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The Evolution of Our Success. Sanford Bernstein 19 th Annual Strategic Decisions Conference June 2003. Jim Robbins – President and CEO. Safe Harbor.
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The Evolution of Our Success Sanford Bernstein 19th Annual Strategic Decisions ConferenceJune 2003 Jim Robbins – President and CEO
Safe Harbor During this presentation, we will be making certain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, about business strategies and goals, market potential, future financial performance, new service and product launches and other matters. These statements address matters that involve significant risks and uncertainties that could cause actual results to differ materially from such statements, including, without limitation, possible changes in expected market acceptance of new products or services, impact of rate changes, ability of vendors to meet contractual obligations, competitive issues, regulatory issues and continued access to capital on terms acceptable to the Company. Please refer to publicly filed documents of the Company, including the Company’s most recent Form 10-K for additional information about the Company and for additional information about the risks and uncertainties related to the Company.
Use of Non-GAAP Measures This presentation contains certain non-GAAP financial measures including operating cash flow (also referred to as EBITDA) and free cash flow. For full disclosure of the use of these non-GAAP measures and a reconciliation between the non-GAAP financial measures and the GAAP financial measures, please see our quarterly earnings press release, 10K or 10Q available at www.cox.com/investor.
The Evolution of Our Success Throughout the last eight years, Cox Communications has grown in size, service offerings and wisdom. Although our focus has changed and evolved over time, our overall strategy has remained the same – to deliver long-term shareholder value. We see tremendous upside across all areas of our business and a bright future ahead. In order to understand where we’re going, it is first important to understand where we’ve been….
The Evolution of Our Success MOMENTUM MOMENTUM 1996 1997 2001 2002 1995 2000 2003 The Cox Timeline A Journey Through the Years
MOMENTUM MOMENTUM The Evolution of Our Success Launch of digital video, high speed Internet and digital telephone IPO & Acquisition of Times Mirror Cable Acquisition of TCA Cable TV Cox embraces 96 Telecom Act 1996 1997 1998 1999 1995 2000 2003 Focus: Clustering through Acquisitions Upgrades/Rebuilds Establish High Standards of Customer Service Introduce New Services
Clustering Through Strategic AcquisitionsSystem Profile - 1995 2.6 million basic customers Ohio: Cleveland Coshocton / Newark New England Virginia: Hampton Roads Roanoke Lafayette, IN Omaha, NE Oklahoma City, OK Myrtle Beach, SC Lubbock / Midland, TX Phoenix, AZ Middle Georgia California: San Diego Orange County Bakersfield / Santa Barbara Humboldt Palos Verdes Pensacola/Ft. Walton Beach, FL Gainesville/Ocala, FL New Orleans, LA Note: Some systems are not shown above because they were subsequently sold, traded or only partly owned by Cox as of Dec. 1995
Clustering Through Strategic AcquisitionsSystem Profile - 2000 Grew to over 6 million basic customers in 5 years Kansas: Wichita Topeka Manhattan/Junction City Southeast Kansas Salina Dodge City/Garden City New England (includes parts of Rhode Island, Connecticut, & Massachusetts) Sun Valley, ID Cleveland, OH Oklahoma: Oklahoma City Tulsa Enid Muskogee Stillwater Virginia: Northern VA Hampton Roads Roanoke Omaha, NE (includes Council Bluffs, IA) Arkansas: Fayetteville/ Springdale Fort Smith Bentonville Russellville Jonesboro (+S.W. Missouri) Las Vegas, NV North Carolina: Rocky Mt. Greenville New Bern Phoenix, AZ Middle Georgia California: San Diego Orange County Bakersfield / Santa Barbara Humboldt Tucson/Sierra Vista, AZ Pensacola/Ft. Walton Beach, FL Gainesville/Ocala, FL Texas: Bryan Georgetown Tyler Victoria West Texas (includes Lubbock, Midland, Amarillo, San Angelo, Abilene and nearby areas, + Clovis, NM) Louisiana: Alexandria Baton Rouge Bossier City Lafayette Lake Charles New Iberia New Orleans
HEADEND Network Rebuilds & UpgradesClassic Cable Network in the Beginning HEAD END (Signal Processing Center) DISTRIBUTION SYSTEM (Trunk & Feeder Lines) DROP SYSTEM (Service Wire & Set Top Terminal)
750 Homes HEADEND Network Rebuilds & UpgradesA New Beginning – 1995 Classic Cable Network – The Cox Way Ring-in-Ring Redundant Fiber to Nodes Serving ~750 Homes Passed Outstanding Reliability and More Targeted Bandwidth
Node Ring in Ring HE 750 MHz 1000 HP Upstream Downstream 5 MHz 30 MHz 42 MHz 54 MHz 550 MHz 650 MHz 750/860 MHz I m p u l s e Voice & Data Svcs Voice & Data Analog TV Services Digital TV Services Reserve Reserve Two-Way Two-Way HDTV, VOD Spare "Broadcast" Network Rebuilds & UpgradesThe Cox Way 750 MHz of bandwidth serving an average of 750 homes passed is more than enough capacity for our future needs
Introduction of Broadband StrategyMore Than Just a Cable Company • Cox embraced the spirit of the 1996 Telecommunications Act by providing competition and customer choice • Digital Cable • High-Speed Internet • Digital Telephone • One common back-office platform
The Evolution of Our Success Launch trial of EOD Cox Business Services is established Build out of IP Backbone MOMENTUM MOMENTUM 2001 2002 1995 2000 2003 Focus: Clustering through Acquisitions Upgrades/Rebuilds Establish High Standards of Customer Service Introduce New Services Focus: Completion of Rebuilds Launch of New Services Development of Commercial Services
Early Focus on Rebuild/Upgrades Largely Complete YE 2003 YE 2000 YE 2001 YE 2002 4% 5% 6% 11% 81% 68% 86% 92% 112,071 Miles 75% Two-Way 114,469 Miles 91% Two-Way 117,479 Miles 96% Two-Way 119,542 Miles 97% Two-Way <450 550/625 450 750> From 2000 to 2003, we upgraded over 45,000 miles of plant and built over 8,000 miles of new fiber
New Product LaunchesPenetration by Product How high can we go? From 2000 to 2002, Cox launched digital cable and high-speed Internet to over 4 million homes and launched digital telephone to over 2.5 million homes Note: Penetration is defined as the number of subscribers divided by ready homes passed by product
New Product DevelopmentCommercial Services • Launched Cox Business Services in 2000 and today CBS contributes 5% of total company revenues • Significant opportunity with over 320,000 businesses within 100 feet of our existing HFC network • We are leveraging the residential infrastructure • Same NOC • Same switches • Same trucks, employees, etc.
The Evolution of Our Success Because we’ve focused on the right things at the right time, we’re powerfully positioned for a competitive marketplace! The “Sweet Spot” MOMENTUM MOMENTUM 1995 2000 2003 Focus: Clustering through Acquisitions Upgrades/Rebuilds Establish High Standards of Customer Service Introduce New Services Focus: Completion of Rebuilds Launch of New Services Development of New Services Focus: Growth As a Top Priority Improve productivity and efficiencies Enhance our Competitive Position Execution
The “Sweet Spot”1Q03 Highlights • Basic subscribers grew 0.6% since 1Q02 and total customer relationships grew 2.0% • High-speed Internet additions remain strong with 7 out of 10 customers continuing to choose Cox NOT DSL • 780,000 telephone subscribers and 19% penetration to ready homes at the end of 1Q03 • Digital penetration to basic customers at 30% • Continued focus on sell-in to new basic subscribers
The “Sweet Spot”Product and Customer Growth 1Q03 1Q02 % Change Total Basic Customers 6,315,950 6,275,390 .6% Total Advanced Service RGUs 4,219,101 3,059,199 38% Total RGUs 10,535,051 9,334,589 13% Total Homes Passed 10,268,146 10,021,979 2.4% RGUs per Home Passed 1.03 .93 11% Total Rev. per Home Passed / mo. $ 44 $ 39 13% We continue to leverage the capital investment in our plant to deliver more services and derive more revenue from every home we pass
Growth As a Top PriorityFinancial Performance (in millions) 16% Growth 46% Decline 22% Growth 1Q03 EBITDA margins were 35.1%, a 180 basis point improvement over 1Q02
The “Sweet Spot”Consistently Delivering Free Cash Flow (Millions of Dollars) Actual 1Q03 Actual 4Q02 Actual 3Q02 Total Operating Cash Flow $ 479 $ 492 $ 453 Capital Expenditures (326) (501) (418) Cash Increase in Working Capital (32) 105 73 Cash Paid for Interest (93) (85) (118) Cash Refunded (Paid) for Taxes 2 75 28 TOTAL FREE CASH FLOW $ 30 $ 86 $ 18 We will be free cash flow positive for the full year 2003
Growth As a Top PriorityDiversified Revenue Streams Percentage of Residential Revenue 1Q00PF 1Q03 2% 3% 4% 91%
Growth As a Top PriorityNew Product Rollout as of 1Q03 • HDTV available to approximately 40% of homes passed • Local, premium, Discovery and ESPN content • Digital Video Recorder (DVR) launched in Gainesville and Northern Virginia • Entertainment on Demand in various stages of launch in four markets • Home Networking now launched in 13 markets
Improving ProductivityProductivity Initiatives • Increase field service efficiency and effectiveness • Promoting self-installation • Multiple product installations on one truck roll • Decrease calls into the call center • Providing alternatives such as web mail, website FAQ’s, etc. • Increasing ease of self-installation and product use • Stabilization of HSI network • Decrease churn • Bundling and sell-in strategies • Price/value equation • Commitment to quality customer service
Service Call Truck Rolls – All Lines of Business January February March Total 2002 Pro forma 234,867 219,961 231,447 686,275 2003 Actuals 195,435 163,136 185,216543,787 Difference -17% -26% -20% -21% Improving ProductivityService Calls This improvement resulted in 143,000 less truck rolls during the quarter
Improving ProductivitySelf-Installations – High Speed Internet ~35% ~15% 2002 2003 Approximately 80% Self-installations in Omaha in 1Q03
Improving ProductivityCall Volume (Self-Reliance) The build out and management of our own backbone has increased network reliability
Improving ProductivityWe’re Executing On Our Goals Making Progress • Increase field service efficiency and effectiveness • Decrease calls into the call center • Decrease churn Improvements in the above areas contributed to the 180 basis point improvement in margin from 1Q02 to 1Q03
Control Our CostsDrivers of Capital Expenditure Reduction Capex trends… What it means… • Over 90% of our HFC plant is upgraded to 750 MHz or higher • Customers are buying their own equipment - 80% of 1Q03 new High-Speed Internet connects purchased their modem • 41% of homes are upgraded to provide telephone service • Rebuild and upgrade capital spending is behind us • Reduced spending on customer premise equipment • Customer growth is driving success-based capital • Major capital spending to offer phone service is behind us
Competitively PositionedBundling is a Key Advantage Upgrade Completion Retail Distribution Strategy Customer Service Quality Cox Bundling Strategy New Product Development Programming & Content Competitive Marketing
Bundling Drives Penetration (In Thousands) % = Bundled Penetration to Basic Customers 28% 26% 23% 21% 19% Bundled penetration in Orange County and Omaha is now above 50%
Competitively PositionedWhy Phone is Important to the Bundle The more products we offer, the more likely our customers are to subscribe to all of our services!
Competitively PositionedCox Versus DBS • Our fully integrated 3-product bundle is more competitive than what DBS can provide • DBS penetration in Cox markets grew more in 2001 than in 2002 despite local into local launches and increased promotional activity • 1Q03 DBS penetration in our markets was flat versus 4Q02 at nearly half the national average • DBS operators are constrained by bandwidth and lack localism and two-way capability Only Cox can offer video, voice and high-speed Internet services with the option of one bill
Competitively PositionedCox versus the RBOC • DSL providers (most notably SBC) have been using aggressive promotions for the past 9-12 months • We have seen no impact on Cox High-Speed Internet run rates - even in California • Verizon recently reduced DSL pricing to $34.95 raising questions in investors’ minds Cox HSI is very competitively positioned: CoxVerizon • Speed - downstream 3 Mbps 1.5 Mbps* • Speed - upstream 256 Kbps 128 Kbps • Availability 96% 63% * 1.5 Mbps at best depending on distance from central office
Competitively PositionedThe Cox Bundle Comes Out Ahead RHODE ISLAND VERIZON COX Difference HSI Service $ 29.95 $ 39.95 $ 10.00 (a)Telephone Service 28.95 11.95 (17.00) (b)Telephone Features included 5.95 5.95 Subtotal (HSI + Phone) 58.90 57.85 (1.05) (c)Video Service 39.98 40.99 1.01 Bundle Value/Discount (10.00) (10.00) Total$ 98.88 $ 88.84 $ (10.04) • $29.95 Verizon offer requires purchase of telephone package and LD • Minimum feature requirement for Cox Bundle • Verizon Video represents DISH Network Top 100 plus local channels; Cox Video is standard service (bundled discount does not require digital service in this market)
The Evolution of Our Success A Journey Through the Years MOMENTUM MOMENTUM 1996 1997 2001 2002 1995 2000 2003 Despite our changing focus throughout the years, our strategy has always stayed the same – grow and manage the business to maximize long-term shareholder value
What’s in Store for the Future?We’ll Keep Doing What We Do Best • Continued basic subscriber growth • Driving the new and advanced services penetration higher • Double-digit growth in revenue and EBITDA through the plan years • Improving margins • Continued significant declines in capex leading to significant free cash flow generation • Expect capex of ~$1 billion in the outer years of our plan assuming mid-teens revenue and EBITDA growth Our long-term strategy puts us in a great position for future growth
The Evolution of Our Success Sanford Bernstein 19th Annual Strategic Decisions ConferenceJune 2003 Jim Robbins – President and CEO