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charter communications 3Q_2008_Earnings_Presentation_vFINAL
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Transcript of charter communications 3Q_2008_Earnings_Presentation_vFINAL
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Charter CommunicationsThird Quarter 2008 Earnings Call November 6, 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 inother 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 capital expenditures, 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 a default of our other obligations under cross-default provisions; •our ability to repay debt prior to or when it becomes due and/or successfully access the capital or credit markets to refinance that debt through new issuances, exchange offers or otherwise, including restructuring our balance sheet and leverage position, especially given recent volatility and disruption in the capital and credit markets;•the impact of competition from other distributors, including incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and digital subscriber line (“DSL”) providers;•difficulties in growing, further introducing, and operating our telephone services, while adequately meeting customer expectations for the reliability of voice 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 downturn, including the recent volatility and disruption in the capital and credit markets and the significant downturn in the housing sector and overall economy; 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
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Consistent Priorities Generating Results
Increase sales of products &
services
Improve customer experience
Drive operating & capital
effectiveness
Enhancing products to improve customer lifetime valueHD customers up nearly 50% y/yMajority of HSI net gain was on higher speed tiersImproving service levels on all key fronts
11% ARPU growth from bundling, upselling, & advanced services205K RGU net adds; up 53% y/y52% bundle penetration, up from 45% in 3Q07
Diversifying product mix to higher margin HSI and phoneScaling operating infrastructure; phone COGS / sub down ~35% 79% of capex success based
1. See notes on slide 12
Deliver solid financial growth
8% revenue growth11% adjusted EBITDA1 growth34.4% adjusted EBITDA1 margin – up 90bp over prior year
3Q08 Highlights
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Bundled Customers
3Q07 3Q08
2,433
2,718
Triple Play Customers
Double Play Customers
$125 - $130$125 - $1303-Play ARPU
Bundle Pen. 45% 52%
+12% y/y
Growing Bundled Relationships
Value of home entertainment in a bundle plays well in today’s economy
Bundled customers up 12% y/y
Triple play penetration 19%, up from 12% in year ago period
Triple play ARPU consistent at $125 -$130
Bundle continues to provide retention benefits
Leveraging Bundle to Drive Performance
(Customers in thousands)
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Investing in Success Based Initiatives
79% of capex in 3Q was success based
CPE represented 55% of capex
Continue to invest in new growth opportunities
Charter Business
Deploying technologies to maximize bandwidth capacity
Increasing Internet speeds and launching DOCSIS 3.0 in next couple months
2008 capital expected to be $1.2 billion
Disciplined approach to capital investments
Capital Spending
3Q07 3Q08
Customer Premise Equipment Scalable InfrastructureLine Extensions Upgrade/RebuildSupport Capital
17.6%20.5%% of Revenue
Success Based 74% 79%
$311$288
($ in millions)
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16%28916%100Commercial
11%$1,69911%$563Adj EBITDA1
4%2234%80Ad Sales
0.4%
8%
9%
7%
69%
10%
3%
YTD Y/YGrowth
35.2%
3,124
$4,823
304
399
1,009
$2,599
YTD 08Revenue Summary ($ millions) 3Q08
3Q Y/YGrowth
Video $867 3%High-Speed Internet 342 8%Telephone 144 55%
Other 103 -2%
Total Revenues 1,636 8%Operating Costs and Expenses 1,073 6%
Adj EBITDA1 Margin 34.4% 0.9%
3Q08 Financial Performance
1. See notes on slide 12
3Q08 Highlights
Revenue growth 8% y/y
RGUs up 7% y/y and ARPU increased 11% y/y
Telephone and HSI contributed to 65% of revenue growth
Charter Business continued strong revenue growth
Margin up 90bp year-over-year from bundle growth, scaling the infrastructure, and shift in product mix
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Upselling Video Customers
Success in moving customers to digital tier
Video bundled households up 11% y/y
62K digital net adds, up nearly four-fold from 3Q07
Digital penetration now 61%, up from 54% a year ago
Video ARPU up nearly 7% y/y:
HD customers up nearly 50% y/y
VOD orders up nearly 60% y/y
Bundled Video Mix (Residential)
Video Customer Mix
0%
25%
50%
75%
100%
3Q06 3Q07 3Q08
Basic Only Digital
3Q08 Highlights
0%
25%
50%
75%
100%
3Q06 3Q07 3Q08
Single Double Triple
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Growing HSI
(Customers in thousands)
2,858
2,632
3Q07 3Q08
+9% y/y
HSI Net Adds
HSI customers up 9% y/y
71K net adds, up 32% y/y
HSI ARPU essentially flat y/y at $40.53
Continue to see demand for premium services
Majority of HSI net gain was higher speeds
Home networking net adds up 68% y/y
3Q08 Highlights
(Customers in thousands)71
54
3Q07 3Q08
+32% y/y
HSI Customers
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Leveraging Telephone to Drive Bundle
Strong customer and revenue growth
Telephone penetration at 12% of 10.2 million homes passed
Telephone launches essentially complete
Phone available to 86% of footprint
Telephone COGS per customer down ~35% y/y
Expect to reach 20-25% penetration in next few years
(Customers in thousands)
$144
$93
3Q07 3Q08
($ in millions)
1,274
804
3Q07 3Q08
+59% y/y
Telephone Customers
+55% y/y
12%10%Phone Pen (mkt HH)
3Q08 Highlights
Telephone Revenue
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Solid Momentum at Charter Business
$86
$100
$76
Charter Business Revenue
3Q073Q06 3Q08
($ in millions)Charter Business revenue up 16% y/y
169K commercial customers at Sep 30; up 10% y/y
Commercial telephone customers have increased 133% year to date
Strong bundle sell-in for new customers
$5.5B market opportunity on-network or within 600ft of network
+16% y/y
+13% y/y
3Q08 Highlights
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RGUs
1. See notes on slide 12
Delivering Value to Customers
11,581
12,083
12,387
3Q07 1Q08 3Q08
(Customers in thousands)
+7% y/y
Total ARPU
$95
$100
$106
3Q07 1Q08 3Q08
Revenue Adjusted EBITDA1
+11% y/y
$1,517$1,564
$1,636
3Q07 1Q08 3Q08
($ in millions)
$508
$545$563
3Q07 1Q08 3Q08
($ in millions)+8% y/y +11% y/y
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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, impairment charges, 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 $33 and $32 million for each of the three monthsended September 30, 2008 and 2007, respectively, which expense amounts are excluded for the purposes of calculating compliance with leverage covenants.
For a reconciliation of pro forma adjusted EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measure, see the Appendix.
Footnotes
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Appendix
Three Months
2008 2007 2007 2008Actual Actual Pro Forma (a) Actual
Net cash flows from operating activities 242$ 209$ 207$ 204$ Less: Purchases of property, plant and equipment (288) (311) (311) (334) Less: Change in accrued expenses related to capital expenditures - (12) (12) (31)
Free cash flow (46) (114) (116) (161)
Interest on cash pay obligations (b) 462 449 449 452 Purchases of property, plant and equipment 288 311 311 334 Change in accrued expenses related to capital expenditures - 12 12 31 Other, net 13 6 6 10 Change in operating assets and liabilities (154) (154) (154) (121)
Adjusted EBITDA 563$ 510$ 508$ 545$
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 September 30, Ended March 31,
Revenue Summary - Actual($ millions) 3Q Y/Y YTD Y/Y
3Q08 Growth YTD08 GrowthVideo 867$ 2.6% 2,599$ 2.2%High-Speed Internet 342 7.5% 1,009 9.7%Telephone 144 53.2% 399 69.1%Commercial 100 14.9% 289 15.1%Advertising sales 80 3.9% 223 3.2%Other 103 -1.0% 304 7.0%
Total Revenues 1,636$ 7.3% 4,823$ 8.4%
Operating Costs andExpenses 1,073 5.7% 3,124 7.6%
Adjusted EBITDA 563$ 10.4% 1,699$ 9.9%