suisse

Okay great, and if I can just clarify too, Rocco, your response on the programming question, 7% to 8% per sub, is that inclusive of the re-trans or would the re-trans be on top of that?

Rocco Commisso

I think the re-trans will be on top of that. But that’s not a huge number right now.

Bryan Kraft - Credit Suisse

Okay, thank you.

Operator

We have a question from the line of Jason Bazinet - Citi.

Jason Bazinet - Citi

Thanks so much, two questions. You mentioned you’re getting a bit more restrictive in your disconnect policy and I was just looking through the Comcast and EchoStar 10-K and their bad debt expense both went up about 50% to 55% for each company.

And my question is, are you seeing, to the extent that your bad debt expense went up as well, are you seeing an increased reluctance on the part of customers to pay their bill or is most of what we’re seeing is at the industrial level do you think; companies getting aggressive with more restrictive policies regarding disconnects. That’s my first question.

Mark Stephan

We saw an increase in 2007, but it was an increase based on phenomenal bad debt experience in 2006 ...

Rocco Commisso

Meaning good experience.

Mark Stephan

Yes, phenomenal meaning very good experience in 2006, probably the best we’ve ever seen.

Jason Bazinet - Citi

Okay.

Mark Stephan

So we did go up from 2006 and I think we’re more normalized in 2007. So I’m not going to say that we saw the same kind of experience that DISH and Comcast had seen. In some markets where we’ve always had chronic bad debt issues, we have tightened the window. Not because of what’s happening in the general economy, but because it makes good business sense to stop chasing marginal customers when they cost you a great deal of money in the end.

Jason Bazinet - Citi

Okay. And then my second question, I think, Mark you said that for ‘08 the way we can think about it is the interest savings will essentially offset the incremental CapEx for…?

Mark Stephan

Yes, most of it. We spent $20 million in interest and we went up CapEx about $30 million.

Rocco Commisso

Yes, and then you also have at the mid-point of the guidance, $30 million in OCF. So, you got OCF growing $30 million, we got interest expense reducing by $20, that’s $50 million. That minus the increments of CapEx gives you the positive swing in free cash flow.

Jason Bazinet - Citi

And my question is, on the interest savings, is a lot of that a function of the reduction in LIBOR?

Rocco Commisso

Yes, exactly. Just to make it an easy analysis, 31% of our debt is flowing.

Jason Bazinet - Citi

Okay.

Rocco Commisso

So as you take 31%, we’re already seeing a 200% reduction in the cost of debt.

Mark Stephan

200 basis points.

Rocco Commisso

200 basis points. So 31% of 200 basis points is about 60 basis points. On your total debt, you’ll see you get very close to that $20 million.

Jason Bazinet - Citi

My philosophical question is, if we move into ‘09 and the CapEx comes down, isn’t there the risk that LIBOR moves up and we end up with as much benefit as we would think?

Rocco Commisso

Yes and no. First of all, we have some pretty expensive swaps; I used to do this for a living, so I am qualified to talk about this. But we got – round numbers − 1/3 of our debt is totally fixed, which is our high yield debt. That’s got a weighted average cost of about 9%.

The other 1/3 of our debt is swaps at very high swap rates. They were done back when interest rates were high and the swap rates were high, which will be expiring at some point in time in 2009.

But the weighted average quote for the swap rate it’s about 200 basis points higher than what the LIBOR rate is. And then you got 1/3 of our debt that is currently flowing. Where we’re seeing the benefit right now, the interest rate reduction is the one that’s flowing.

As you get into 2009, even if the Fed were to reverse itself, we don’t see rates going up to 5.5% in 2009. So a combination of our continuing liability management to access the market to do some swaps.

Our strategy, our philosophy over our 10 years has always been to do more than 50% fixed, if you will. And probably our average has been 60% to 70%, if I were to look over the last 10 years. Even if there’s a reversal in interest rates, we don’t see the interest rates going up to over 5%, meaning the LIBOR rate. Now the LIBOR rate right now is 3%, should give us an additional benefit, I would hope, in interest rate reduction in 2009.

So in 2009, we will have increased cash flow, we hope, decreased CapEx and even decreased interest expense, which means there could be a dramatic improvement in free cash flow.

Jason Bazinet - Citi

Okay, very helpful. Thank you.

Operator

And our next question comes from the line of Ethan Lacy - Merrill Lynch.

Ethan Lacy - Merrill Lynch

Just wanted to get back to the liability management briefly if you don’t mind. We know you’re not restricted from using your revolver capacity to repurchase your equity. Is there anything in the credit facility which would limit your ability to use revolver for repurchasing bonds?

Rocco Commisso

No that’s pretty much the same. Actually, it’s even easier because in buying bonds we don’t have to move the restricted payments away from the bond level.

Ethan Lacy - Merrill Lynch

Fair enough, thanks, Rocco. And then as far as your appetite for potentially buying back bonds in the open market, do you feel like that’s something you would largely try and do with the free cash flow? Or are you not adverse to using the revolver for that purpose?

Rocco Commisso

We have on purpose not delineated our strategy. Although what has been my remark is that we are looking at it very seriously right now.

It’s fair to say that this opportunity has presented itself to us in the last month or so, month and a half. We’re not any longer just limiting ourselves and thinking about buying back stock. But you know, the bond investment may be just as good as buying back stock.

Then it also gives us the ability to deleverage, because when you buy debt with debt on a percentage of face value and a much lower interest clause, there’s a dramatic improvement on leverage for whatever debt you buy.

Ethan Lacy - Merrill Lynch

Are you indifferent to coupon versus dollar price when you look at your existing debt securities? On the bond side.

Rocco Commisso

I can’t give you any more information. As a matter of fact we haven’t done any and we don’t know what we’re going to be doing.

Ethan Lacy - Merrill Lynch

Okay. And then if you don’t mind, just briefly on the competitive front, when you were speaking about the local, on the DBS side, just achouse cleaning question; is the 30% of the footprint, is that today or is that where you expect to be in the near term?

Rocco Commisso

With all their public announced launches, that’s what we get to. It’s not today.

Ethan Lacy - Merrill Lynch

Okay, great. And then just thinking about the CapEx initiatives and the switched digital; when you’re looking at your long term appetite for linear channels on the HD side, I think you said 25 for year end, obviously your DBS competitors continue to roll out, taking your HD VOD advantage into consideration, where do you think you feel you need to go?

John Pascarelli

Let me just clarify one thing for you. The 25 is free HD. That will be on the lineup available at the entry level, that’s for the cost of a digital box. We’ll have closer to 40 services on the network at that point when you add them all together, when you count the premium services and the other things together.

I think the one thing that we’re doing is, we don’t want to play the tonnage game in HD. It takes up a lot of network capacity and we want to put on services, and if you look at what we’ve launched in any of our lineups, it’s the most highly viewed services that we’re putting on to our network.

It’s the ones that customers wants. Obviously it’s driven by sports, and then it’s movies, and then obviously the other popular television shows, the broadcast stuff. So we focused on putting on what people are watching in HD rather than trying to get out there and sell tonnage.

Ethan Lacy - Merrill Lynch

Fair enough, thank you. And then just lastly with respect to guidance, we had a couple of revisions last year. Are you being more conservative in this year’s guidance in lieu of last year’s experience?

Rocco Commisso

That’s a good point, surely. When we put out the guidance last year, we did not expect to lower it and I don’t expect to lower it this year. Whether it’s going to get increased, I don’t know.

I think the issue for this year, frankly, we’re going to have a great first quarter. Mark might have alluded to that, but we don’t have the visibility that we otherwise would have in prior years with respect to the economic situation.

So far in the first two months, we’ve almost finished the month of February, we haven’t seen any negative impact on our RGU performance as a result of the economic situation. But I can’t forecast six, seven, eight months down the road.

So that’s part of the reason why the guidance is what it is. As we get into the year, we’ll look at everything, but give us a couple months, at least three months, four months, to see what may happen out there.

Now let me just on the CapEx front, if it hasn’t been stated, that even moving up our CapEx to this new number, that is the highest number that we would spend, going back to 2002.

So we would have had five years where our CapEx was lower than $260, the midpoint of our guidance, but even as a $260 on a per subscriber basis, it’s really $200 per sub and both Comcast and Time Warner in the last two years, including what they’re forecasting for 2008, are averaging in the $250 level.

So it’s still lower than what the larger companies are doing, which shows you that we’re really managing and very disciplined in how we spend our money, even with the increased guidance.

Ethan Lacy - Merrill Lynch

Thank you.

Operator

Our next question comes from the line of Tuna Amobi - Standard & Poor’s.