ICCI Insight Communications CO CL A (MM)

Insight Communications Company (NASDAQ:ICCI) today announced financial results for the quarter ended September 30, 2005. Third Quarter Highlights -- Revenue of $279.0 million, an increase of 11% over Q3 2004 -- Operating Income before Depreciation and Amortization* of $116.0 million, an increase of 10% over Q3 2004 -- Capital expenditures of $51.1 million -- Free Cash Flow* of $30.7 million -- Total Customer Relationships of 1,334,200, compared to 1,330,300 for Q3 2004 -- Total RGUs of 2,281,000, an increase of 9% from Q3 2004, comprised of: -0- *T -- High-speed Internet customer net gain of 47,900, an increase of 27% over Q3 2004 net additions. Total HSI customers at quarter end were 439,200, a penetration of 19% of HSI homes passed. -- Basic customer net gain of 13,800, an increase of 12,600 customers over Q3 2004 net additions, resulting in 1,271,000 basic customers at quarter end -- Digital customer net gain of 29,100, an increase of 37% over Q3 2004 net additions, increasing digital customers to 489,900 at quarter end. Digital penetration was 40% of the company's Digital Universe. -- Telephone customer net gain of 7,400, bringing total telephone customers to 80,900 at quarter end and penetration to 10% of marketable homes passed *T -- As of September 30, 2005, 97% of the company's customers were passed by two-way, 750 MHz or higher capacity upgraded network Operating Results for the Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004 Revenue for the three months ended September 30, 2005 totaled $279.0 million, an increase of 11% over the prior year, due primarily to customer gains in high-speed Internet and digital services, as well as basic rate increases. High-speed Internet service revenue increased 46% over the prior year, which is mainly attributable to an increased customer base. Insight added a net 47,900 high-speed Internet customers during the quarter to end at 439,200 customers. -0- *T * See explanation of these Non-GAAP measures on page 5. -1- *T In addition, digital service revenue increased 10% over the prior year due to an increased customer base. Insight added a net 29,100 digital customers during the quarter to end at 489,900 customers. Basic cable service revenue increased 3% due to basic rate increases partially offset by customer losses over the last twelve months. Insight is increasing its customer retention efforts by emphasizing bundling, enhancing and differentiating its video services and providing video-on-demand, high definition television and digital video recorders. The company is also continuing to focus on improving customer service through higher service levels, increased education of product offerings and increased spending on marketing and sales efforts. Revenue by service offering was as follows for the three months ended September 30 (dollars in thousands): -0- *T Revenue by Service Offering -------------------------------------- ---------- Three Three Months Months Ended Ended September % of September % of 30, Total 30, Total % Change 2005 Revenue 2004 Revenue in Revenue ---------- -------- --------- -------- ---------- Basic $148,393 53.2% $143,918 57.4% 3.1% High-Speed Internet 49,677 17.8% 33,955 13.5% 46.3% Digital 27,300 9.8% 24,872 9.9% 9.8% Advertising 18,416 6.6% 15,725 6.3% 17.1% Premium 13,215 4.7% 13,694 5.5% (3.5)% Telephone 9,020 3.2% 3,829 1.5% 135.6% Franchise fees 7,681 2.8% 7,183 2.9% 6.9% Other 5,284 1.9% 7,340 3.0% (28.0)% ---------- -------- --------- -------- ---------- Total $278,986 100.0% $250,516 100.0% 11.4% ========== ======== ========= ======== ========== *T Total Customer Relationships were 1,334,200 as of September 30, 2005, compared to 1,330,300 as of September 30, 2004. Total Customer Relationships represent the number of customers who receive one or more of Insight's products (i.e., basic cable, high-speed Internet or telephone) without regard to which product they purchase. Revenue Generating Units ("RGUs"), which represent the sum of basic, digital, high-speed Internet and telephone customers, as of September 30, 2005, increased 9% as compared to September 30, 2004. RGUs by category were as follows (in thousands): -0- *T September 30, 2005 September 30, 2004 ------------------- ------------------- Basic 1,271.0 1,283.6 Digital 489.9 439.4 High-speed Internet 439.2 311.5 Telephone 80.9 62.8 ------------------- ------------------- Total RGUs 2,281.0 2,097.3 =================== =================== *T -0- *T -2- *T Average monthly revenue per basic customer was $73.57 for the three months ended September 30, 2005, compared to $65.08 for the three months ended September 30, 2004. This primarily reflects the continued growth of high-speed Internet and digital product offerings in all markets, as well as basic rate increases. In addition, telephone revenues for the three months ended September 30, 2005, reflect service revenues earned directly from customers, compared to the three months ended September 30, 2004, which reflected revenues billed to Comcast under a previous contractual arrangement that was terminated effective December 31, 2004. Also included in telephone revenue for the three months ended September 30, 2005, is the continued amortization of installation revenue under the previous arrangement with Comcast in the amount of $833,000. Programming and other operating costs increased $7.4 million, or 8%. Total programming costs for Insight's video products increased primarily as a result of increases in programming rates offset by a credit of approximately $3.4 million. The credit resulted from favorable resolution of pricing negotiations related to certain prior period programming costs that were accrued at a higher rate than the amount actually paid, as well as $1.7 million for a settlement of disputed claims with a vendor. Other operating costs increased primarily as a result of increases in technical salaries for new and existing employees, in addition to decreased capitalized labor costs due to the continued transition from upgrade and new connect activities to maintenance and reconnect activities. Other operating costs also increased as a result of cost of sales associated with telephone that were previously paid by Comcast, increases in repairs and maintenance costs due to increased repairs on customer premise equipment and increased software maintenance costs and increased property taxes due to a favorable reversal of accrued property taxes recorded for the quarter ended September 30, 2004. Selling, general and administrative expenses increased $10.2 million, or 18%, primarily due to increased payroll and payroll related costs, including salary increases for existing employees. Marketing support funds (recorded as a reduction to selling, general and administrative expenses) decreased over the prior year's quarter. Marketing expenses increased over the prior year's quarter to support the continued rollout of high-speed Internet, digital and telephone products, and to maintain the company's core video customer base. A decrease in expenses previously allocated to Comcast, under Insight's prior agreement to manage certain Comcast systems, also contributed to the increase in selling, general and administrative expenses. As this agreement was terminated effective July 31, 2004, the period ended September 30, 2005 does not include any of these expense allocations, and the quarter ended September 30, 2004 includes one month of these expense allocations. Some cost savings have been realized upon termination of the management agreement, and the impact of certain of these savings is reflected in programming and other operating costs. An increase in other miscellaneous selling, general and administrative expenses was partially offset by a decrease in bad debt expense over the prior year's quarter. Depreciation and amortization expense increased $4.6 million, or 8%, primarily as a result of additional capital expenditures through September 30, 2005. -0- *T -3- *T These expenditures were primarily for network extensions, capitalized payroll, telephone equipment and purchases of customer premise equipment, all of which Insight considers necessary in order to continue to maintain and grow its customer base and expand its service offerings. Partially offsetting this increase was a decrease in depreciation expense related to certain assets that have become fully depreciated since September 30, 2004. As a result of the factors discussed above, Operating Income before Depreciation and Amortization increased $10.9 million, or 10%. Interest expense increased $8.5 million, or 17%, due to higher interest rates, which averaged 8.3% for the three months ended September 30, 2005, as compared to 7.0% for the three months ended September 30, 2004, and an increase in the accreted value of the 12 1/4% Senior Discount Notes. Liquidity and Capital Resources Insight's business requires cash for operations, debt service, capital expenditures and acquisitions. The cable television business has substantial ongoing capital requirements for the construction, expansion and maintenance of its broadband networks and provision of new services. In the past, expenditures have been made for various purposes, including the upgrade of the existing cable network, and in the future will be made for network extensions, installation of new services, customer premise equipment (e.g., set-top boxes), deployment of new product and service offerings, and, to a lesser extent, network upgrades. Historically, Insight has been able to meet its cash requirements with cash flow from operations, borrowings under its credit facilities and issuances of private and public debt and equity. Cash provided by operations for the nine months ended September 30, 2005 and 2004 was $225.0 million and $227.7 million. The decrease was primarily attributable to the timing of cash receipts and payments related to Insight's working capital accounts; the decrease was partially offset by increased operating income and the effect of non-cash items. Cash used in investing activities for the nine months ended September 30, 2005 and 2004 was $143.0 million and $130.9 million. The increase primarily was due to capital expenditures for the buildout of Insight's telephone product. Cash used in financing activities for the nine months ended September 30, 2005 and 2004 was $64.3 million and $60.8 million. The increase was primarily due to debt issuance costs paid for the refinancing of the Term B loan facility and increased amortization payments of the credit facility in 2005. For the nine months ended September 30, 2005 and 2004, Insight spent $144.6 million and $130.9 million in capital expenditures. These expenditures principally constituted telephone equipment, purchases of customer premise equipment, capitalized labor, headend equipment and system upgrades and rebuilds, all of which are necessary to maintain Insight's existing network, grow its customer base and expand its service offerings. -0- *T -4- *T Free Cash Flow for the nine months ended September 30, 2005 totaled $80.4 million, compared to $96.8 million for the nine months ended September 30, 2004. The decrease was primarily driven by the following: -- An $8.1 million use of Free Cash Flow for the nine months ended September 30, 2005 compared to a $13.5 million source for the nine months ended September 30, 2004 from changes in working capital accounts; -- A $14.5 million increase in cash interest expense paid primarily driven by an increase in interest rates; and -- A $13.7 million increase in capital expenditures. The above fluctuations reduced Free Cash Flow by $49.8 million and were largely offset by an increase in operating income before depreciation and amortization of $33.4 million. While Insight expects to continue to use Free Cash Flow to repay its indebtedness, as interest rates continue to increase, it expects interest costs will also be higher. On July 21, 2005, Insight completed a refinancing of the existing $1.1 billion Term B loan facility under the Insight Midwest Credit Agreement. This refinancing reduced the applicable margins for LIBOR rate borrowings from LIBOR plus 275 basis points to LIBOR plus 200 basis points. The applicable margin will reduce an additional 25 basis points if the Midwest Holdings leverage ratio drops below 2.75. The maximum total leverage ratio covenant was reset from 3.75 to 4.50 on July 1, 2005 with additional step-downs to 4.25 on July 1, 2006 and to 4.00 on July 1, 2007. The facility was also amended to provide certain flexibility to refinance the senior notes at Insight Midwest. Use of Operating Income before Depreciation and Amortization and Free Cash Flow Insight utilizes Operating Income before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. Operating Income before Depreciation and Amortization is considered an important indicator of the operational strength of Insight's businesses and is a component of its annual compensation programs. In addition, Insight's debt agreements use Operating Income before Depreciation and Amortization, adjusted for certain non-recurring items, in their leverage and other covenant calculations. Insight also uses this measure to determine how it will allocate resources and capital. Insight's management finds this measure helpful because it captures all of the revenue and ongoing operating expenses of its businesses and therefore provides a means to directly evaluate the ability of the business operations to generate returns and to compare operating capabilities across its businesses. This measure is also used by equity and fixed income research analysts in their reports to investors evaluating Insight's businesses and other companies in the cable television industry. Insight believes Operating Income before Depreciation and Amortization is useful to investors because it enables them to assess its performance in a manner similar to the methods used by Insight's management and provides a measure that can be used to analyze, value and compare companies in the cable television industry, which may have different depreciation and amortization policies. -0- *T -5- *T A limitation of Operating Income before Depreciation and Amortization, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in Insight's businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures, investment spending and Free Cash Flow. Management also evaluates the costs of capitalized tangible and intangible assets by analyzing returns provided on the capital dollars deployed. Another limitation of Operating Income before Depreciation and Amortization is that it does not reflect income net of interest expense, which is a significant expense for the company because of the substantial debt it has incurred to acquire cable television systems and finance capital expenditures to upgrade its cable network. Management evaluates the impact of interest expense through other measures including interest expense itself, Free Cash Flow, the returns analysis discussed above and debt service covenant ratios under Insight's credit facility. Free Cash Flow is net cash provided by operating activities (as defined by accounting principles generally accepted in the United States) less capital expenditures. Free Cash Flow is considered to be an important indicator of Insight's liquidity, including its ability to repay indebtedness. Insight believes Free Cash Flow is useful for investors because it enables them to assess Insight's ability to service its debt and to fund continued growth with internally generated funds in a manner similar to the methods used by Insight's management, and provides a measure that can be used to analyze, value and compare companies in the cable television industry. Both Operating Income before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, Operating Income, Net Income and various cash flow measures (e.g., Net Cash Provided by Operating Activities), as well as other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States. -0- *T -6- *T Reconciliation of Net Loss to Operating Income before Depreciation and Amortization The following table reconciles Net Loss to Operating Income before Depreciation and Amortization. In addition, the table provides the components from Net Loss to Operating Income for purposes of the previous discussions. -0- *T Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2005 2004 2005 2004 --------- --------- --------- --------- (in thousands) Net loss $7,375 $5,447 $16,445 $19,791 Income tax benefit (provision) (125) 15 (375) 326 --------- --------- --------- --------- Loss before income taxes 7,250 5,462 16,070 20,117 Minority interest expense (2,242) (1,597) (6,069) (877) --------- --------- --------- --------- Loss before minority interest and income taxes 5,008 3,865 10,001 19,240 Other income (expense): Other (834) (475) (1,505) 1,701 Interest income (853) (174) (1,876) (423) Interest expense 57,773 49,228 168,781 150,165 --------- --------- --------- --------- Total other expense, net 56,086 48,579 165,400 151,443 --------- --------- --------- --------- Operating income 51,078 44,714 155,399 132,203 Depreciation and amortization 64,930 60,360 190,599 180,381 --------- --------- --------- --------- Operating Income before Depreciation and Amortization $116,008 $105,074 $345,998 $312,584 ========= ========= ========= ========= *T -0- *T -7- *T Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow The following table provides a reconciliation from net cash provided by operating activities to Free Cash Flow. In addition, the table provides the components from net cash provided by operating activities to operating income for purposes of the previous discussions. -0- *T Three Months Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 2005 2004 2005 2004 ----------- -------- --------- --------- (in thousands) Operating income $51,078 $44,714 $155,399 $132,203 Depreciation and amortization 64,930 60,360 190,599 180,381 ----------- -------- --------- --------- Operating Income before Depreciation and Amortization 116,008 105,074 345,998 312,584 Changes in working capital accounts(1) (13,713) 4,083 (8,136) 13,470 Cash paid for interest (20,480) (15,778) (112,598) (98,093) Cash paid for taxes (30) (46) (252) (242) ----------- -------- --------- --------- Net cash provided by operating activities 81,785 93,333 225,012 227,719 Capital expenditures (51,109) (47,308) (144,622) (130,895) ----------- -------- --------- --------- Free Cash Flow $30,676 $46,025 $80,390 $96,824 =========== ======== ========= ========= *T About Insight Communications Insight Communications (NASDAQ: ICCI) is the 9th largest cable operator in the United States, serving approximately 1.3 million customers in the four contiguous states of Illinois, Kentucky, Indiana and Ohio. Insight offers bundled, state-of-the-art services in mid-sized communities, delivering analog and digital video, high-speed Internet and, in selected markets, voice telephony to its customers. Any statements in this press release that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The words "estimate," "expect," "anticipate" and other expressions that indicate future events and trends identify forward-looking statements. The above forward-looking statements are subject to risks and uncertainties and are subject to change based upon a variety of factors that could cause actual results to differ materially from those Insight anticipates. Factors that could have a material and adverse impact on actual results include: all of the services offered by Insight face a wide range of competition; Insight has substantial debt and has significant interest payment requirements; there is uncertainty surrounding the potential dissolution of Insight's joint venture with a subsidiary of Comcast Corporation; the terms of Insight Midwest's indebtedness limits Insight's ability to access the cash flow of Insight Midwest's subsidiaries; Insight has a history of net losses; Insight's programming costs are substantial; general business conditions, economic uncertainty or slowdown, and the effects of governmental regulation; and the other risk factors described in Insight's annual report on Form 10-K and other periodic filings. In addition, actual results could differ materially from the forward-looking statements contained in this press release as a result of the timing of the completion of the proposed going private transaction or the impact of such transaction on Insight's operating results, capital resources, profitability, cash requirements, management resources and liquidity. Insight does not undertake any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events, except as required by law. (1) Changes in working capital accounts are based on the net cash changes in current assets and current liabilities, excluding charges related to interest and taxes and other non-cash expenses. -0- *T -8- *T -0- *T INSIGHT COMMUNICATIONS COMPANY, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) September 30, December 31, 2005 2004 -------------- -------------- unaudited Assets Cash and cash equivalents $117,782 $100,144 Investments 5,736 5,053 Trade accounts receivable, net of allowance for doubtful accounts of $1,291 and $1,050 as of September 30, 2005 and December 31, 2004 22,629 31,355 Launch funds receivable 517 2,749 Prepaid expenses and other current assets 19,532 11,343 -------------- -------------- Total current assets 166,196 150,644 Fixed assets, net 1,117,526 1,154,251 Goodwill 72,430 72,430 Franchise costs 2,361,959 2,361,959 Deferred financing costs, net of accumulated amortization of $22,894 and $18,892 as of September 30, 2005 and December 31, 2004 25,606 27,896 Other non-current assets 2,053 2,692 -------------- -------------- Total assets $3,745,770 $3,769,872 ============== ============== Liabilities and stockholders' equity Accounts payable $22,645 $31,886 Accrued expenses and other current liabilities 37,224 40,838 Accrued property taxes 12,830 13,049 Accrued programming costs (inclusive of $37,743 53,478 51,329 and $36,838 due to related parties as of September 30, 2005 and December 31, 2004) Deferred revenue 5,744 8,996 Interest payable 48,131 20,643 Debt - current portion 83,500 83,500 -------------- -------------- Total current liabilities 263,552 250,241 Deferred revenue 1,835 2,904 Debt 2,687,935 2,724,063 Other non-current liabilities 2,008 1,331 Minority interest 251,592 245,523 Stockholders' equity: Preferred stock; $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding as of September 30, 2005 and December 31, 2004 - - Common stock; $.01 par value: Class A - 300,000,000 shares authorized; 51,841,390 and 50,912,910 shares issued and outstanding as of September 30, 2005 and December 31, 2004 517 509 Class B - 100,000,000 shares authorized; 8,489,454 shares issued and outstanding as of June 30, 2005 and December 31, 2004 85 85 Additional paid-in-capital 828,409 813,853 Accumulated deficit (276,715) (260,270) Deferred stock compensation (13,893) (8,689) Accumulated other comprehensive income 445 322 -------------- -------------- Total stockholders' equity 538,848 545,810 -------------- -------------- Total liabilities and stockholders' equity $3,745,770 $3,769,872 ============== ============== *T -0- *T -9- *T -0- *T INSIGHT COMMUNICATIONS COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except share and per share amounts) Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Revenue $278,986 $250,516 $827,624 $739,910 Operating costs and expenses: Programming and other operating costs (exclusive of depreciation and amortization) (inclusive of $39,438 and $120,114 and $37,490 and $110,968 of programming expense incurred through related parties for the three and nine months ended September 30, 2005 and 2004) 94,872 87,522 287,005 264,277 Selling, general and administrative 68,106 57,920 194,621 163,049 Depreciation and amortization 64,930 60,360 190,599 180,381 ---------- ----------- ----------- ----------- Total operating costs and expenses 227,908 205,802 672,225 607,707 ---------- ----------- ----------- ----------- Operating income 51,078 44,714 155,399 132,203 Other income (expense): Interest expense (57,773) (49,228) (168,781) (150,165) Interest income 853 174 1876 423 Other income (expense) 834 475 1505 (1,701) ---------- ----------- ----------- ----------- Total other expense, net (56,086) (48,579) (165,400) (151,443) Loss before minority interest and income taxes (5,008) (3,865) (10,001) (19,240) Minority interest expense (2,242) (1,597) (6,069) (877) ----------- ----------- ----------- ----------- Loss before income taxes (7,250) (5,462) (16,070) (20,117) Benefit (provision) for income taxes (125) 15 (375) 326 ----------- ----------- ----------- ----------- Net loss applicable to common stockholders $(7,375) $(5,447) $(16,445) $(19,791) =========== =========== =========== =========== Basic and diluted loss per share attributable to common stockholders $(.12) $(.09) $(.27) $(.33) Basic and diluted weighted-average shares outstanding 60,300,352 59,757,557 59,880,754 59,711,272 *T -0- *T -10- *T -0- *T INSIGHT COMMUNICATIONS COMPANY, INC. FINANCIAL INFORMATION (in thousands) Q3 Q2 Q3 2005 2005 2004 --------- --------- --------- Customer Relationships 1,334.2 1,315.4 1,330.3 Total Average Monthly Revenue per Customer $73.57 $73.64 $65.08 Basic Cable ----------------------------------------- Homes Passed 2,417.6 2,396.4 2,364.1 Basic Cable Customers 1,271.0 1,257.2 1,283.6 Basic Cable Penetration 52.6% 52.5% 54.3% Cable Revenue $148,393 $150,071 $143,918 Average Monthly Cable Revenue per Customer $39.13 $39.57 $37.39 High-Speed Internet ("HSI") ----------------------------------------- HSI Homes Passed 2,364.6 2,338.7 2,307.5 HSI Customers 439.2 391.3 311.5 HSI Penetration 18.6% 16.7% 13.5% HSI Revenue $49,677 $46,318 $33,955 Average Monthly HSI Revenue per Customer $13.10 $12.21 $8.82 Average Monthly HSI Revenue per HSI Customer $39.88 $40.68 $38.67 Digital Cable ----------------------------------------- Digital Universe 1,222.0 1,210.5 1,234.1 Digital Customers 489.9 460.8 439.4 Digital Cable Penetration 40.1% 38.1% 35.6% Digital Revenue $27,300 $27,838 $24,872 Average Monthly Digital Revenue per Customer $7.20 $7.34 $6.46 Average Monthly Digital Revenue per Digital Customer $19.14 $20.18 $19.33 Telephone ----------------------------------------- Telephone Universe (marketable homes) 801.1 763.7 740.7 Telephone Customers 80.9 73.5 62.8 Telephone Penetration (to marketable homes) 10.1% 9.6% 8.5% Telephone Revenue $9,020 $8,387 $3,829 Average Monthly Telephone Revenue per Customer $2.38 $2.21 $.99 Average Monthly Telephone Revenue per Telephone Customer $38.96 $39.35 NM Advertising Revenue ----------------------------------------- Advertising Revenue $18,416 $19,749 $15,725 Average Monthly Advertising Revenue per Customer $4.86 $5.21 $4.09 Other Revenue ----------------------------------------- Other Revenue $26,180 $26,948 $28,217 Average Monthly Other Revenue per Customer $6.90 $7.10 $7.33 NM = Not Meaningful *T -0- *T -11- *T -0- *T INSIGHT COMMUNICATIONS COMPANY, INC. NCTA STANDARD REPORTING CATEGORIES CAPITAL EXPENDITURES (unaudited) (in thousands) Insight Consolidated Q3 2005 YTD Q3 2004 FY -------------------------------------------------- --------- --------- Customer Premise Equipment $30,160 $75,239 $95,311 Scaleable Infrastructure 3,022 14,450 14,920 Line Extensions 7,761 18,984 25,168 Upgrade/Rebuild 4,689 13,954 13,616 Support Capital 5,477 21,995 25,081 -------- --------- --------- Total Insight Consolidated $51,109 $144,622 $174,096 -------- --------- --------- *T -0- *T -12- *T