Mediacom Communications Corporation Q1 2008 Earnings Call Transcript

Mediacom Communications Corporation (MCCC)

Q1 2008 Earnings Call

May 7, 2008 10:30 am ET

Executives

Rocco B. Commisso - Chairman and Chief Executive Officer

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

John G. Pascarelli - Executive Vice President of Operations

Analysts

Jason Bazinet - Citigroup

Michael Pace – J.P. Morgan

David Joyce - Miller Tabak & Co.

Richard Greenfield - Pali Research

James Radcliffe – Lehman Brothers

Ethan Lacy - Merrill Lynch

Tuna Amobi - Standard and Poor's

Operator

Welcome to the Mediacom Communications Corporation’s first quarter 2008 conference call. (Operator Instructions)

With us today are Rocco B. Commisso, the Chairman and Chief Executive Officer; Mr. Mark Stephan, the Executive Vice President and Chief Financial Officer; and John Pascarelli, the Executive Vice President of Operations. I would now like to turn the conference over to Mr. Stephan.

Mark E. Stephan

Welcome to our first quarter 2008 earnings call. In our call today we will be making statements about expected future events and financial results that are forward-looking and are subject to risks and uncertainties. Please see the reports and documents we file from time to time with the SEC including our annual report on form 10-K for a description of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements.

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

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

Rocco B. Commisso

We are extremely pleased with our results this quarter. While we expect that our performance will benefit from comparisons to the unusually weak first quarter of last year, we exceeded our expectations and delivered record RGU growth, adding 78,000 RGUs in the quarter. To put this achievement into perspective, we added 133,000 RGUs in all four quarters of 2007 put together. This quarter we even grew basic subscribers sequentially by 2,000, the first time since Q1 2005.

Unit gains together with basic rate adjustments combined to drive 10.3% year-over-year revenue growth with our total monthly revenues per basic sub increasing 14.2% to $85.45. While the strong RGU performance drove a great deal of activity, we will be able to control costs effectively as total operating costs grew by only 6.7% year-over-year.

As a result, we delivered 17.1% year-over-year cash flow growth, our highest since 2002. I should note that our results also reflect a substantial improvement in our cash flow margin from 34.9% in the first quarter of 2007 to 36% in the fourth quarter of 2007 and 37% in this quarter. We had a solid start to 2008 and although we are headed into a seasonably slow period, we are raising our full year 2008 revenue and cash flow guidance and plan to spend more to satisfy strong customer demand for HDTV and DVR set top boxes in our growing commercial enterprise business.

Mark and John will discuss in more detail our first quarter performance and the upward revisions to our 2008 financial guidance. In the first quarter we launched a slower speed internet service so we can compete more effectively with the lower priced DSL offerings. Today we are announcing that by June 30, 2008, we will deploy a new 20 megs down, two megs up internet service to over 98% of our footprint, even in some rural areas where we may only serve 50 customers.

We take great pride in this new product launch because, with the exception of a few markets, where Verizon has launched [fires], we are the first and only internet service provider that will offer a super high speed broadband product to essentially all of our customers.

I would like now to take a moment to discuss the effects of our improving operational performance on financial leverage. In the first quarter of 2007, our leverage was at 7.3 times. Even after returning $70 million to shareholders for stock repurchases in 2007, by the fourth quarter our leverage had declined to 6.7 times with a continued cash flow growth. As of the end of the first quarter, even after spending a further $13 million on stock repurchases, our leverage stands at 6.4 times down almost one turn from the prior year.

Today we are announcing that our Board of Directors has authorized an additional $50 million stock repurchase plan. At the same time as we have demonstrated in the past, we will be very careful on our liquidity position as we execute stock repurchases, making sure that we keep on track to de-leverage while deploying capital for the betterment of all our stakeholders.

Lastly, let me acknowledge our 4,400 dedicated employees in 23 states who come to work each day committed to reaching our customers’ lives with Mediacom products of the highest quality. Today, our employees are much better prepared than ever before to deliver Mediacomm’s multiple services and have demonstrated a boundless ability to adapt to continuous change in customer expectations in a competitive environment. I thank them for their dedication to Mediacom and they should stand tall and proud for the results they delivered in the first quarter of 2008.

With that, let me turn the call over to Mark.

Mark E. Stephan

It was a great quarter. Let’s get right into the details. Record RGU growth, price improvement, and a favorable comparison to the first quarter last year all combined to drive first quarter revenues higher by 10.3%. First quarter adjusted OIBDA rose 17.1% and as Rocco noted, our margin rose to 37% up from 34.9% in the same period last year. We pushed down high speed data and telcom costs and did a good job controlling expenses during a high RGU growth quarter. To a lesser extent, we benefited from non-recurring costs recorded in the first quarter of 2007.

It is worth mentioning that we haven’t seen a 37% margin in almost two years. Highlights for the quarter were digital, data, and phone customer ads, giving us a year-over-year RGU growth rate of 17.2% and a 14.2% increase in total monthly revenue per basic customer. Our total monthly revenue per RGU was also up 3.9% to $40.98.

Growth in first quarter video revenues was a very healthy 6%, mainly due to price increases and growth in digital customers and advanced video services offset in part by a lower number of basic subscribers. Our high speed data services continue to perform well with a 17.3% revenue increase for the quarter, largely fueled by a 14.7% year-over-year gain in data customers.

First quarter phone revenues grew 69.3% driven by a 65.9% year-over-year growth in phone customers. Quarterly unit ads were 19,000 which were close to what we had sequentially and in the prior year period. First quarter advertising revenues fell 2.8%, in large part due to much weaker national and regional advertising.

Excluding non-cash compensation costs, first quarter total costs and expenses were much better controlled, rising 6.7% for the quarter. This was accomplished despite greater marketing spend and other costs related to our RGU growth. We had a couple of things going our way in service costs. We significantly reduced our high speed data delivery cost and did a great job controlling the field activity cost in the face of greater than expected RGU growth. Higher unit programming cost and product delivery cost tied to customer growth in our phone service were principally behind as quarterly increase in service costs of 6.3%.

SG&A expenses were also well contained, particularly in light of higher marketing spend and they grew 7%, helped by reductions in call center telcom and bad debt costs. Interest expense fell 7.5% due to lower market rates on our floating rate debt, offset by higher levels of bank debt. We are now seeing that annual interest expense reduction that we mentioned in our last earnings call of some $20 million which will certainly help our free cash flow for 2008.

Now a brief comment on taxes, we recorded a $14.6 million non-cash tax provision in the quarter and we expect like 2007 that the full year provision will come in around $60 million to account for the ongoing differences in GAAP versus tax accounting in our indefinite-lived assets. I would like to reinforce that the real story here is our current net operating loss carry forwards of $2.2 billion which will go a long way towards sheltering future taxable income. Our capital spending for the first quarter came in at $64 million with the primary drivers being DVRs and HDTV set top purchases and network performance investments to support customer growth in our high speed data and phone services.

Overall, as we look at it, success-based CapEx was 76% of our spending in Q1 2008 as we invested heavily in advanced set tops. Even with higher CapEx, first quarter free cash flow was $7.2 million compared to negative free cash flow of $1.4 million in Q1 2007. Our other notable use of cash flow during the first quarter was the purchase of $2.8 million shares for a total price of $12.9 million. We finished the quarter with total debt outstanding of about $3,230,000,000 which was a $15 million increase from fiscal year end 2007.

This additional borrowing during the quarter essentially funded our share buy backs. Debt leverage using annualized adjusted OIBDA came down meaningfully over the past 12 months from 7.3 times to 6.4 times, even after we funded about $82 million in stock buy backs in the same time period. We continue to maintain significant financial flexibility.

At quarter end, we had available to us unused bank lines of about $602 million. At the same time, we have very manageable debt maturities over the next three to for years which we can fund through a combination of free cash flow and our unused revolvers, so overall; we remain in good shape from a balance sheet standpoint.

68% of our debt is now fixed and the current cost of debt is now at a very attractive 6.8%. Also, we are pleased to note that given our performance this quarter, together with our low cost of debt, we generated an interest coverage ratio of 2.3 times which is the highest level we have achieved in the history of Mediacom.

Now turning to our 2008 guidance, because first quarter results exceeded our expectations, we are raising revenue guidance from a range of 6% to 7% to 6.5% to 7.5% and adjusted OIBDA guidance from a range of 6% to 7% to 7% to 8%. We also expect to spend CapEx of $270 million versus our initial midpoint guidance figure of $260 million.

Even with this higher spending at $207.00 per basic subscriber, we compare favorably to the industry average of more than $230 so we believe we are being careful with our CapEx spending, making sure we balance growth capital with network investment to keep us competitive in our markets. Moreover, this incremental CapEx spending is aimed at success based revenue generating investments which are greater than anticipated RGU growth and higher spending in commercial enterprise.

We still believe that 2008 will be a high point in CapEx given what we anticipate doing with our digital transition plans this year. Looking beyond 2008, we see CapEx trending lower. Given this revised guidance, and even with the higher CapEx spending, free cash flow is expected to swing from a negative $4 million in 2007 to a positive $7 million in 2008.

Now I’d like to turn to our two bond issuers. Mediacom LC had total debt of about $1,504,000,000. Its adjusted OIBDA was $60.6 million inclusive of its quarterly cash investment income from Mediacom Broadband of $4.5 million.

Interest expense and CapEx for the quarter were $26.7 million and $27.9 million respectively. Unused bank lines totaled $340 million, all of which was available. Mediacom Broadband LLC had total debt of about $1,726,000,000. Its adjusted OIBDA was $69.7 million. Interest expense and CapEx for the quarter were $27.9 million and $33.8 million respectively. Unused bank lines totaled $247 million, all of which was available.

That concludes my part. Now I’d like to turn it over to John for his remarks.

John G. Pascarelli

We had a great quarter all around and a good start to 2008. The RGU additions recorded of 78,000 set a new record for Mediacom and tripled what we did in the first quarter last year. The basic customer gains in the first quarter of 2000 is our first quarterly gain in three years which we believe is the result of increased perception of value in our bundle packages.

This change in perception combined with our overall improvement and campaign and sales execution and our greater commitment to provide a higher level of quality service with our ever-expanding suite of products ad services has generated increased sales and lower disconnects. Average revenue per basic customer grew $10.60 or 14.2% quarter-over-quarter and in Q1 we reached $85.45.

Our strategy of selling bundled products and services is resonating with our customers, offering them tremendous value ultimately leading to higher customer satisfaction. We currently have 43% of our customers in product bundles in 84% of our phone customers take our Triple Play.

Now let me give you some color on each of our different products. Digital additions of 27,000 in the first quarter continued the momentum started in the second half of 2007 and almost matched what we generated for all of 2007. Our 4100 on-demand titles, free HDTV, and DVR give our customers a great selection of advanced digital services. This mix of products is driving greater product usage, leading to higher customer demand and better customer retention rates. This is a great combination and our customers are responding to it.

We finished the quarter at 44% digital penetration, up from 39% in Q1 2007. We like our position in the HD product category and we will focus our video product on being the best value in HDTV programming available with a no-cost transaction for digital customers.

We are expanding our free HDTV programming tier with more channel adds and most of our systems are more than halfway to our goal of having up to25 free quality HDTV channels by year end ad we are also beginning to see greater utilization of our newly launched HDTV movies on demand as well.

What we’re doing seems to matter to our customers because this quarter we had the greatest level of HDTV unit gains. HDTV and DVR customers now represent over 31% of our digital customers. You should know that with DVS, the most recently announced market additions of local broadcast HDTV, they will still be less than 50% of or footprint.

Mediacom Online turned in a great quarter with 30,000 new customers; the highest add rates since the fourth quarter of 2006. This brings our data penetration to over 24% of homes passed. As I mentioned in the last call, we have re-launched our HSD light service, targeting the price-sensitive users of internet with a fixed long term producing strategy of $19.95 per month. It’s too early to tell how successful this will be, but DSL has focused on this low speed, low price point for so long, we believe we can capture some market share.

As Rocco stated, the newly announced increased speeds of our Max product will maintain our current market lead position as the fastest high speed data product available. I think it’s worth noting that not only are we able to continue to improve our product speeds very cost-effectively, our networks allow us to push these speeds deep into small and rural communities covering over 98% of our foot print. We feel good with our competitive mix of product and pricing in the speeds of 20, 10, 8, and 3 megs, providing customers the choice to buy HSD packages that fit their needs as well as their pocketbooks.

We had a good quarter in the phone business generating a net gain of $19,000 new customers, bringing our Mediacom full penetration of 8% of marketable homes passed. Over the past year, we’ve made great progress in lower returns and tighter quality monitoring and better credit screening on new customers. We are going to re-energize Mediacom phone service with a new campaign of real customer testimonials, highlighting the cost savings and attractive features to help accelerate unit growth for greater sales.

Our enterprise business looks promising for future growth. Given our vast fiber networks, we are starting to see very attractive opportunities with large telecom carriers to transport circuits for the wireless and wire land business. We also continue to see strong local activity from healthcare, education, and the financial sectors. Our commercial phone is expected to go live in the second half of 2008. This will be a nice complement to our enterprise business, allowing us to become a complete provider of communication and data services for small to midsize companies.

Our objective in the commercial enterprise is to focus on high demand, high return areas and accelerate capital spending for the right projects. On the cost size of the business, our focus last year of improving our product and delivery costs are starting to provide real savings in a number of key areas. Our investment in an automated dispatch system is improving field productivity and helping to lower overall labor transaction costs.

In the HSD business we achieve a combination of lower bandwidth cost and lower network support cost by doing more with our own in house network management. We have lowered our telephone costs related to our call centers through better internal network routing and management of call activity. We have decreased delinquency windows in some of our markets and we are disconnecting customers early to keep balances lower, improving in both gross write offs and recoveries year over year.

We have completed a review of our billing and order processing system, and expect to see savings in both the processing costs, as well as future transaction costs, by pushing more traffic online. As we noted in our last call, we are busy with our own version of a digital transition. Aside from satisfying customers with advanced services like HDTV and DVRs, much of our incremental capital spend this year will be to rebuild, upgrade our lower capacity systems, and expand digital simulcasts while going all digital in others.

Our switch digital launch plan has begun, and we expect to be providing a good portion of our HD channels and standard DEF channels on a switch platform on three systems by year end. All of our efforts are towards a more efficient use of bandwidth so we can expand HDTV and provide faster high speed data service.

With the 2008 network planned activity, as well as our analog recapture plans, we believe our networks have the capacity required to provide a full competitive lineup in today’s environment as well as for the foreseeable future. It will also allow us to fully utilize the advanced star 3.0 channel bonding platform to maintain our market leading position in the high speed data business.

In summary, we believe we still have a window of opportunity to capitalize on a strong competitive market position in HDTV and the high speed data market. The consumer proposition of greater HDTV channels, multiple speed with lower entry level price points in HSP, combined with the cost savings in our VIP bundle package, positions us well as the best consumer value for these services.

We are going to do much better telling our story to our customers. We have increased the marketing spent to provide more direct marketing tactics. Heavy use of door to door sales and targeting direct mail combined with a greater mix of support media like telemarketing, email, broadcast TV, and other traditional media should provide a more consistent flow of sales.

Building on the service levels which was made in the first quarter, we will continue our focus on providing the highest quality of service to ensure greater customer satisfaction with all of our products. With that, that concludes my remarks.

I will turn it back to Mark.

Mark E. Stephan

We’ll take questions. I just want to make one comment. I did say our CapEx guidance was $270 million, it is $275 million. With that, Art, we will take questions.

Operator

(Operator Instructions) Your first question comes from Jason Bazinet - Citi.

Jason Bazinet - Citigroup

Given what is going on with the industry, with the strong growth of DirecTV and Verizon, AT&T and Time Warner, it seems like we are on track to add the highest level of basics industrially that we have seen in some time. You also saw market improvement on that metric. I just wondered if you have any hypothesis for what might have caused this abrupt change in the trajectory?

John G. Pascarelli

We had a raise increase in the first quarter for the first time in many years. What is happening to our industry, and particularly our company is, given the fact that we are discounting our products the consumers are focusing more on what value and benefits Mediacom brings to the market as opposed to what the usual [inaudible] for the cable [inaudible] always raise the rates on the media products.

At a $90.00 price point, to divide it by 3, comes out to $30.00 on a discounted basis, not the $50 or $55 that retail would entail. There is dramatic perception, I think, a changed perception in the marketplace that Mediacom and the cable industries bring in value to the consumer.

In fact, we just finished doing an analysis and while there’s complaints sometimes at the FCC that the cable rates always go up, very little gets mentioned, that the results of the cable industry introducing phone service nationally at a much lower price point and consequently because the phone companies have had to reduce their price to compete with us.

We estimate that just in the last year or two, the annual savings to the consumer nationally has been about $17 billion. Now that is a huge number and it rarely gets mentioned in the results of what cable industries have done in the last two years.

Operator

Your next question comes from Michael Pace - J.P. Morgan.

Michael Pace – J.P. Morgan

Given the strength in the RGUs I’m wondering were there any specific promotions in the first quarter that we did not see in the last few quarters in terms of premiums or free premiums for digital, or double play bundles for non-video customers? Maybe that is for John or Rocco.

Mark, when we look at bank amortization and the small bond comes through in the next few years, we know that the company likes to have a little bit cleaner runway. How should we think about that in terms of refinancing versus reducing revolver, which then reduces liquidity, which we know you like a lot of?

John G. Pascarelli

On the first question, I think we have done a much better job selling this quarter. Everything seems to have clicked right. We have spent because of substantial reductions in our delivery costs on the high speed data business; we took some of that money and dedicated it to marketing dollars, direct sales activity, and direct mail campaign. All our calls are employee based; our sales call is providing a dividend.

In terms of discount, that takes place every day. We are doing the discounting today, we did it last year, and we did it the year before. The triple play by definition is a discounted package, but we have not done anything unusual to go out and get these units. If I could recap, we have had much more sales and frankly, there have been lower turnover and therefore much less disconnects. That difference provides us with our net growth.

With respect to the second question, since I know a little bit about finance, we like our liquidity where it is right now. We all know that for things we did not cause, meaning as an industry, that the debt market, the credit market, are in a financial turmoil but we are encouraged to see that since our last call our bonds have pretty much rating a par in the 9.5s when they were trading in the mid-80s to high 80s.

Just because things at least for our company, our industry, are changing for the better. We have absolutely no need right now, not in the next 12 months, not in the next 24 months, to raise any debt capital. Clearly, as always, there is a window of opportunity to raise capital. We will consider raising some money.

Operator

Your next question comes from David Joyce - Miller Tabak & Co.

David Joyce - Miller Tabak & Co.

In this first quarter with the positive $7 million in free cash flow, were there any timing items that might reverse subsequently?

Mark E. Stephan

Not really so much timing items because we do not use the cash from the cash flow statement, we take our adjusted OIBDA less CapEx less interest expense to wipe out all the changes in working capital as we go through the year. We will see. Things that will move as we go through the rest of the year will be the higher levels of capital, expenditures that are implied in the $275 million number. I think overall we are still looking at positive free cash flow for the year.

David Joyce - Miller Tabak & Co.

Marketing has been effective and you said you were going to spend some more in this second quarter. Is it going to be at levels comparable to last year?

Mark E. Stephan

We spent more marketing in the first quarter and we will spend more marketing dollars in the second quarter, relative to last year’s second quarter. As Rocco and John talked about, we did such a great job in wringing out costs on high speed and telcom that we were able to redirect some of the savings toward marketing and at the same time bring our cash flow margins higher. It is a win-win. We get the win on the units and we also get the win on the margin improvement.

David Joyce - Miller Tabak & Co.

Your RGU ads were great this quarter. Following on an earlier question, are you perhaps seeing some customers moving to multi channel service now who have perhaps been over the air only viewers, ahead of the DTV transition?

Mark E. Stephan

I just think that housing velocity, housing change, has slowed. People are staying in their homes so there is less move. When people move that is always a new decision, so if they are not moving, they are not making a new decision on their provider. That is helping. I also think with digital transition there might be a little confusion there. I also think people are going into digital TV sets, HDTV sets, and they need to step up on their service. I think it is a combination of those three. There might be some other theories.

John G. Pascarelli

I think it is too early for people to run away from losing their signals, but I do think that HD and the other things are driving people to digital.

David Joyce - Miller Tabak & Co.

On the recession that we are in, combining that with the strong advance services you sold, do you have perhaps a greater proportion of lower [npeers] on digital video and on high speed data that are added to RGU’s, but actually in the future could be upselled?

John G. Pascarelli

I do not think so. Frankly, what we have as I have mentioned already, is a dramatic perception by the customer that cable, generically, meaning cable, data and phone, is much cheaper than it has been as a stand along package if they were to buy from different providers 2 or 3 years ago. I have been in this business for over 30 years now and through the three or 4 recessions that I have encountered, cable for the most part has been recession proof.

People stay home and watch television instead of going to the restaurant or the ball game, if they do not have disposable income. The $90 is maybe the introductory price, and that is a tremendous value to the consumer, from everyone that I have had a chance to speak to. I was in the field a couple of weeks ago meeting with our technical staff and customer service staff. It is being confirmed directly from our front line people that our customers are seeing tremendous value in our products and their pipeline.

Mark E. Stephan

There is a great quote by consumers that were being interviewed. They said ‘I am not going out to dinner, I am not driving as much, I am not doing this, I am not doing that, but I am buying my $1500 high def TV set’. We have made high definition inexpensive for customers. John talked about the free HD. We are pushing that number up to 25 channels, where all customers have to do is have the high def set top box on their television and they are not paying for additional tiers.

Our competitors are continuing to charge them for those tiers. We are a very good option, and on top of that we are still the only local into local in most of our markets because they have been slow to launch market into market. This all plays to our advantage.

Lastly, we are in the Midwest for the most part, and we did not see the absolute highs in economic activity over the last several years. We are not seeing those lows, or those corrections, that are taking place and those bubbles being burst. We have steady economies in our markets. It does not help our advertising business because our advertising business is hurt by large categories like automotive and housing and furniture. By and large, we are reaping the benefits of having good economies that we serve.

Operator

Your next question comes from Richard Greenfield - Pali Research.

Richard Greenfield - Pali Research

When you look at the growth of the first quarter, obviously, well ahead of your full year, even if you back out the impact of Sinclair and the ice storms, I think you said it was about $2.5 million last year, you were still up in the mid teens in terms of your EBITDA growth in Q1.

I am curious why, then, when you look at the past nine months of the year you are only assuming your guidance is a mid single digit EBITDA growth. Is that just being conservative given where the economy is right now? Is there something fundamental that we should be looking at in the back half of the past nine months?

Mark, you commented that CapEx is up about $15 million and your EBITDA is going to be up about $5 million, in terms of the shift in your guidance. Why is the increased CapEx not translating into greater EBITDA growth? Obviously free cash flow is moving down in your analysis by about $10 million.

John G. Pascarelli

First of all, if you look at last year’s quarter related to the first quarter you will note that we grew our cash flow potentially by 11%. So we’re being very careful of not putting numbers out we can’t meet. So we’re really comfortable with the revised guidance and I’ll leave it at that.

The other thing with respect to CapEx, we generate $5 million of permanent improvement to our cash flow, that $5 million had a multiple of eight times or ten times the value of $40 million or $50 million. That’s the way we look at it. To the extent that we spent an additional $15 million, that’s a payback for a fee which is pretty damn good.

Mark E. Stephan

And Rich, one is basically the timing of that CapEx and when are you going to start to see cash flow from that CapEx and secondly on the enterprise side, John alluded to we’re having good success working with wireless companies and providing connectivity to the public’s switch network from their cell towers, so you may have capital up front from those projects but you’re getting into 5, 7 year contracts, so you’re putting the capital up front and you’re reaping the returns like an annuity over the term and those projects are very, very high return and they also seem to grow because as soon as we finish the project, connecting say 75 sites, they’re already talking about increasing the capacity on the first site so it’s not only a good annuity stream, it’s a growing annuity stream.

John G. Pascarelli

Before we get to the next question, I also want to make mention of the fact that things have been written about the effect of the Big Ten, of the NFL Network, interestingly enough, we have to deal with both of those in the first quarter and the tail end of the fourth quarter and we produced the best subscriber performance in a couple years so I do want to emphasize that our decision not to carry these two networks with the prices and the tiers that they were demanding was absolutely the correct decision and we will stay firm and unless the price changes or their demands change, we’re going to stay firm in how we approach this business going forward in launching high priced niche networks for which a very small percentage of our consumers are willing to pay but yet with respect to the two networks that want all our consumers to pay a certain price.

Operator

Your next question comes from James Radcliffe - Lehman Brothers.

James Radcliffe – Lehman Brothers

One thing we’ve been hearing from a number of operators is it seems that move churn is down in the quarter. Have you seen something similar?

John G. Pascarelli

Yes.

James Radcliffe – Lehman Brothers

And secondly, it seems for the last three months, one of your two major Iowa markets, Cedar Rapids, has had a HD local and a local option while Des Moines has not. Have you seen any variance in performance between the two since that differential started?

John G. Pascarelli

It’s still a little early but we have not seen an increase in marketing activity. The last I checked they didn’t even have all of the channels secured yet so it’s still early on but we have not seen an increase in subscriber defections. Actually HD did very well in the Cedar Rapids market.

Operator

Your next question comes from Ethan Lacey - Merrill Lynch.

Ethan Lacy - Merrill Lynch

Just wanted to touch on voice briefly, looking at the net adds, particularly in light of your data and how strong data was, it seems like looking at all my RGUs that was the only thing where you didn’t beat in what was a pretty strong quarter. Can you just talk a little bit about what your view is on that, were you happy with the adds and why did what did they come in?

John G. Pascarelli

We don’t even look. I’m glad you asked the question because we don’t provide guidance on specific products or RGU growth. It’s your statement that we didn’t beat it. We never provided guidance, number one.

Number two, we are very, very proud of the accomplishments we have made with our phone service. We just crossed the 200,000 threshold. We launched the service a little less than 2.5 years ago and frankly we’re truly pleased with the fact that today we have 200,000 subs and while companies like our competitors, like Qwest, have had the better part of two or three years to try to get for instance in the state of Iowa a state franchised for video, they still haven’t launched in one town. We have gained 200,000 customers.

The total for the industry, the thing that rarely gets mentioned again and I have to step in because everybody knows I’m deeply devoted to this industry and proud to be involved in the cable industry, last year for instance everyone’s been talking about the large entrance of video service. They gained 850,000 TV customers but guess what; they lost 3 million landline customers.

Another statistic that people are not really familiar with, we don’t brag too much about these things, but the phone industry from our analysis gained 1.5 million video customers but the cable industry has gained $15 million, 1-5, meaning ten times as much, phone lines, so we have gained 15 million phone lines and the phone industry has gained 1.5 million video customers, so we’re pretty proud, I think.

At this growth rate we’re happy because it gives us the growth and it gives us the momentum to go forward as we enter the commercial phone, as we enter as a single line which we already have commercial phone line, and as we introduce new features to our products, so I don’t think we should be apologetic. It is what it is and going on 80,000 units per year is okay.

Ethan Lacy - Merrill Lynch

Since you mentioned commercial phone, with the go live date getting closer here, can you just talk about your estimates for what the total market size you think is in your footprint and do you have any plans for what share you might be able to take?

John G. Pascarelli

I think we stated somewhere that there are about 450,000.

Mark E. Stephan

Small, medium?

John G. Pascarelli

Right, I think we stated that, even a small market share is already a significant achievement.

Ethan Lacy - Merrill Lynch

And a dollar number on those 450,000?

John G. Pascarelli

No, 250,000.

Mark E. Stephan

If you want to use industry averages it’s somewhere between $125 and $200 a month that they spend in phone, depending on the size of the business.

Ethan Lacy - Merrill Lynch

And then just if you don’t mind, lastly on the competitive environment, two things. You said DBS was at 50%, your footprint, the local to local I’m talking about.

Mark E. Stephan

Less than 50%.

Ethan Lacy - Merrill Lynch

Any rough idea what the breakout between DTV and Dish is on that?

Mark E. Stephan

It’s more DirecTV than it is Dish.

Ethan Lacy - Merrill Lynch

And then on the Telco TV side, sorry, lastly, any incremental rollouts in the quarter, anything coming?

Mark E. Stephan

The only thing we have is an expansion of FIOS in one of our small system in Delaware where they’re expanding in launching FIOS.

Ethan Lacy - Merrill Lynch

And total footprint overlap today is –

John G. Pascarelli

For FIOS? Less than 3%.

Operator

Your last question comes from Tuna Amobi - Standard and Poor's.

Tuna Amobi - Standard and Poor's

I just want to get a sense on this WiMax announcement, I know you are not part of it, but do you think it’s something that will finally provide the cable industry with some solution or what’s your take on what’s going on?

John G. Pascarelli

I’m glad you reminded me. We had a great relationship with Sprint. There are [inaudible] services, we were aware of these conversations, and we’ve been made aware of how this whole thing has been planned out.

My understanding that this venture will require or would want to have a national footprint and you can’t do it without the likes of us so [inaudible] we think that we were never involved for the right reasons and the pivot venture and that being disbanded because we don’t like the economic and the way that was being done, but I think this is very interesting and it will give Mediacom the ability to achieve the same things that the larger cable companies will be able to do and it’s just a matter of time before we get involved as opposed to will we get involved. That’s my opinion.

Tuna Amobi - Standard and Poor's

On the marketing changes, I know last quarter you had increased your door-to-door sales force significantly so I just want to get some more color as to how much that was a factor. I think you probably commented on that and I may have missed that –

John G. Pascarelli

Let me just say overall that our marketing spend as a percentage of revenue has gone up about 1%.

Tuna Amobi - Standard and Poor's

Where do you see in terms of channels, how you see that playing out, where do you see your channels ultimately settling out in terms of where your expect the bulk of the future growth or adds to come from?

Mark E. Stephan

Tuna, it’s not one channel. In this business, we have to be hitting all cylinders on all channels, all right? We have taken, we’ve specialized our CSR group and segmented out the better salespeople within that group and we have them selling to generate more sales and higher close rates. We have more direct salespeople out in the road, out pounding doors, trying to get win back and trying to continue with basic subscribers.

We’ve got telemarketing working to get upgrades of different products so it’s all of the different things and I think the difference for us, I think we’re doing today; we’ve taken a more disciplined approach. We’re hitting the market more consistently with our marketing pieces and our marketing message, driving a more consistent flow of sales, and it’s just all about a re-evaluation that we made last year of our approach and the changes that we’ve made that I think has really helped us deliver this increased activity.

Tuna Amobi - Standard and Poor's

[inaudible] apples to apples, right, [inaudible] had to do with the rate increases. If you ex out that factor what was it growth, assuming that the timing of the rate increases were comparable, you still expect to be in that double digit?

John G. Pascarelli

I think I would have to take out my calculator. I think you should take out about $1.50 from that.

John G. Pascarelli

Let me make one other mention because Mark alluded to on a speech. I’ve been borrowing money in the cable business either at Mediacom or Cablevision for over 22 years and always managing a leverage capital so I think this is the first time in my recollection that we achieved [inaudible] ratio of 2.3 times either at Mediacom or Cablevision.

That’s a significant accomplishment. A lot of it has to do clearly with how we manage our capital structure, the de-leveraging that’s taking place in our company, and our phenomenal financial position that we’re in. I just want to make mention of that because I remember when PCI caught the 2.3 times coverage ratio that they were rated less than great by the rating agencies where they already, they may not investment great but surely are much better financial position than we were only a year ago.

Okay, with that, I think we’re finished, and I want to thank everyone for joining us today and I look forward to seeing you in a couple months.

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