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Mediacom Communications Corporation Q2 2008 Earnings Call Transcript

August 07, 2008 | about: MCCC

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Mediacom Communications Corporation (MCCC)

Q2 2008 Earnings Call

August 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

Michael Pace – JP Morgan

Jason Bazinet – Citigroup

Richard Greenfield - Pali Capital

Ethan Lacy - Merrill Lynch

Tuna Amobi - Standard & Poor’s

Chris Taylor - Evergreen Management

Presentation

Operator

Welcome to the Mediacom Communications Corporation second quarter 2008 conference call. (Operator Instructions) With us today are Rocco Commisso, Chairman and Chief Executive Officer, Mark Stephan, the Executive Vice President and Chief Financial Officer, and John Pascarelli, the Executive Vice President of Operations. I would now at this time like to turn the call over to Mr. Stephan.

Mark E. Stephan

Welcome to Mediacom’s second 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 their most directly comparable GAAP measures.

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

Rocco B. Commisso

Good morning, everyone, and thank you for joining us. I’m more than pleased to report another solid quarter built upon the strong momentum of our first quarter performance. Despite tough economic conditions for most of the market industries, including companies in the media and telecommunications sectors, it has been an excellent first half for Mediacom. Given what we expect for the second half, we are raising our full year 2008 revenue and cash flow guidance for the second time this year.

Mark and John will go over in greater details our second quarter performance and company initiatives. What I will do is briefly highlight the important milestones achieved by Mediacom thus far in 2008 and put them in some form of historical perspective.

First, our basic subscriber loss was both for the [inaudible] second quarter and cumulatively for the first half of 2008 was the lowest before the AT&T acquisition in 2001. During the first half of the year, we lost 3,000 basic subscribers whereas in last year’s first half we had a loss of 36,000. Our RGU growth this quarter was a record and more than double what we grew in last year’s quarter. In the first half, RGUs rose by 120,000 or almost triple the 42,000 RGU growth achieved in the first half of 2007.

At June 30, 2008, we crossed the 100% penetration ratio of RGUs to estimated homes passed. To put this milestone in better perspective, exactly 10 years ago, when our only RGUs were basic subscribers, the RGU penetration rate for our company was 67% with a monthly revenue for RGU around $32.00 compared to $41.00 today, so over a 10 year period, we have been able to dramatically increase the RGU penetration rate and also the ARPU per RGU.

What has made all this possible is the huge investments we have made in our network, our delivery systems, and our employees, which [inaudible] us to launch a [inaudible] media services, high speed internet, and [inaudible] over this time frame. Today we are seeing the fruits of our investments, especially in relation to our direct competitors. For instance, this quarter Dish Network reported first sequential subscriber loss ever while the phone industry in general is moving access lines at an 8% to 10% annual rate. Another example is that this past quarter, Qwest launched a 20 meg internet service at a retail price of $120 per month to a de minimus percent of their footprint in Iowa and in other states. In comparison, we announced the launch of our 20 meg parts at a $60 price point and to over 80% of our footprint. No wonder, then, that we grew our high speed customers sequentially by 20,000 this quarter, [inaudible] Qwest, a company that is 10 times our size, with a [inaudible] by only 31,000.

While the [inaudible] sector in general is laying off staff, we on the other hand added more employees over the past 12 months than in any other 12 month period since our founding, bringing our total employee base to 4700. Lastly, let me underscore the critical milestones achieved with our financial position at a time when there is significant turmoil in the financial markets. Measured on a 12 month trailing basis or on the most recent quarter annualized, at June 30, 2008, our balance sheet leverage was the lowest since the AT&T acquisition in 2001. Moreover, our interest coverage in Q2 at 2.4 times was the highest ever, and our available lines of credit of $900 million gives us plenty of liquidity to continue investing for the future.

So our balance sheet is healthy, which is absolutely critical in this challenging credit environment. Our business is demonstrating once again that it can withstand and even prosper during an economic slowdown. I believe it’s our [inaudible] to consumers that is winning. We are offering good products and good service at a great price, and we will continue to make investments in our network and delivery systems to better the customer experience and keep our competitive edge all aimed at maintaining strong momentum in our operating performance.

With that, I would like to turn the call over to Mark to review in more detail our second quarter results and financial position.

Mark E. Stephan

The second quarter was a real solid follow through to our first quarter performance. Rocco mentioned our record RGU growth and much improved basic subscriber experience. Our unit gains drove second quarter revenues higher by 7.6%. Adjusted OIBDA rose 9.1%, our best second quarter growth rate since 2003. We had good control over expenses during a period where we have a lot of negative activity like seasonal disconnects, as well as additions to headcount. Consequently, we were able to push adjusted OIBDA margin higher to 37.2% from 36.7% in the second quarter of last year.

Highlights for the quarter were digital, data, and phone customer adds and minimal basic subscriber loss, giving us a year-over-year RGU growth rate of 8% and helping us achieve a 10% increase in total monthly revenue per basic subscriber. Our total monthly revenue per RGU was essentially flat at $41.27.

Growth in second quarter video revenues was 2.3%, mainly due to price increases and growth in advanced video services offset in part by a lower number of basic subscribers. We did a much better job with basic subscribers in this seasonally low period, having lost 5,000 basic subs during the quarter, down significantly from 18,000 in last year’s second quarter, and this year’s number includes about 1400 that were lost as a result of the Iowa floods in June. Quarterly digital adds were much higher than second quarter last year. We gained 15,000 compared to 2,000 in the prior year period.

Our high speed data services continue to perform well with a 15.4% revenue increase in the quarter, largely fueled by a 14.5% year-over-year gain in data customers. Quarterly high speed adds were 14,000, a little better than the 13,000 in the prior year period. Phone revenues grew 67.1%, driven by a 54.2% year-over-year growth in phone customers. Quarterly unit adds were 18,000 compared to 21,000 in the prior year period.

Second quarter advertising revenues were flat. We had a modest gain in local advertising, but it was offset by weak national and regional advertising. The automotive category, particularly on the national level, was hit hard. Excluding non-cash compensation costs, second quarter total costs and expenses continued to be well controlled, rising 6.8% for the quarter. This was accomplished despite a 10% increase in head count for our technical, customer care, and marketing groups, and costs related to our RGU growth. Higher unit programming, phone delivery and vehicle fuel costs were principally behind this quarterly increase in service costs of 8.3%, offset in part by lower high speed internet delivery costs. Our fuel costs alone were up 29% quarter-over-quarter.

SG&A expenses were also well contained, particularly in light of higher staffing expenses and marketing and customer care, growing 3.1%. But it was helped by reductions in call center telecom expenses. Interest expense fell 10.0% due to lower market rates on our floating rate debt, offset by higher levels of bank debt. This reduction in interest expense, together with growth and adjusted OIBDA, helped us achieve an interest coverage ratio of 2.4 times, and as Rocco mentioned, that was the highest we’ve seen in more than 7 years.

Now a brief comment on taxes. As we’ve done in the past, we recorded a $14.6 million non-cash tax provision in the second quarter and similar to 2007, we expect that the full year provision will come in around $60 million. This takes new account ongoing differences in GAAP versus tax accounting in our indefinite lived assets. Again, note that this is a non-cash charge and the real story here is our $2.2 billion of current net operating loss carry forwards that expire between 2020 and 2027. These NOLs will go a long way towards sheltering future taxable income.

Now turning to our announced upward revision to 2008 guidance. Given our performance to date and the outlook we have for the balance of 2008, we are raising revenue guidance for the second time this year from a range of 6.5% to 7.5% to 7% to 8% and adjusted OIBDA guidance from a range of 7% to 8% to 8.5% to 9.5%. Guidance for 2008 capital spending will stay at our current level of $275 million. As we noted on our earlier calls this year, this total spending reflects network investments we are making to ready ourselves for the digital transition including rebuild and upgrade, digital simulcast, and all digital projects. We expect our CapEx in 2009 to go back to historical levels aimed more at success-based unit growth. Our capital spending for the second quarter came in at $70.7 million and our first half spending was $134.7 million. Second quarter capital spending reflected more of our planned network upgrade and rebuild activities and to a lesser extent, DVRs and HDTV set top purchases and network performance investments. Overall, as we look at it, success-based capital was about 78% of our total spending for the first half of 2008 as we continue to invest heavily in the customer premise and scalable categories.

We finished the quarter with total debt outstanding of about $3 billion $249 million and this represents a $19 million increase from first quarter end. This additional borrowing during the quarter funded our buy back of 2 million shares for a total amount of $9.5 million and term loan financing costs of about $11 million. In May we closed on a $350 million term loan at one of our operating subsidiaries. Most of the proceeds were used to repay revolver debt without any reduction in revolver availability. Importantly, with this transaction, we improved our debt maturity profile by repaying revolver debt maturing through 2012 with term loan debt maturing in 2016. Closing the term loan facility allowed us to further improve our very ample liquidity position in terms of unused revolver lines of credit, giving us a great deal of financial flexibility.

At quarter end we had available to us unused bank lines of about $903 million. At the same time we have very manageable debt maturities over the next three to four years which we can fund through a combination of free cash flow and our unused revolvers. Therefore, we can be opportunistic when it comes to using our liquidity and free cash flow. So overall, we’re in good shape from a balance sheet standpoint. Debt leverage using annualized adjusted OIBDA was 6.5 times. Again, as Rocco noted, it’s our lowest leverage in seven years. Just over 68% of our debt is now fixed and our current cost of debt remains at a very attractive 6.7%.

Now turning to our two bond issuers, Mediacom LLC had total debt of about $1 billion $474 million. Its adjusted OIBDA was $61.6 million, inclusive of its quarterly cash investment income from Mediacom Broadband of $4.5 million. Interest expense and CapEx for the quarter were $25.4 million and $33.5 million respectively. Unused bank lines totaled $371 million, all of which was available. Our other bond issuer, Mediacom Broadband, LLC, had total debt of about $1 billion $775 million. Its adjusted OIBDA was $73 million. Interest expense and CapEx for the quarter were $28.7 million and $36.2 million respectively. Unused bank lines totaled $532 million, all of which was available and reflected the closing of the previously mentioned $350 million term loan during the quarter. Again, the proceeds were used to repay the outstandings under the revolver.

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

John G. Pascarelli

We had another good quarter all around and we are in a great position to deliver on revised guidance. As Rocco mentioned, we are continuing on the momentum from the first quarter and our core business was strong with higher sales and fewer disconnects in a typically weak quarter. We are extremely pleased that the trends of customers taking more products and staying with us longer is continuing. Currently, 46% of our customers take more than one product and 84% of our phone customers take the Triple Play. Our disciplined approach of using multiple discrete sales channels to sell bundled products and services is continuing to pay off as evidenced by higher revenues per customers as well as improved retention.

Now let me give you some color on each of the products. With 15,000 digital additions in the second quarter, our digital penetration has increased to 45% from 40% in Q2 2007. As with many cable companies, our digital customers are becoming our core customer, and we are focused on providing a product that is simple and easy to use and an excellent value proposition. We are currently offering all digital simulcast products at 37% of our households and plan to continue this expansion to bring us to over 50% by year end.

Once of the key components of our strategy to provide value to our digital customers is the HD product and our focus is on being the best value in HD programming by providing it at no additional cost for digital customers. We recently expanded our free HD programming tier with a focus on getting the NBC universal products on ahead of the Olympics, providing our customers with a great selection of events in HD. HD and DVR demand remains strong and now represents over 32% of our digital customers.

Mediacom Online also turned in good results with 14,000 customer additions. HSD penetration is now almost 25% of homes passed and we are positioned well with both product pricing and speed. With speeds ranging from 3 to 20 megs and competitive bundled pricing, we believe we have a great value proposition for our consumers.

Our phone business generated a net gain of 18,000 new customers, bringing Mediacom Phone to a total of 222,000 customers and a penetration to 8.6% of marketable homes passed. We are pleased with the steady performance of this product and we believe it will continue to be a prime contributor to RGU and revenue growth going forward. Our SNB phone product is on track to be available in select markets in the fourth quarter. As with all products designed for new customers, we will start cautiously as we launch to ensure quality service customer experience.

The combination of continued growth from our enterprise business network and the opportunity in the SNB phone market gives us significant growth potential in this area. We’ve done a good job controlling costs while at the same time rising the level of quality service to our customers. Our total operating cost for the past three quarters have increased in the 5% to 7% range compared to 9% to 10% going back several quarters. We achieved this despite adding 400 new employees year-over-year to staff our call centers, our technical work force, and our direct sales group. We’re focused on quality service and sales. Our staffing cost s have been offset by improved fuel productivity, lower telcom costs in our call centers, lower bandwidth costs on our internet service, and lower network management costs for our IP products. Also, our market seemed to be holding up quite nicely. We are not seeing higher levels of voluntary and unpaid disconnects, service downgrades, or higher levels of bad debt expense. Some of it can be attributed to better managing customer quality at the front end and customer delinquency cycles.

We are busy with our own vision of the digital transition. We have multiple solutions. We are rebuilding and upgrading certain low capacity systems and converting all this to all-digital networks while we continue to expand digital simulcasts into new markets. Our upgrade activity is in full swing and our first digital conversion will take place in September, and we expect to have all of our rebuilds and digital conversions complete before year end. Our switch digital launch plan may slip from fourth quarter 2008 to Q1 2009 based on an availability of a new TV Guide firmware. Given this was a limited deployment, the budgeted dollars and impact on capacity is minimal. We are also aggressively pursuing analog recapture plans. We have completed these plans in most of the largest systems and expect to begin moving channels in early fourth quarter. We are also implementing improved channel grooming processes and encoding technologies to maximize channel capacity.

We believe that everything we’re doing with the digital transition and the analog recapture will give us the capacity required to provide a full competitive lineup in today’s environment as well as for the foreseeable future. Our bandwidth allocation strategy in allocating HD channels is to focus on the most widely viewed services as well as premium type services like pay TV, VOD, and pay per view. With the NBC Universal channel additions, most of our markets are well on their way to having the 25 most widely viewed channels available free to digital customers by year end. We are also looking to provide customers the simple and most cost-effective way to enter into HD while maintaining a disciplined focus on product costs and future bandwidth needs.

On the internet business, we have been upgrading our network equipment, preparing ourselves for a Docsis 3.0 launch in 2009. Although some of the larger telcom providers continue to announce service launches, we see little activity in markets to support any major launches in the near future. We feel good with the Docsis 3.0 channel platform that we can maintain our market leading position in the high speed internet business.

Now let’s talk about the government’s digital transition. In September 2008 we will begin marketing the roughly 15% of our total households that rely on rabbit ears or roof antennas for their television reception and continue marketing through the transition in February 2009. The bulk of these households are older and have limited income. As a result, we will be using household-specific data to target the seniors among the non-customer households. We will also identify through broadcast mapping households in limited or marginal reception areas. Our initial offer will be a bundle of broadcast basic and Mediacom phone service to get them started, to which they can always add our introductory high speed data service to move them out of the dial up internet world. All bundles will be attractive pricing as well as have an element of a coupon redemption. We will honor the Federally issued digital converter coupon at face value for single product customers and double the value for double product households.

In closing, the consumer proposition of multiple speeds with low entry level price points and HSD combined with the cost savings in our VIP bundle packages and greater free HD channels position us well as the best value for these services. Our new commercial phone product further demonstrates the versatility of our existing broadband network infrastructure to cost-effectively expand our service offerings and allow us to compete in a whole new market. Building on the service level improvements made in the first half of this year, we will continue to focus on providing faster service response times and a higher quality service with all of our products.

Now let me turn it back to Mark.

Mark E. Stephan

We’ll begin the Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Pace with JP Morgan.

Michael Pace – JP Morgan

The first one, RGUs were a lot better than what we were expecting. I guess, and I apologize, I had to jump off for a little while earlier if you already said this, but can you get in a little bit. Was it the gross adds that were better, was churn better, what was actually driving the net adds for the RGUs? I’m wondering if maybe a lower move rate helped with the churn. On the flip side of the good RGUs, I guess ARPUs were a little lighter than what we were thinking. I’m wondering were there any specific promos that you were doing during the quarter, and then I have one follow up.

John G. Pascarelli

As far as the net adds, it’s a combination of two things going on, Mike. You have greater sales on almost every product category and lower disconnects and downgrades. We’re seeing it on both sides. It’s continuing and it’s what’s leading to the better performance in the net change. As far as the ARPU –

Rocco B. Commisso

The ARPU is pretty flat in relation to last year, Mike. Part of the reason on the ARPU is that advertising is flat. When we do the ARPU per RGU, if you have greater RGUs but your advertising balance is flat, that component leads to lower advertising per RGU. Follow me?

Michael Pace – JP Morgan

Yes. There were also no rate increases at all since last year?

Rocco B. Commisso

We had rate increase in the first quarter, not in the second quarter.

Michael Pace – JP Morgan

Then on CapEx, can you just remind us, what one-time items there might be this year, I guess whether those are 550 upgrades that’s in your CapEx guidance of $275 million? That might not be in your ’09 budget.

Mark E. Stephan

We’ve got rebuild upgrade, we have like 10% of our miles give or take that are going to be affected by what John calls our own version of the digital transition, so it’s a combination of rebuild, upgrade, and going all digital where it makes sense, and we look at the spending differential between what we’ve done historically and what we’re doing in 2008, call it a $40 million type delta, so that $40 million is going to capture traditional rebuild upgrade spending together with head end type investing for all the digital things that we’re doing together with the set top investment that we’ll be making for the all digital systems.

Michael Pace – JP Morgan

And just how much lower would that incremental 40 be going forward in ’09? I’m sure you still have --

Rocco B. Commisso

We don’t have --

Mark E. Stephan

We haven’t done our cap spending for ’09. It’s not going to be a $40 million number. I think we’re going to be getting back to more normalized spending.

Operator

Your next question comes from Jason Bazinet with Citi.

Jason Bazinet – Citigroup

Thanks, I just have a question on share buybacks. If my numbers are right, it looks like over the last three quarters the magnitude of buybacks in dollar terms has stepped down. The reason I ask the question is it seems like all of the underlying things that we can look at, it seems like the buybacks would be flat or up, and what I mean by that is your leverage is down, your stock price is down relative to Q307. Your borrowing capacity is up, you’ve raised your guidance, your op metrics are up, and your interest coverage is up, so I’m just wondering is there some exogenous factor we’re not aware of related to black outs or is there some other reason why the magnitude of the buy backs is moderated?

Rocco B. Commisso

We go in and out based on what’s available, how fast we can get it in, and it’s been pretty consistent over the lat three or four years. Not every quarter do we exactly make the same buys. We basically, especially after the earnings announcement that took place where stock jumped up, we basically reduced the number of buy backs.

Operator

Your next question comes from Rich Greenfield with Pali Capital.

Richard Greenfield - Pali Capital

Hi, a couple questions. One, Rocco, you seemed very cautious on the Q1 conference call. You had an amazing Q1 and yet you put a lot of caution on Q2 and we’re just wondering, obviously we thought you’d do well and you did do well, but what change from your kind of cautionary outlook to how well you actually ended up doing in the second quarter, and then two, on your free cash flow, obviously you kept your CapEx, you raised your EBITDA, is there any reason to believe that all doesn’t just flow through to improved free cash flow versus your prior expectation on a reported basis, not the adjustment you do, but the reported basis, cash from operations less CapEx you were down about $2 million for the 6 months. It seems like you’re going to be relatively flat for the full year if not a little bit on the plus side and I’m just wondering if that’s accurate. Thanks.

Rocco B. Commisso

I don’t know if I was cautionary or not. We provided guidance, we stepped up the guidance, and basically we wanted to see what the numbers were and the numbers were good. We kept on growing our RGUs at a much greater rate than we did in last year’s quarter and that was a pleasant surprise. That’s part of the reason why today we feel good increasing the guidance once again. In terms of the free cash, our standard way of looking at free cash flows is pretty much there for the last 5 or 6 years. I think part, let’s not get picked up in our free cash flow, for instance, is that the stock buy backs and the financing costs.

Mark E. Stephan

Rich, the other thing is, the reason why we stay away from the operating cash flow statement is because of all the different moves as you go through quarter to quarter, but we also have another wrinkle. If you go to other financing activities which is on our financing activity section of the cash flow statement, you have this thing called book overdrafts, and that’s actually a source of operating funds, so if you want to make that adjustment, you could push that up to net cash flows provided by operating activities so you’ll have $133 million plus the $23 million of book overdrafts and then you can do your subtraction of CapEx and get to a better number, but these things just move from quarter to quarter. The book overdraft is really checks that are cut. They haven’t left the house or haven’t cleared the bank, and this is how we account for those checks, but they’re really become a source of cash.

Richard Greenfield - Pali Capital

But there’s no reason to believe that free cash flow won’t be flat to positive onto that methodology for the full year?

Mark E. Stephan

I would say that would be the expectation.

Richard Greenfield - Pali Capital

Rocco, could you just follow up on that comment about the RGUs in the second quarter? How much of it do you think was the pull back in marketing and trouble that have occurred at EchoStar and do you think that’s going to change going forward? Charlie seemed a little bit more upbeat in terms of the second half marketing and I’m just wondering what your thoughts are about competing with Dish.

Rocco B. Commisso

We feel pretty good. In relation to any other period in the last 5 years, I don’t think Charlie’s pulling out the pig campaign again. In our market [inaudible] years ago and we’re very happy with our position. We’re very happy with our performance in relation, as I mentioned in my prepared notes, with other images especially those in our own sector, the media telecommunications industry, and we continue on having much better sales performance this year as we did last year, as John mentioned, with less disconnects. So as of today we feel pretty good that we’re going to be able to dramatically grow the RGU growth, they’re going to have much higher RGU growth than we did last year.

Operator

Your next question comes from Ethan Lacy with Merrill Lynch.

Ethan Lacy - Merrill Lynch

Just wanted to start with working capital if you don’t mind. It seemed like you had a little of both in the third quarter, just sort of housekeeping item, but should we see that come back down in the third quarter? It looked like it was up fairly significantly in 2Q. Is there something specific that drove it?

Mark E. Stephan

There’s really nothing. It’s really just a flow of payments. It’s programming, and things get paid at different times. It’s not exactly second quarter compared to second quarter last year. I wouldn’t read much into it. I’d just smooth it all out.

Ethan Lacy - Merrill Lynch

And then on the guidance, your EBITDA guidance still is implying here sort of a mid-5% print for the second half of ’08. Is that predicated on sort of trends you’re seeing so far in the third quarter or is guidance still sort of relatively conservative?

Rocco B. Commisso

I don’t know if it’s conservative or not. We have increased it. Look, there’s certain unknowns related to programming of course when they hit the books and [inaudible] and frankly I can’t forecast that. The last thing we want to do is what we did last year, having to reduce our guidance. So I’ll leave it at that, but we are negotiating a few programming agreements and we have mentioned more than once we have to [inaudible] to deal with as the new cycle comes through beginning in October.

Ethan Lacy - Merrill Lynch

Fair enough, and I guess just on digital transition, there’s a lot of views obviously about what it means for different paid TV operators, but can you just talk about what you think the impact will be for Mediacom in terms of no net adds or any other sort of impact as well, possibly from a CapEx perspective and then over what time frame?

John G. Pascarelli

The whole digital transition I think is a good thing for everybody. It gives customers a better experience because a digital product is better than the analog product. So you’re going to have a much better quality picture for consumers. The second thing is it’s going to make our networks more efficient as we can convert to all digital networks. We’re going to recapture lots of space and we’re going to be prepared in the future and prepare us to continue to expand whatever services come along that we want to add. As far as cost, there’s a lot going on right now as far as the digital box world which is really the primary drivers around digital where you have some new competitors stepping into the landscape that are going to provide us with a competitive environment to buy digital equipment. You also have the new DTA product which is going to allow us to be able to get out and very cost effectively transition households from analog to digital much more efficiently than we’ve been able to do in the past, so there’s a lot going on. Time will tell how it shakes out. I think customers themselves will win big from our all digital product and we’re going to be winners as far as what we can continue to provide our services.

Ethan Lacy - Merrill Lynch

And the analog spectrum reclamation you referenced in the prepared remarks, how much of your footprint are you kind of targeting at this point?

John G. Pascarelli

Right now the primary move is probably about 80% to 85% as the groups that are running on our one network and then we will gradually move into the smaller locations once that’s complete.

Ethan Lacy - Merrill Lynch

And then just data if I can just briefly touch on the last question. Qwest, their fiber initiative, how much overlap do you guys have with that, and then as far as your net adds, where are you actually seeing them come in? Are they coming in at your higher speeds or are people opting for lower tiers here and are you taking shares from DSL?

John G. Pascarelli

As far as Qwest, they’ve announced that they’re doing this. We see limited activity. We see some activity in a West Des Moines operation that they’re building and the product is available to a limited piece of it but we don’t see a whole lot of evidence to see that it’s going to be mass distributed throughout our territories right now. As far as the growth, most of the growth is with our 8 and 10 meg product. That’s the primary driver of this service, and that’s what people fall. We have over the last quarter continued to increase the number of customers taking our light service which is the three meg service and still the high end products, although it sounds sexy, there isn’t a huge demand for people looking for these things. I mean, the majority of households are quite content with an 8 or a 10 meg product right now because there’s just not enough applications that they get the benefit for.

Rocco B. Commisso

Just on the fiber that you mentioned, maybe other people are not aware of it, Qwest has not announced a fiber to their home. They’re doing fiber to their node, we’ve been at fiber to the node the last few years at least. Two, they still have not announced [inaudible] strategy. Facility based [inaudible] strategy. Three, we’re very happy with our particular [inaudible]. As I mentioned in our press release, when we announced our 20 meg service, the day that we announced it, we launched it through our entire footprint, over 98% of our footprint. They announced something, they just go up to where their plant is which is typically a very small percentage of their market.

Operator

Your next question comes from Tuna Amobi with Standard and Poor’s.

Tuna Amobi - Standard & Poor’s

So Rocco, as you think about the evaluation of cable systems right now in the market, I’m just kind of wondering what your thoughts are. You’ve heard what CableVision has announced in terms of looking for ways to close that valuation gap and one could argue I guess that in terms of leverage, you guys aren’t that much different although they have gotten some head start with phone obviously and Triple Play and all that stuff, so some of your peers as well along those lines have trimmed some of their cable systems and I just wanted you to kind of put this all together in terms of what is it that as you look at it over the next year or more that you think that you need to do in terms of maybe a recap or some kind of aggressive move to kind of help the values of your shares, kind of get to where I think it should be.

Rocco B. Commisso

Well Tuna, that’s a great question and I don’t know if I can give you the right answer. But anyway, look, outside of those two companies that are going private, i.e. Cox and [Inside], there’s no other company in the public cable sector that’s bought as much stock as a percent of total stock than Mediacom. We have basically bought over 27 million shares in the last 3 or 4 years and so we have done that part while still reducing our leverage. Going forward, we have a program in place and I can’t tell you exactly what we’re going to be doing because I don’t know what we’re going to be doing, but we’re executing on our business plan and move forward.

Tuna Amobi - Standard & Poor’s

Just a question for John on HD. My last question. In terms of your strategy, I think you’ve talked about getting to 25 channels by the end of the year. I apologize if I missed that but if you could just provide some color on where you are with that, what markets are ahead of the others in terms of national channels, HD, and on local HD as well. What are you seeing right now in terms of where CBS is rolling out local HD? Are there competitive dynamics in those markets markedly different than other markets or how have you reacted to local HD?

John G. Pascarelli

That’s a lot of questions there, Tuna. From an HD standpoint, let me just be clear. We’re looking to get 25 free HD channels in the most widely used channels in front of folks. We’ll have closer to 40 channels on most of our networks, at least, when you add in the premium services and the other things, the types of service that are out there. There’s actually a small subscription tier service that people can buy into as well that has some services in it. Now as far as local to local, we’ve had a huge push and we’ve got tremendous coverage with our own local to local HD. Dish and DirecTV have made announcements. We still are significantly ahead of those announcements. As of today they’re about 50% active where local to local is available. With their most recent announcements, if they do everything, it’s probably going to jump closer to 75”% available. With everything based on what we’re tracking and seeing what’s going on, and I think it’s just really gets down to the fact that we’re making the transaction so much easier for consumers to get into HD. We’ve got local employees on the ground, you can come into our offices and transition the box, and digital households can do it at no cost, so there’s just a lot of positives to our digital HD transition plans.

Operator

Your final question comes from Chris Taylor with Evergreen.