Charter Communications Second Quarter 2008 Earnings Call August 5, 2008

Transcription

1 Charter Communications Second Quarter 2008 Earnings Call August 5,

2 Cautionary Statement Regarding Forward Looking Statements 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 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 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 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 slowdown, including the recent significant slowdown 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, For comparable actual results for 2007, see the Appendix to these slides. 2

3 Executing on Priorities Deliver Solid Financial Growth 8.9% revenue growth and 10.1% adjusted EBITDA 1 growth Total ARPU up 12% - double-digit growth for over two years Added 735,000 RGUs in the past year 50% bundle penetration up from 44% in year ago period Leverage Investments in Infrastructure Results reflect scaling platform Telephone COGS per customer down 40% Increased productivity and improved service levels on all key fronts Expanded EBITDA margin to 36.4% up 40bp over prior year Capture New Growth Opportunities Charter Business revenues increased 17% over prior year HD customers grew 55% year-over-year VOD orders up nearly 60% from prior year Increased Internet speeds and plan to launch DOCSIS 3.0 in 2H08 See notes on slide 12 3

4 Focus on Delivering Healthy Growth RGUs Total ARPU (Customers in thousands) +6% y/y 12, % y/y $104 11,780 $98 11,447 $93 2Q07 4Q07 2Q08 2Q07 4Q07 2Q08 ($ in millions) Revenue Adjusted EBITDA 1 ($ in millions) +8.9% y/y +10.1% y/y $1,623 $591 $1,548 $563 $1,490 $537 See notes on slide 12 2Q07 4Q07 2Q08 2Q07 4Q07 2Q08 4

5 Growing Bundled Relationships (Customers in thousands) Triple Play Customers Double Play Customers Bundle Pen. 3-Play ARPU Bundled Customers 2,371 2Q07 +11% y/y 2,639 2Q08 44% 50% $125 - $130 $125 - $130 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 5

6 2Q08 Financial Performance 2Q08 Highlights Revenue Summary ($ millions) 2Q08 2Q Y/Y Growth YTD 08 YTD Y/Y Growth Video $874 3% $1,732 3% High-Speed Internet % % Telephone % % Commercial 96 17% % Ad Sales % Other % % Total Revenues 1, % $3, % Operating Costs and Expenses 1,032 8% 2,051 9% Adj EBITDA 1 $ % $1, % Adj EBITDA 1 Margin 36.4% 35.6% Year-over-year revenue growth of 8.9% driven by balance of rate and volume ARPU increased 12% yearover-year Telephone and HSI contributed to 65% of revenue growth Charter Business continued strong revenue growth Margin up 40bp year-overyear from bundling and productivity improvements See notes on slide 12 6

7 Upselling Video Customers 2Q08 Highlights 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 100% 75% 50% 25% 0% Video Customer Mix Basic Only Digital 2Q06 2Q07 2Q08 Video ARPU Opportunities Leveraging the HD VOD platform Initial deployment of switched digital planned for 2H08 Increasing digital and advanced services penetration $ % y/y $56.13 $ Q07 4Q07 2Q08 7

8 Growing HSI 2Q08 Highlights 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 (Customers in thousands) HSI ARPU 2,578 HSI Customers 2Q07 +8% y/y 2,787 2Q08 $40.14 $ % y/y Opportunities Continue to focus on speed tier upgrades Launched 1 Mbps HSI Lite service bundled with telephone Expand home networking penetration ($ in millions) $307 HSI Revenue +10% y/y $339 2Q07 2Q08 HSI revenue growth driven by bundle, speed migration, and home networking 8

9 Leveraging Telephone to Drive Growth 2Q08 Highlights 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) +68% y/y Phone Pen (mkt HH) Telephone Customers 701 2Q07 1,176 2Q08 9% 12% Opportunities 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 ($ in millions) Telephone Revenue $80 +68% y/y $134 2Q07 2Q08 9

10 Charter Business 2Q08 Highlights 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 ($ in millions) $73 Charter Business Revenue +12% y/y $82 +17% y/y $96 Opportunities 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 2Q06 2Q07 2Q08 10

11 2Q08 Highlights Solid Revenue and Adj EBITDA Growth 1 8.9% revenue growth 10.1% adjusted EBITDA 1 growth 36.4% adjusted EBITDA 1 margin up 40bp year over year Balance Rate and Volume 12% ARPU growth from bundling, upselling & advanced services RGU net adds approx. 100K; total RGUs up 6% y/y Migrating basic customers to digital platform Leveraging HSI and telephone to drive bundle 50% bundle penetration, up from 44% in 2Q07 Disciplined Capital Investments Continue to expect $1.2B capex in 2008 Three-quarters of capex was success-based See notes on slide 12 11

12 Footnotes 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, 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 capitalintensive 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. 12

13 Appendix 13

14 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES UNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES (DOLLARS IN MILLIONS) Three Months Ended June 30, Three months Ended December 31, Actual 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) Free cash flow (362) (436) (439) (305) (307) Interest on cash pay obligations (b) Purchases of property, plant and equipment Change in accrued expenses related to capital expenditures (49) (49) Other, net Change in operating assets and liabilities Adjusted EBITDA $ 591 $ 540 $ 537 $ 565 $ 563 (a) Pro forma results reflect certain sales and acquisitions of cable systems in 2007 as if they occurred as of January 1, (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. 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.

15 Revenue Summary ($ millions) 2Q Y/Y YTD Y/Y 2Q08 Growth YTD08 Growth Video $ % $ 1, % High-Speed Internet % % Telephone % % Commercial % % Other % % Total Revenues $ 1, % $ 3, % Operating Costs and Expenses 1, % 2, % Adj EBITDA $ % $ 1, %