Consolidated Communications Holdings Inc (CNSL) 2005 Q3 法說會逐字稿

Welcome to the Consolidated Communications third quarter earnings call.

At this time, all participants are in a listen-only mode.

Following managements prepared remarks, we'll hold a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded, Wednesday November 9, 2005.

I would now like to turn the call over to Mr. Steve Jones, Vice President Investor Relations of Consolidated Communications.

Please go ahead, sir.

Thank you, Dennis, and good morning, and thank you all for joining us today on Consolidated Communications third quarter 2005 earnings call.

As Dennis mentioned, I'm Steve Jones, Vice President Investor Relations and with me on the call today are Bob Currey, President and Chief Executive Officer;

Steve Childers, our Chief Financial Officer, and other members of senior management.

And also as Dennis mentioned, after the prepared remarks, we will conduct a question-and-answer session.

I will now review the safe harbor provisions of this call and then turn it over to Bob.

This call may contain forward looking statements within the meaning of the federal securities laws.

Such forward-looking statements reflect among other things managements current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements.

Many of these risk are beyond our ability to control or predict.

Please see the risk factors section of our prospectus files with the securities and exchange commission for greater detail.

Because of these risks, uncertainties and assumptions you should not place undue alliance on forward-looking statements.

Furthermore, forward looking statements speak only as of the date they are made.

Consolidated Communications does not undertake any obligation to update or review any such forward-looking information as whether a result of new information, future events or otherwise.

In addition, during this call, we will discuss adjusted EBITDA cash available to pay dividends, which are non-GAAP financial measures.

Our earnings release for this quarters results which has been posted in the investors relations section of our website contains the reconciliation of these measures to the nearest GAAP equivalent.

I will now turn the call over to Bob Currey.

Thank you, Steve.

And thank you, everyone, for joining us today.

The sun is shining in Central Illinois, and we are very pleased with our third quarter financial results, the progress we've made on our integration plans, and our opportunity to share them with you.

As I have discussed previously, our focus is on providing high quality voice and broadband services to our customers and generating strong cash flow.

We are focused on the long-term success of the business by growing revenue per customer, improving our operating efficiency, maintaining our discipline CapEx philosophy and selectively pursuing acquisitions.

We will touch on the recent developments that support these strategies throughout this call.

This quarter did mark our first quarter operating as a public company.

We completed a number of major initiatives around the time of our July IPO.

Key among them were delivering the balance sheet by redeeming our high coupon senior notes, initiating our dividend with the first payment on November 1st to shareholders of record on October 15th, executing on our business plan and delivering results.

Going forward, we are confident in our ability to sustain and grow cash flow as well as provide for dividend commitments.

We anticipate the next dividend will be paid on our about February 1, 2006 to shareholders of record on January 15, 2006.

As noted, we continue to deliver on our operating strategy.

Including the effect of a prior period subsidy receipts, our third quarter revenue was $82.2 million.

Our adjusted EBITDA for the quarter was 33.1 million which included a non-recurring $2.7 million payment.

During the quarter, cash available to pay dividends pro forma for the IPO was $17.7 million.

For the three-month ending September 30, total connections increased 637 to almost $281,000 for the quarter, driven by our focus on broadband.

Our digital subscriber lines, DSL, grew 48% year-over-year and 9% sequentially to just over 36,000 lines.

We are also seeing increased penetration of our products such as long distance, custom calling services, and our bundled feature packages.

The increase in these high value services represents an increase in telephone Ops (ph) ARPU of $1.00 as compared to the same period in 2004.

Effecting results in this quarter was a legal settlement.

As discussed in our recent AK filing, the company chose to settle this suit which we believe was without merit, but we needed to avoid the time, distraction and continued expense of litigation and, therefore, allow us to focus on running and growing the business.

We chose to move on by settling the litigation for a small fraction of the damages claimed, which we view as an indication of the small likelihood that the litigation would have prevailed at trial.

The settlement did result in a $2.7 million charge in the third quarter, including a 2.5 million cash settlement and 200,000 in legal expenses.

These legal expenses were an addition to the 400,000 we had paid in legal fees in the first half of 2005.

Regarding our integration efforts, we continue to make great progress in combining the Illinois and Texas operations.

One example I am particularly proud of, and I think highlights our success in bringing these companies together, is our swift, effective response to hurricane Rita.

As most of you are aware, our Texas properties were directly in the path of the storm.

Our Texas operation teams were prepared and activated their emergency response plans.

As you can imagine, it was an all-hands-on-deck event.

We effectively and seamlessly moved the equipment, not only within the Texas market but also between the two states to support our recovery efforts.

We diverted customer service calls to our Illinois service centers to allow non-emergency response employees the opportunity to evacuate the Houston area as recommended by the authorities.

In addition, the network through its reliability under the force of nature with the primary recovery issue being power outages in parts of our operating territory, problems our logistical teams worked tirelessly to resolve by routing backup power and equipment to the impacted areas.

As we previously announced shortly after the storm passed, the hurricane did not have a material financial impact on our results.

And lastly on integration, we are on schedule with our last remaining project, that being our billing system integration project.

We completed phase one of the project on budget and on schedule in July, which allowed us to move off of a third party provider and bring all our billing operations in house.

Phase two is underway, and we are pleased with its progress.

I look forward to answering your questions on integration during the Q and A session that follows.

Looking ahead to our plans for increasing revenue per customer, we will continue to leverage our network to drive growth and support on marketing strategy.

We enjoy the benefits of the efficient network architecture and technologies in an internet protocol backbone, giving us the most robust and flexible network possible.

Our ability to provide advanced capabilities, such as high speed DSL, and merging services such as digital video is a key strategic advantage.

Growth in DSL remains strong and we continue to leverage our network, and we are able to provide DSL to over 90% of our access lines, and in being capable of providing speeds of up to 6 mb per second to those DSL customers.

As previously mentioned, we now have slightly over 36,000 DSL customers, an increase of 48% compared to a year ago.

Our DSL market penetration is now at 14.7% of total lines and over 21% of residential lines.

Looking to long term drivers of growth, we are also increasingly excited about the prospects of digital video, a component of our triple play bundle offering.

We named our internet protocol TV, or IPTV, Digital Video Service - we call it DVS.

And it is an incremental product launch that allows us to leverage the existing network, our workforce, and the IP infrastructure of our core voice and data services.

We have not talked a great deal about our IPTV in the past, but now would be a good time to present a summary and introduce some metrics concerning the results today.

First of all, we have a solid programming lineup of up to 195 channels.

All the major networks and the most popular programming, such as HBO, Cinemax, and Showtime, just to name a few.

This makes Consolidated IPTV a comparable programming alternative to cable and one that represents a good deal on its own and an even better value when packaged with our other services.

Our network is ADSL 2+ based and is capable of delivering over 200 all digital channels, plus Ondemand services to the home over existing phone lines.

The DVS launch to date has been limited to a select number of markets in Illinois, where we are seeing accelerating interest and positive feedback concerning the service.

We conducted a soft launch of our IPTV offering in early 2005, passing approximately 7,500 homes as of the end of the first quarter.

As of September 30, we have installed DVS in over 1,000 homes and now pass approximately 19,500 homes.

We began a more aggressive marketing campaign in august and are very pleased with the products momentum.

The Gateway set hot box that we talked about in the past is now fully operational and will significantly improve the customer installation experience.

The service is working well and we will continue to roll this product in Illinois during the remainder of 2005 and expect to complete the majority of the build by mid 2006, passing 36,000 homes.

Before I turn it over to Steve, let me speak on acquisitions.

As I've stated previously, we are happy with our current size and organic growth prospects and, thus, don't feel compelled to make acquisitions to drive increases in cash flow.

That said, we will continue to review the opportunities that are out there, and we will pursue an opportunity if it makes good strategic sense and is cash flow accretive on day one.

Let me now turn the call over to Steve Childers, our CFO, for the financial review.

Thanks, Bob.

Good morning, everyone, and thanks for joining us on today's call.

First, I will review the third quarter ended September 30, 2005 compared to the third quarter ended September 30, 2004.

Revenues were 82.2 million this year compared to revenues of 84.4 million in 2004, impacting the year-over-year change as a reduction in prior period subsidy settlements of 3.1 million.

The primary driver of difference was the refilling of interstate common line support for both Texas and Illinois for the 2002 to 2004 time period.

This results in 4.6 million in (inaudible) receipts in 2004, whereas this years annual filing process resulted in a reimbursement of 1.5 million.

In addition to the change in subsidy settlements, we realized increases in other operations, other services and data and internet revenues.

We also experienced a decline in local calling services and network access revenues.

Let me provide some additional color on revenue.

First, regarding local a year-over-year decline was driven by the reduction in local access lines.

The increase in other services revenues being driven by directory revenue as we are beginning to see the positive impact of bringing the (inaudible) directory business back in house.

For the quarter, we are also pleased to see revenue growth from our other operations in Illinois driven primarily by telemarketing and systems of business.

Finally, due to our continued success of driving DSL penetration, we continue to year-over-year improvement data in internet revenues.

Growth in DSL revenues is being partially offset by declined dial up and private line products.

Total expenses were 75.3 million compared to 67.9 million last year.

The increase in operating expense is being driven by the following factors - First, in connection with completing the ITO, we recognized 7.2 million in non-cash stock compensation expenses associated with our restricted share plan. 6.4 million expense represents the 50% vesting in a plan on the (inaudible) date which was July 27th.

An additional 6.4 million in non-cash stock compensation will be recognized (inaudible) additional shares vested through 12-31-07.

This quarter also included a one-time non-recurring $2.7 million expense associated with a litigation settlement.

Partially offsetting these non-cash or non-recurring expense items, we experienced a $800,000 reduction in management fees, as certain fee arrangements terminated effective with the ITO.

Additionally, we continue to drive cost structure improvements associated with the changes, the Texas pension plan and other post-retirement employee benefits, closing the Irving office and head count reductions.

As a result, income from operations was 6.9 million compared to the third quarter of 2004 income from operations of $16.5 million.

Interest expense of Q3 2005 was 19.8 million compared to 11.6 million for the third quarter of 2004.

This increase was driven by the recognition of the 6.3 million redemption premium and the write off of a 2.3 million deferred financing costs, each in connection with the IPO and the redemption of $65 million of our 9.75% senior notes which are due 2012.

As a result, net loss for the third quarter of 2005 was 10.7 million compared to net income of 3.5 million for the third quarter of 2004.

We provide adjusted EBITDA, which was referred to as bank EBITDA in prospectus for IPO as management believed adjusted EBITDA is useful as a means to evaluate our ability to pay estimated cash needs including our dividends.

In addition, adjusted EBITDA is also a component of our bank covenant (ph).

Adjusted EBITDA was 33.1 million compared to 38.5 million for the third quarter of 2004.

As already described the third quarter was impacted with a litigation settlement of $2.7 million.

The third quarter of last year included an incremental 3.1 million of prior period subsidy receipts and an incremental 1.8 million cash distributions from cellular partnerships.

We generated $17.8 million in net cash provided by operating activities in the third quarter of 2005 compared to 27.8 million for the same period last year, primarily (inaudible) the increase in interest expenses previously discussed.

Cash available to pay dividends for the third quarter of 2005 calculated on pro forma phases of the ITO and related transactions has been completed on July 1, 2005 with 16.7 million.

The determination (ph0 of cash available to pay dividends starts with adjusted EBITDA of $33.1 million and subtracts $9.6 million in cash interest and subtracts capital expenditures at $6.8 million.

Because this metric (ph) has impacted the ITO transaction, it is not relevant to present a comparison to the same period last year.

Now for the nine month ended September 30, 2005 compared to the nine month ended September 2004 - Revenues were 240.2 million compared to 191 million for the prior year.

GX communications ventures or GXUCV acquisition closed on April 14, 2004.

If GXU had been included for the full period 2004 revenues would have been 244.9 million.

The year-over-year change reflects declining local service revenue associated reduction from local access lines, reduction of long distance revenues and other operations, primarily our telemarketing group.

These reductions were partially offset by increases in data revenue and increases in other services revenue.

Net loss was 2.8 million compared to net income 5.1 million with comparable period 2004.

If Texas had been included for the full period 2004 net income would have been 6.9 million.

Net cash provided by operating activities were 47.1 million for the nine month period.

Capital expenditures were 21.6 million for the nine-month ended September 30, 2005.

We expect total capital expenditure for 2005 to be approximately 33.5 million, remaining on plan and on budget for the year.

We ended the quarter with a cash balance of 33.7 million and our 30 million (inaudible) credit facility remains fully available to us as well.

Subsequent to quarter end, we completed and initiated a number of debt related transactions.

On October 12th , we executed $100 million no show (ph) amount floating (ph) fixed rate interest swap agreement relating to a portion of 425 million term loan facility.

The six-year interest rate swap will become effective on January 3, 2006.

The term loan facility is currently priced at an annual rate equal to (inaudible) plus 225 basis points.

Combined with the $100 million no show (ph) amount slot agreement we executed in August, interest rates on approximately 85% of our term loan debt are now effectively fixed, and our rate of average interest rate on term debt will be approximately 6.18%.

Additionally, as permitted under the conventions (ph) of senior notes we have notified our trustee of our intention to redeem an additional 2.5%, or $5 million, of our 9.75% senior notes.

We expect the transaction to be complete by year-end and expect that the redemption will yield a full year cash interest savings of $487,500.

Given the effect of the ITO capital structure, recent (inaudible) resets, the impact of our new swaps and additional pay down of our senior notes, our full year cash interest expense is expected to be $39.7 million on a pro forma basis.

Now, a little bit more about operating metrics - at September 30, 2005, total connections for 280,953 up from 280,316 at the end of the second quarter.

Total access lines were approximately 244,900, representing a loss of approximately 2,400 lines.

If we include the impact associated with the UCI metro loss which we discussed and disclosed in our second quarter call, our year late line loss would be approximately 2.2%; this translates to just under 3% on annualized basis. (inaudible) continues to pose strong growth and reach 36,051 subscribers at quarters end, representing 9% sequential and 48% year over year growth respectively.

DSL penetration of residential lines was 21%.

DSL is a strategic product for us and a key component of our value proposition.

We are very pleased with its growth and its contribution to our group.

Long distance lines grew to over 142,000 as of September 30th. (inaudible - brief audio gap) popular our customer base is important to us because it increases consolidated overall value proposition.

As Bob mentioned, one new metric we're introducing this quarter is video subscribers in Illinois, which now has over 100,000 subs (ph).

While we are rapidly expanding the number of homes pass in selected markets within the state it is important to realize we re doing this expansion all within our targeted outlook for CapEx spending, which this year totaled 33.5 million.

While DSL is still in early roll out phase, customer interests are strong and we look forward to updating you on the progress in future quarters.

Penetration of whole high value bundled feature packages increased 28% year-over-year to 14.4%.

This growth demonstrates the results were focused on introducing competitive packages and superior services.

A recent development I want to update you on is the launch of our directory business in Illinois.

As discussed in the past, we have taken the Illinois directory business back in-house.

This quarter, we began publishing with the National Charleston (ph), Taylor (ph), S&M (ph) books.

The feedback from our customers has been very positive, and we are pleased with the results of the first three quarters (ph).

With that, I will turn back to Bob.

Thank you, Steve.

And I hope you see why we are excited about this quarter and about our prospects in both Texas and Illinois markets and are confident of our ability to integrate and execute on our strategy of growing revenue per customer with continued penetration of high valued services, such as DSL and video, increasing our operating efficiencies, maintaining our disciplined CapEx philosophy while leveraging the robust network that we have already deployed, and finally, all in support of our dividend policy.

My last comment before we open this up to Q and A - we will be attending several upcoming conferences, including the CSFV High Yield Conference on November 17th in New York, The Lehman Brothers Small Cap Conference in Carlsbad, California also on November 17th, and the CSFV Annual Technology Conference in Phoenix November 30th.

We look forward to seeing, hopefully, many of you at these events.

With that, Dennis I would like to open it up for questions.

(Operator Instructions) Your first question is from the line of Tom Sykes with Lehman Brothers.

Good morning guys, nice quarter.

Can you just talk a little bit about the expense line, you know, can you talk about what sort of puts and takes we should expect going forward in terms of any kind of incremental spend for video marketing.

And I know it wasn't material, but were there incremental costs associated with bringing more people on during the hurricane -- during the whole hurricane process such that, you know, expenses may trend down a little bit because of that?

Tom, this is Steve.

One clarification, I think I said during my presentation on the video that we had over 100,000 subs, I might want to make that 1,000.

We're pretty excited about the product, but I might have been a little ahead of my headlights there.

With respect, to your question on the operating expense, I mean, puts and takes in the quarter, we obviously called out the non-cash compensation, the legal settlement, reduction of management fees, and with respect to your question on hurricane Rita, again it was immaterial the third quarter was lost and we are estimating we incurred roughly $300,000 in incremental operating expense, probably $30,000 or so on CapEx, so very little impact to the quarter.

Then we, again, have launched the video product with our marketing, basically in August and September, and I don't expect to see a material impact to run rate operating expense in the fourth quarter as a result of video.

Tom, I don't mean to pile on, but all I was going to add is this product is word of mouth.

There will be no spike marketing.

There's a slight shift in our focus to bundles from individual products, because this product is the word of mouth on the street, its spreading rapidly, and we're not having to advertise it right now with the demand that we're getting just from our existing word of mouth.

Alright.

And just one follow up, are you getting the shipments from (inaudible) on the boxes now at a pretty stable clip.

I mean do you have enough set top boxes to be able to answer the demand that you have got for the product.

At the present time, we do.

We are working very closely - as you know this is the early stage roll out - and we are working very closely with the vendors, but having been one of the early ones that committed we're getting excellent vendor support, and at this point, we're getting what we need.

Great, thank you very much.

Thanks, Tom.

Your next question is from the line of Andrew Keely (ph) with Deutsche Bank.

Hey, Steve.

I was wondering if you can talk about some of the underlying (inaudible) either the (inaudible) conditions in both of the markets.

It looks like maybe the business lines were a little soft this quarter.

And then, secondly, if you could talk about where the integration projects stand, kind of what is entailed in the phase two integration and if there is anything left to do on the billing conversion.

Thanks.

Let me take that one.

Regarding the access lines, specifically the business lines, there's a couple of fairly large losses that I need to point out in there.

And I think it also maybe is a lustradive (ph) of why you have to look under the access line numbers.

But for instance, in Charleston, Illinois, we lost the school system there, 100 Cintrex lines, but we replaced it with a metro Ethernet providing them with 100 mg of service.

So with the new services that they took, we saw a reduction of $31 a month in actual revenue, almost $5,000 dropped to $4,900 plus.

So while we lost a 100 access lines, the revenue impact is not nearly what it might seem to be.

We have to be -- if we are not out there promoting our products and services and meeting our customers needs, somebody else is.

So we think that's a proper trade off.

Regarding -- if you (inaudible) the markets, you know, in Texas -- if you discount another large customer there, a school system -- in Conrad and Katie, are two high growth markets, we actually grew business lines and we actually grew residential lines in this quarter.

Illinois and the Lufkin areas still are not the high growth properties that we've talked to you about in the past.

Regarding the access line loss in Illinois on the business side though, there was also an ISP re-grooming project, it was the Charleston school district that I talked about, and then there were some out-of-period PRIs, there were some PRI's that were taken down for no billing problem or error, but they were not processed in the second quarter and they were processed in the third quarter.

So, if you look at year to date, I mean, we're not happy being down 706 business lines, but when you dig underneath them, there are examples that- while we don't like the line loss, the revenue loss-- and moving the customer to better functions and features and keeping them is really the important aspect there.

Regarding the integration projects, let me go to billing for just a second because I know there is a lot of interest out there in billing.

We have a totally different strategic approach to both billing and our integration.

Maybe just a brief history, we created right after we completed the Texas acquisition we completed a project office, had executive sponsorship and accountability, check priorities and every other week at my staff meeting, there was an update on their progress, as there also was at our quarterly board meetings and our bank calls, and in fact we completed forty plus projects on schedule and ahead of budget.

We are now on common platforms and systems for engineering, testing, records, H.R., etc.

The only remaining project is billing.

Here we are also different.

We operate in two states with two billing systems, both run off of a DPI platform.

They are on different releases, but they are the same billing platforms.

We are integrating into a single DPI system, and we're taking the best of the two parts of the two states.

However, we are doing it in a phased approach.

Last quarter, we completed phase one, it was critical.

And it predominately was done with our own resources.

We didn't miss a bill, there was no bad debt.

We brought that billing operation in-house from an outsourced vendor.

So we've completed phase one.

Phase two will complete in August 2006, and Phase Three in the second quarter of 2007.

Some of you may realize that we originally planned to complete it as one large project in late 2006 or early 2007, but we have divided that into two projects.

It minimizes risks, but even more importantly delivers some functionality early.

It gives us greater flexibility through the development timeframe, and we've added video and bundling capabilities.

We also realized that billing projects and large IT projects that you keep under a year in duration are much more successful than large projects that go into multiple years.

The advantages for us, both Illinois and Texas have been running on this system for over ten years;

Texas since 1985 and Illinois since 1993.

There's thousands of hours of application coding experience that reside in-house, not with outside vendors.

We internally built and maintained these systems.

We have experienced users and technicians that know the system well, minimizes risks, and we are not moving to an unknown system, a new set of processes or an outside vendor.

This will be our third integration conversion to DPI.

The first two were very successful - one in Texas just before the merger and one together since the merger.

The same project manager who is successfully completed the first two is leading the next two phases.

When completed, we expect to have the best functionality from both the Illinois system and the Texas system.

A little more time, but less risk and greater flexibility, and more importantly, no disruption to our business.

Okay, so just to clarify, everything is brought in-house, and phase two and phase three will just be more integrating to do to set up the platform?

That's exactly right.

Your next question comes from the line of Edo Cohen with CSFB.

Thanks.

A couple questions.

First on CapEx, it looks like it came in a little lower then we expected and is turning quite a bit lower then the first nine months of 04.

Can you comment on what's driving that and what you expect for the fourth quarter.

And then on the video product, I just want to get a sense on whether the quality has been everything you have expected and also clarify if the Gateway box that you mentioned is the box with DVR capabilities.

And then with that one, I guess, I would ask if you have seen any new activity from the cable company in your territory on voice or in response to the DVS product?

Thanks.

That one had four or five parts to it.

Let me see if I can -- hold me to it if I miss one or two of what you asked there.

Regarding CapEx, we still expect our CapEx to be 33.5 million for 2005.

CapEx was lower in the third quarter; it was $6.8 million, as Steve mentioned.

The fourth quarter is always typically our highest CapEx quarter due to the fiscal year close and the timing of projects.

I must also add the fourth quarter will be a little bit larger then normal since we've spent the last few weeks of September focusing on the clean-up of hurricane Rita and restoring customer service and we pulled people off of our CapEx projects.

We have a few large items related to our IP backbone projects, particularly in the west end of Illinois and in Texas.

And so, we fully expect that when the year is done, we will meet our $33.5 million budget.

As far as video, we're very happy with the product.

The viewing experience, the customers enjoy it, it's meeting or exceeding our expectations.

DVR is integrated into the Gateway in the second quarter, maybe early third quarter of next year, and a standalone DVR is available in quarter one.

The Gateway, as you'll recall, allows us to reuse existing customer coaxial cables.

So it greatly enhances the customer experience, instead of having to rewire the home, disrupt them and keep them there for a three or four hour installation, we feel we can do that install in one hour, and we have also seen similar improvements with the installation of Gateway.

I don't know if I hit all those points.

Just on if you're seeing new activity from cable companies on voice or in response to the DVS project?

No, nothing.

We've seen some signage changes that they're rolling out, or will have a voice product, but nothing has been launched.

They're pricing has been rational, and we've seen no response to our DVS here in Illinois, with the exception of a heightened win-back program.

You know, they are on the phone as soon as you process your order and offering you an introductory or trying to scale back, maybe, some of the up scaling they've done in the past, and people are not happy with the size of their bills so they are coming back and offering a more basic package to try to retain the customer.

Great, thanks.

Your next question is from the line of Jonathan Chaplain with JP Morgan.

Hi, thanks very much for taking this question.

I have a couple of quick ones.

The first is regarding your video project.

So 19,000 homes now and going to 36,000 homes next year, I'm wondering if there is any opportunity to go beyond that and what your strategy is for the homes you won't reach with your facilities-based product.

And then, I don't know if you provided this in the past but if you could give some idea for what your CapEx per home cost is and the success CapEx to roll out that video product that would be really helpful.

And then finally, I was wondering if the entire install process is all capitalized or whether there is an expense component to that as well.

Thanks.

Okay, let me see if I can take those in order.

Homes passed, yes.

Our initial field (ph) to hit the major towns will complete, as I said, in second quarter of next year passing 36,500 homes.

There's some fill-in after that, an additional 10,000 to 12,000 homes.

Probably over the next year, we'll extend it out to the majority of our residential customers.

There will be some that the technology won't reach, but that's the extent of where we're going with that product in Illinois.

CapEx is approximately $500 per home.

The install is not capitalized.

The CPE is.

And as far as success-based, almost all of the CapEx now is all related to success base.

There are some minor server additions, but basically, it's success based and we estimate it to be roughly around $2 million.

Can you give us that on a per subscriber basis, or per home basis?

The success base.

It's roughly $500 to $600 per home.

Okay.

Thank you very much.

And, again, the investment in the network is there, the head end is in, the servers are in, and I have to reinforce what Steve said that it's all being done within our 33.5 which is also in the midpoint of what our peer group spends on CapEx.

So as a percent of revenue, we are right on target and still able to launch what we call another product, what some people call a new business, but it's actually just another product on a very robust, IP-based network.

Thank you very much.

Your welcome.

(Operator Instructions) Your next question is from the line of Kevin Moore with Wachovia Securities.

Good morning.

Just touching a little bit on the competition again, are you seeing any new cable type competition in the Houston market.

And also on the IPTV, you touched on sort of install times, can you give us a sense of those install times yet or in line with where you want to be and just generally whether or not the whole sort of operational support and sort of SG&A cost associated with it are sort of on track with where you want those costs to be.

Yes, thank you, Kevin, for the question.

As far as additional cable competition, specifically in Houston, frankly in all of our markets, the answer is no.

We haven't seen anything there.

You probably read that Jerry Kent has announced a deal to acquire one of the properties in the Texas area from Cox.

As far as the install, let me answer that a little differently, it is where we expected it to be, it's not where it's going to be.

And what I mean by that is we're still in the training stage.

You know, we're rolling it out in different markets, we're training the existing workforce, everyone that installs phone or DSL is also going to be video trained.

So we're doing two-man dispatches today for training, making sure that the customer has a great installation experience as contrasted by our competitors.

So it's about where we thought it would be at this stage, and we're on target, but eventually, obviously, when the training is completed, we will go back to single-man dispatches, and with the Gateway, we hope to significantly reduce the time of the install.

What about billing and operational support systems, what's the status of those relative to video?

They're right where we had hoped they would be.

We're doing it on one bill, we're very happy with our back office.

That's why we did a slow launch this year, to make sure that we had our processes perfected before we launched this product.

We're very pleased.

Thanks.

Your next question comes from the line of Edward McCormick with CitiGroup.

Hi, good morning.

Just had a follow-up question on the video product and was just curious how you think about the product.

Is it a churn reduction product and, thus, brought out in anticipation of increasing voice competition, or is it in of itself a product center that you expect to see net positive margins over a period of time?

Thanks.

First of all, it's a plus $50 ARPU for us with every customer, and over 70% of our video customers are taking the triple play.

So in answer to your question, it is both an offensive and defensive strategy.

It's a great product, it's going to add ARPU, and it is also as we've found -- the stickiness, the more services that a customer takes the more value they get, and the one-stop shop or the lack of confusion that they can get their voice, data, video, LD, CPE all from a trusted vendor, we think that is a huge advantage in our market place.

And how would you think about looking forward, is there a possibility for introducing the home-run (ph), a wireless component through some sort of reseller agreement, or as an agent for somebody?

First of all, on the agent piece, in Illinois, we are an agent for Verizon.

We prominently display their products in our communication center, generates a little less than $1 million a year, but it does help support, and we then meet our total customers needs even though it's not necessarily our product.

Right now, our focus is video and continuing the integration of these companies.

We felt that that product and the stickiness of that triple play was where we were going to focus.

An NV&O in the future, you know, there's a lot of change, we follow that, we've had discussions, we don't think that is right yet, and we don't think it is the right time for us with all that we have on our plate.

And so, it's out there, we're following it, but we'll continue to watch and monitor the progress of that.

Okay, thanks guys.

Your next question is from the line of Andrew Hemerling (ph) with Eleven Asset Management.

Hey guys, congratulations on a big quarter.

One comment and then one question.

With respect to video strategy, if you guys are effectively generating incremental dollars and free cash funds, or anticipate that from the product, that's terrific.

And frankly, margins don't really matter.

What matters is obviously generating incremental free cash flow.

You understand that, correct?

We sure do.

Amen, I was going to say.

I just don't understand conceptionally why you would worry about the margins, as long as you generate incremental free cash flow, that's what is meaningful.

My question basically is on, effectively, the way to return capital to shareholders, obviously the dividend is important, with the gain of 13% yield right now.

But I'm wondering with the excess free cash you generate in excess of paying dividends, it would make sense in this kind of environment to be buying back your stock.

And I say that knowing that one, you're getting back 13% you otherwise would have to get out, and point two, you're lowering your share count so you are actually paying less in terms of free cash per share, so ultimately you're benefiting everyone in a capital structure, because it's so accretive.

Have you given any thought to that, recognizing that your stock is down 8% since the ITO and about 25% from its high?

Andrew, Steve Childers here.

Thank you for your question, and number one, we very much appreciate your comments with respect to the free cash flow characteristics of the video product.

We absolutely agree with your comment.

As we talk and when we briefly talked about share buy back program, I guess number one, we just launched the ITO in July, we are committed to doing what we said we were going to do on the road - execute our business strategy, arm dividends and grow the business.

With that being said though, obviously, as we do build cash and execute a concerned business plan, we will evaluate what is best for shareholders and the company, you know, as we build cash, looking at paying down debt, looking - when it is appropriate to do so - to buy back shares or whatever.

But again, we don't want to be reactionary to what market is trading today, we want to focus on executing our business plan, doing what we said we were going to do when we saw you on the road show.

You guys are doing a great job, just keep it up.

Thank you.

(Operator Instructions) There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

Thank you again for joining us today.

I think you have seen that we're delivering on what we said we were going to when we saw you on the road.

The business plan is performing well, operations are increasingly seamless, and our strategy is in place.

We are delivering increased revenues per customer, and our new growth initiative, IPTV is showing early traction in the market place and is well within the capital projections needed to support economic growth.

Our plan is on track to drive increased margins through service, high valued services, and operating efficiencies.

Lastly, we remain confident at sustaining and growing stable cash flows, supporting our dividend policy.

Thanks for joining us today, and we will see, hopefully, most of you on the road.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your line.