charter communications 2Q_2008_Earnings_Presentation_FINAL
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Transcript of charter communications 2Q_2008_Earnings_Presentation_FINAL
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Charter CommunicationsSecond Quarter 2008 Earnings Call August 5, 2008
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:This presentation includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under "Risk Factors" from time to time in our filings with the Securities and Exchange Commission (“SEC”). Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "will," "may," "intend," "estimated," "aim," "on track," "target," "opportunity," and "potential," among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set forth in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
• the availability, in general, of funds to meet interest payment obligations under our debt and to fund our operations and necessary capitalexpenditures, either through cash flows from operating activities, further borrowings or other sources and, in particular, our ability to fund debt obligations (by dividend, investment or otherwise) to the applicable obligor of such debt;
• our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger adefault of our other obligations under cross-default provisions;
• our ability to pay or refinance debt prior to or when it becomes due and/or refinance that debt through new issuances, exchange offers or otherwise,including restructuring our balance sheet and leverage position;
• the impact of competition from other distributors, including incumbent telephone companies, direct broadcast satellite operators, wireless broadbandproviders, and digital subscriber line (“DSL”) providers;
• difficulties in growing, further introducing, and operating our telephone services, while adequately meeting customer expectations for the reliability ofvoice services;
• our ability to adequately meet demand for installations and customer service;• our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services,and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition;
• our ability to obtain programming at reasonable prices or to adequately raise prices to offset the effects of higher programming costs; • general business conditions, economic uncertainty or slowdown, including the recent significant slowdown in the housing sector and overalleconomy; and
• the effects of governmental regulation on our business.
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this presentation.
Unless otherwise stated, all results are pro forma, which reflect certain sales and acquisitions of cable systems in 2006, 2007, and 2008 as if they had occurred on January 1, 2006. For comparable actual results for 2007, see the Appendix to these slides.
Cautionary Statement Regarding Forward Looking Statements
3See notes on slide 12
8.9% revenue growth and 10.1% adjusted EBITDA1 growth Total ARPU up 12% - double-digit growth for over two yearsAdded 735,000 RGUs in the past year50% bundle penetration up from 44% in year ago period
Charter Business revenues increased 17% over prior yearHD customers grew 55% year-over-year VOD orders up nearly 60% from prior yearIncreased Internet speeds and plan to launchDOCSIS 3.0 in 2H08
Executing on Priorities
Leverage Investments in Infrastructure
Deliver Solid Financial Growth
Capture New Growth
Opportunities
Results reflect scaling platformTelephone COGS per customer down 40% Increased productivity and improved service levels on all key frontsExpanded EBITDA margin to 36.4% – up 40bp over prior year
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RGUs
See notes on slide 12
Focus on Delivering Healthy Growth
11,447
11,780
12,182
2Q07 4Q07 2Q08
(Customers in thousands)
+6% y/y
Total ARPU
$93
$98
$104
2Q07 4Q07 2Q08
Revenue Adjusted EBITDA1
+12% y/y
$1,490
$1,548
$1,623
2Q07 4Q07 2Q08
($ in millions)
$537
$563
$591
2Q07 4Q07 2Q08
($ in millions)+8.9% y/y +10.1% y/y
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Bundled Customers
2Q07 2Q08
2,371
2,639
Triple Play Customers
Double Play Customers
Bundle Pen. 44% 50%
3-Play ARPU $125 - $130 $125 - $130
+11% y/y
Growing Bundled Relationships
Bundle strategy focused on maximizing customer lifetime value
Bundle penetration 50%, up from 44%
Triple play penetration 17%, up from 11% in year ago period
Successful migration of existing double play customers to triple play
Strong triple play sell-in to new customers
Increased bundle penetration driving ARPU growth
Triple play ARPU consistent at $125 - $130
Total y/y ARPU growth of 12% in 2Q
Double-digit total ARPU growth for over two years
Bundle continues to provide retention benefits
Leveraging Bundle to Drive Performance
(Customers in thousands)
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Revenue Summary ($ millions) 2Q08
2Q Y/YGrowth YTD 08
YTD Y/YGrowth
Video $874 3% $1,732 3%
High-Speed Internet 339 10% 667 11%
Telephone 134 68% 255 78%
Commercial 96 17% 189 16%
Ad Sales 75 -- 143 4%
Other 105 13% 201 12%
Total Revenues 1,623 8.9% $3,187 9.7%Operating Costs and Expenses 1,032 8% 2,051 9%
Adj EBITDA1 $591 10.1% $1,136 10.3%
Adj EBITDA1 Margin 36.4% 35.6%
2Q08 Financial Performance
See notes on slide 12
2Q08 Highlights
Year-over-year revenue growth of 8.9% driven by balance of rate and volume
ARPU increased 12% year-over-year
Telephone and HSI contributed to 65% of revenue growth
Charter Business continued strong revenue growth
Margin up 40bp year-over-year from bundling and productivity improvements
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Upselling Video Customers
Success in moving customers to premium video tiers
33,900 digital net adds, up from 8,700 in 2Q07
Video ARPU up 6% year-over-year:55% increase in HD customers y/y
30% increase in DVR customers y/y
Video Customer Mix
$55.59$56.13
$58.73
2Q07 4Q07 2Q08
Video ARPU
+6% y/y
0%
25%
50%
75%
100%
2Q06 2Q07 2Q08
Basic Only Digital
2Q08
Hig
hlig
hts
Opp
ortu
nitie
s Leveraging the HD VOD platform
Initial deployment of switched digital planned for 2H08
Increasing digital and advanced services penetration
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Growing HSI
HSI revenue up 10% - performance driven by both rate and volume
HSI customers up 8% year-over-year while growing ARPU
80% of footprint has 16 Mbps available
Customers taking 10 Mbps or higher nearly doubled sequentially
2Q08
Hig
hlig
hts
Opp
ortu
nitie
s Continue to focus on speed tier upgrades
Launched 1 Mbps HSI Lite service bundled with telephone
Expand home networking penetration
HSI revenue growth driven by bundle, speed migration, and home networking
(Customers in thousands)
$339
$307
2Q07 2Q08
($ in millions)
2,787
2,578
2Q07 2Q08
+8% y/y
HSI Revenue
HSI Customers
+10% y/y
HSI ARPU $40.14 $40.67 +1% y/y
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Leveraging Telephone to Drive Growth
Telephone customers and revenue increased nearly 70% y/y
Telephone penetration reached 12% of homes passed
75-80% of telephone customers in triple play
Realizing operating efficiencies as telephone scales
Telephone COGS per customer down 40% y/y
(Customers in thousands)
$134
$80
2Q07 2Q08
($ in millions)
1,176
701
2Q07 2Q08
+68% y/y
2Q08
Hig
hlig
hts
Opp
ortu
nitie
s Expect to reach 20-25% penetration in next few years
Continue to refine offers to upsell existing customers and drive the bundle
Opportunity to penetrate non-video households with HSI + telephone bundle
Telephone Revenue
Telephone Customers
+68% y/y
Phone Pen (mkt HH) 9% 12%
10
Charter Business
$82
$96
$73
Charter Business Revenue
2Q072Q06 2Q08
($ in millions)
2Q08
Hig
hlig
hts
Opp
ortu
nitie
s
Charter Business revenue up 17%
Charter Business Bundle available across the entire residential phone footprint
Commercial telephone customers have nearly doubled year to date
Strong bundle sell-in for new customers
SME business spend ~$5.5B across footprint; primarily targeting 2 - 12 telephone lines
Leverage existing sales force and infrastructure to drive growth
Successful referral campaign from existing customers
+17% y/y
+12% y/y
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2Q08 Highlights
Solid Revenue and Adj EBITDA
Growth1
Balance Rate and Volume
Disciplined Capital
Investments
12% ARPU growth from bundling, upselling & advanced servicesRGU net adds approx. 100K; total RGUs up 6% y/yMigrating basic customers to digital platformLeveraging HSI and telephone to drive bundle50% bundle penetration, up from 44% in 2Q07
8.9% revenue growth10.1% adjusted EBITDA1 growth36.4% adjusted EBITDA1 margin – up 40bp year over year
Continue to expect $1.2B capex in 2008 Three-quarters of capex was success-based
See notes on slide 12
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Unless otherwise stated, all results are pro forma, which reflect certain sales and acquisitions of cable systems in 2006, 2007, and 2008 as if they had occurred on January 1, 2006. For comparable actual results for 2007, see the Appendix to these slides.
1 Adjusted EBITDA and pro forma adjusted EBITDA are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by Charter, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is defined as income from operations before depreciation and amortization, stock compensation expense, and other operating expenses such as special charges or loss on sale or retirement of assets. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital- intensive nature of the Company’s businesses as well as other non-cash or non-recurring items, and is unaffected by the Company’s capital structure or investment activities. Adjusted EBITDA and pro forma adjusted EBITDA are liquidity measures used by Company management and its board of directors to measure the Company’s ability to fund operations and its financing obligations. For this reason, it is a significant component of Charter’s annual incentive compensation program. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and the cash cost of financing for the Company. Company management evaluates these costs through other financial measures.
The Company believes that adjusted EBITDA and pro forma adjusted EBITDA provide information useful to investors in assessing Charter’s ability to service its debt, fund operations, and make additional investments with internally generated funds. In addition, adjusted EBITDA generally correlates to the leverage ratio calculation under the Company’s credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the SEC). Adjusted EBITDA and pro forma adjusted EBITDA, as presented, include management fee expenses in the amount of $32 and $34 million for each of the three months ended June 30, 2008 and 2007, respectively, which expense amounts are excluded for the purposes of calculating compliance with leverage covenants.
For a reconciliation of pro forma adjusted EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measure, see the Appendix.
Footnotes
13
Appendix
2008 2007 2007 2007 2007Actual Actual Pro Forma (a) Actual Pro Forma (a)
Net cash flows from operating activities (36)$ (148)$ (151)$ -$ (2)$ Less: Purchases of property, plant and equipment (316) (281) (281) (354) (354) Less: Change in accrued expenses related to capital expenditures (10) (7) (7) 49 49
Free cash flow (362) (436) (439) (305) (307)
Interest on cash pay obligations (b) 460 452 452 457 457 Purchases of property, plant and equipment 316 281 281 354 354 Change in accrued expenses related to capital expenditures 10 7 7 (49) (49) Other, net 25 18 18 7 7 Change in operating assets and liabilities 142 218 218 101 101
Adjusted EBITDA 591$ 540$ 537$ 565$ 563$
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIESUNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES
(DOLLARS IN MILLIONS)
The above schedules are presented in order to reconcile adjusted EBITDA and free cash flows, both non-GAAP measures, to the most directly comparable GAAP measures in accordance with Section 401(b) of the Sarbanes-Oxley Act.
(a) Pro forma results reflect certain sales and acquisitions of cable systems in 2007 as if they occurred as of January 1, 2007.
(b) Interest on cash pay obligations excludes accretion of original issue discounts on certain debt securities and amortization of deferred financing costs that are reflected as interest expense in our consolidated statements of operations.
Three Months Ended June 30, Three months Ended December 31,
Revenue Summary($ millions) 2Q Y/Y YTD Y/Y
2Q08 Growth YTD08 GrowthVideo 874$ 1.7% 1,732$ 2.1%High-Speed Internet 339 10.1% 667 10.8%Telephone 134 67.5% 255 78.3%Commercial 96 15.7% 189 15.2%Other 180 6.5% 344 8.2%
Total Revenues 1,623$ 8.3% 3,187$ 9.0%
Operating Costs andExpenses 1,032 7.6% 2,051 8.6%
Adj EBITDA 591$ 9.4% 1,136$ 9.7%