MOBILE METRICS: 1Q09 RESULTS SUMMARY

Despite a fiercely competitive environment, the wireless industry continues to grow both its subscriber counts and top line, helped in large part by rapidly expanding demand for mobile data services.  The ten public companies for whom we had financials collectively grew first quarter revenue by a healthy 9.5% compared with the year earlier period—although the acquisition of Alltel by Verizon Wireless accounted for some of that increase.  Together, the group generated $44.8b in revenue in the March quarter.  For the trailing twelve months, overall wireless revenue expanded by 2.3% to nearly $172b. 

On average, the group’s subscriber base increased by 13% year-over-year; the median growth rate was 8.5%.  Leap Wireless (Nasdaq:LEAP) and MetroPCS (NYSE:PCS), both of whom continue to aggressively launch new markets with their all-you-can-eat service plans, topped the list with 40% and 37% annual growth in subscribers, respectively.  AYCE is the “plan du jour” in this difficult economy, as consumers increasingly are looking for ways to get more bang for their buck, and in many cases, these customers are moving to wireless as a landline replacement service.

Overall, OIBDA for the group also expanded in the first quarter, by 11.6% to $14.3b, but on a trailing twelve month basis the growth was just 2.9%, and four of the ten suffered a decline in year-over-year cash flow.  Competitive pressures are weighing on ARPU and roaming revenue for several of those we track.  United States Cellular (NYSE:USM), T-Mobile, Sprint Nextel (NYSE:S) and LEAP saw their operating income before depreciation and amortization decline anywhere from 3.5% to nearly 22% on a year-over-year basis. 

Despite the push by many to upgrade their networks for next-gen services, capex declined for the group overall, by 13.8% to $4.675b in the first quarter.  On a trailing-twelve-month basis, capital investment fell by 3.3%, to $21.8b, but as the year passes we would expect to see the capex figure rise again.  As a percentage of revenue, wireless capex averaged just under 17% in 1Q09.

The following contains our analysis of the operating results of each of the public pure-play wireless companies through 1Q09, including a summary of the operating and financial highlights over the past year.

1Q09 EARNINGS: Time Warner Cable

Thank God Almighty, We are Free at Last!

On March 12, 2009, Time Warner Cable (NYSE:TWC) completed its separation from Time Warner (NYSE:TW), a few days after making a special dividend of $10.8b, the vast majority of which went to TW, and after TW distributed all of its TWC shares to its shareholders.  TWC funded the special dividend with $5.6b of cash on hand and $5.2b of new borrowings.  TWC emerged from the separation as the nation’s second largest cable provider, serving 14.7m discrete customers and 26m voice, video and broadband connections.

The separation comes in the midst of what TWC calls a “challenging economic environment.”  While TWC has arguably done a better job than many of its industry-peers retaining core video subscribers and growing broadband, voice and other advanced communications services, the company believes that growth in revenue generating units, as well as growth in other video services (e.g., digital video recorders, premium channels and transactional video-on-demand), will continue to be slower in 2009 as compared to 2008. In addition, TWC expects that advertising revenues, off 26% during 1Q09, will continue to decline throughout 2009 due to lower political advertising revenues and continued weakness in advertising revenues from national, regional and local businesses    

TWC’s 1Q09 operations are back to normal after taking some rather significant impairment losses at the end of 2008.  During 4Q08 the company recorded an impairment of $14.8b to reduce the value of its cable franchise rights as a result of its annual impairment testing of goodwill and indefinite-lived intangible assets.  Roughly $10b of the impairment was attributable to the perceived higher cost of capital during 4Q08 while approximately $5b of the impairment was attributed to lower projected cash flows.  TWC also recognized a pretax impairment of $367m during the last quarter of 2008 on the $550m it invested in Clearwire Corp. (Nasdaq:CLWR) in November 2008 (The Deal Advisor, 05/08, p.1).

1Q09 EARNINGS: RCN

Looking for the NEON Light

Over the last several years, two significant events have defined Herndon, Va.-based RCN Corporation (Nasdaq:RCNI).  In May 2004, the company filed for Chapter 11 bankruptcy, emerging in December 2004 with $1.2b less debt on its balance sheet.  Then, in November 2007, RCNI paid $255m for Westborough, Mass.-based NEON Communications Group (The Deal Advisor, 12/07, p.15), significantly bulking up the company’s carrier-grade transport facilities in the Northeast.

Subsequent to the NEON acquisition, RCNI reorganized into two primary business units – Residential/SMB, which provides voice, video and data services to approximately 429k discrete residential and small business customers, and RCN Metro Optical Networks, which provides transport products and services to approximately 800 customers including telecommunications carriers, wireless providers and enterprise customers.  While residential and small business sales account for 77% of RCNI’s revenues, providing transport services to other carriers and enterprise customers looks to be where the company is banking on near-term growth.  While the Residential/SMB unit, which saw YoY revenues increase 3.2% in 1Q09, is currently licensed to provide video, data and voice services to over 5m homes and businesses, its FTTP network currently passes only 1.4m homes and businesses, a figure that has not changed since the company emerged from bankruptcy.  The RCN Metro unit, on the other hand, “continues to expand” and saw YoY growth of 12% during 1Q09.

RCNI’s current debt levels are mostly comprised of the $455m that was on the company’s balance sheet when it emerged from bankruptcy and the $255m borrowed to pay for NEON.  An existing FTTP network, better than average near-term revenue growth prospects, additional expected synergies from the continued integration of the NEON acquisition, and nominal debt maturities prior to 2013 should put RCNI on solid ground well into 2010.

1Q09 EARNINGS: Mediacom Communications

Sailing into a Cash Crunch

True to its sector, Mediacom Communications Corporation (Nasdaq:MCCC) has managed to post respectable gains in revenue, operating income and OIBDA, despite the chilly economic environment of the last nine months.  Even chairman and ceo Rocco B. Commisso was surprised by MCCC’s “unexpectedly good start to 2009.”  Commisso remains “cautious” about MCCC’s operating results for the rest of the year but is confident the company will be able to generate at least $67m of after-tax free cash flow during 2009. 

With $3.4b of debt, $67m of after-tax free cash flow doesn’t cut it and MCCC is clearly biding its time in hopes of a much improved capital market.  Barring a technical default, the company appears to believe the $629m of availability under its revolving credit facilities will be able to address near-term debt maturities.  But with MCCC’s current revolvers slated to phase out over the next few years, scheduled maturities of debt set to spike at $273m during 2011 and $575m during 2013, and a current leverage ratio (debt to cash flow) in excess of 6.0x, things are cloudy at best.

Despite all this, MCCC nonetheless piled on another $84m of debt during 1Q09.  The increase is attributable to the February 13, 2009 closing of the so-called “Morris Transaction” where MCCC redeemed 28.3m of its outstanding shares in exchange for a 25k sub Western North Carolina cable system and $110m (The Deal Advisor, 09/08, p.9).

1Q09 EARNINGS: Knology

Slow and Steady

In the recent past, Knology, Inc. (Nasdaq:KNOL) has borrowed heavily to fuel growth through acquisitions.  With credit tough to come by and no acquisitions over the past year, KNOL’s YoY revenue growth tailed off considerably during 1Q09. 

The 684k connections served by KNOL include 27k access lines served by four RLECs – Graceba Total Communications, Interstate Telephone Company, PrairieWave Communications and Valley Telephone Company.   For 1Q09, KNOL reported a decrease in voice revenues attributable to a reduction in toll revenues and the effect of converting PraireWave’s  customers to KNOL’s service plans.  KNOL closed on its acquisition of PrairieWave back in April 2007 and Graceba Total Communications on January 4, 2008.

KNOL took in $23.7m in cash from operating activities during the first quarter, about the same amount it spent on capital expenditures and debt payments during the quarter.  With annual free cash flow (OIBDA less capex) in the area of $50m and $55m of cash on the books as of the end of 1Q09, scheduled debt maturities of $21m over the next three years are more than manageable. 

KNOL expects growth to be slow the rest of 2009, but feels its current cash flow levels will be sufficient to get it through these tight times.  The president and cfo, M. Todd Holt said, “Our EBITDA…and capital expenditures…are tracking to plan, and our business continues to benefit from a very simple and efficient capital structure.  We are comfortable with the liquidity and leverage profile of the business and believe that the Company is well positioned to deliver healthy free cash flow on a go forward basis.”