RCN reports Q4 and full-year 2008 results

February 24, 2009

7 Min Read

HERNDON, Va. -- RCN Corporation (NASDAQ: RCNI), a leading provider of all-digital and high-definition video, high-speed internet, and premium voice services to residential and small-medium business customers, as well as high-capacity transport services to carrier and large enterprise customers, today announced its results for the fourth quarter and full year 2008.

"RCN reached its financial objectives and made a strong push forward in operational improvements in 2008," stated Peter D. Aquino, President and Chief Executive Officer. "In our Resi/SMB segment, we grew customers organically by 12,000 from last year and invested in our small-medium business unit, which is now contributing at a good pace. The completion of RCN's Project Analog Crush(SM) in all 5 metro markets - Chicago, Boston, New York, Washington D.C., and Philadelphia suburbs - was a significant accomplishment. This major capital project, now behind us, freed up valuable video spectrum for 100+ HD channels, a best-in-class international tier, and hundreds of digital channels available for new programming. Going all-digital enables RCN to be very competitive and offer customers a superior choice of products and services. In addition, 2008 was a great year for RCN Metro, our facilities-based CLEC, which completed the integration of NEON and produced double-digit revenue growth. We anticipate continued strong demand for RCN Metro services given the location of our metro fiber rings and building connectivity in 5 of the top 10 cities in the country, particularly in the carrier and large enterprise segments. Despite a weaker economy, requirements for high-capacity transport, network protection and redundancy, as well as network management will still need to be met by on-net fiber providers like RCN."

Mr. Aquino continued, "We enter 2009 with a solid liquidity position and a flexible capital program that, while reduced, will allow RCN to continue to compete effectively in this uncertain economic environment. Our milestone financial goal for this year is to produce solid positive free cash flow through continued growth in our business units and a less demanding capital program. We remain focused on operational execution and on using our strong position to be opportunistic in business development to support our growth objectives."

Fourth Quarter Review

Following are highlights of fourth quarter 2008 results for consolidated RCN and for the company's two reporting segments: Residential/Small Business, comprised of the RCN and RCN Business Services business units; and RCN Metro Optical Networks. For ease of comparison, RCN is presenting results on both a reported basis and on a pro forma basis as if the NEON Communications acquisition, completed November 13, 2007, had been completed on January 1, 2007:

Consolidated Results

  • Revenue. Total revenue of $188 million increased 12% as reported from $168 million in the fourth quarter of 2007 and increased slightly from $187 million in the third quarter of 2008. Pro forma for the NEON acquisition, fourth quarter 2008 revenue increased 6% from last year.

  • EBITDA. EBITDA of $53 million increased 30% as reported from $41 million in the fourth quarter of 2007 and 6% from $50 million in the third quarter of 2008. Pro forma for the NEON acquisition, fourth quarter 2008 EBITDA increased 23% from last year, and EBITDA margin of 28% increased by nearly 400 basis points from last year. Sequentially, EBITDA margin increased by over 100 basis points. EBITDA is a non-GAAP financial measure - see "Non-GAAP Measures" below.

  • Capital Expenditures. Capital expenditures, as reported, were $33 million compared to $27 million in the fourth quarter of 2007 and $34 million in the third quarter of 2008. Pro forma for the NEON acquisition, capital expenditures were $29 million in the fourth quarter of 2007.

  • Share Repurchases. RCN repurchased approximately 800,000 shares of common stock at an average price of $6.14, or an aggregate value of approximately $5 million, which leaves approximately $14 million remaining under its $25 million repurchase authorization.

Residential/Small Business Segment

  • Revenue. Residential/Small Business revenue of $143 million increased 4% from $137 million in the fourth quarter of 2007 and decreased slightly from $144 million in the third quarter of 2008 due primarily to a reduction in reciprocal compensation revenue. Year-over-year revenue growth was driven by the addition of approximately 12,000 new customers and 18,000 revenue generating units ("RGUs"); average revenue per customer ("ARPC") was $110 compared to $109 last year and $111 last quarter.

  • EBITDA. Residential/Small Business EBITDA of $40 million increased 19% from $33 million in the fourth quarter of 2007, and increased 8% from the third quarter of 2008. EBITDA margin of 28% increased by nearly 350 basis points from last year and by over 200 basis points from last quarter.

  • Capital Expenditures. Residential/Small Business capital expenditures were $25 million compared to $21 million in the fourth quarter of 2007 and $27 million in the third quarter of 2008.

  • Customers, RGUs and Digital Penetration. RCN's residential/small-medium business customers increased 3% from last year to 428,000, and total revenue generating units increased 2% from last year to approximately 911,000, with video and data RGUs increasing 2% and 6%, respectively, and voice RGUs decreasing 2%. On a sequential basis, customers remained flat and RGUs decreased by approximately 4,000, primarily as a result of continued declines in landline phone penetration. Bundle rate remained steady at 68%, and digital video penetration rate rose to 87% of video customers from 69% in the fourth quarter of 2007 and 78% in the third quarter of 2008 as the company neared completion of Project Analog Crush(SM) in its metro markets.

RCN Metro Optical Networks Segment

  • Revenue. RCN Metrorevenue of $45 million increased 47% as reported from $31 million in the fourth quarter of 2007, and 4% from $43 million in the third quarter of 2008. Pro forma for the NEON acquisition, fourth quarter 2008 RCN Metro revenue increased 13% from last year. Revenue growth was driven primarily by continued strength in transport services.

  • EBITDA. RCN MetroEBITDA of $13 million increased 82% as reported from $7 million in the fourth quarter of 2007, and decreased slightly from $14 million in the third quarter of 2008 due primarily to the timing of certain favorable vendor settlements during the third quarter. Pro forma for the NEON acquisition, fourth quarter 2008 EBITDA increased 34% from last year. EBITDA margin of 30% grew by nearly 600 basis points from the fourth quarter of 2007, as reported, and decreased slightly from the third quarter of 2008. Pro forma for the NEON acquisition, EBITDA margin grew by nearly 500 basis points from last year, primarily as a result of revenue growth and realization of synergies.

  • Capital Expenditures. RCN Metro capital expenditures, as reported, were $7 million compared to $5 million in the fourth quarter of 2007 and $6 million in the third quarter of 2008. Pro forma for the NEON acquisition, capital expenditures were $7 million in the fourth quarter of 2007.

Full Year 2008 Review

Total revenue for the full year 2008 grew 16% as reported to $739 million from $636 million in 2007; Residential/Small Business segment revenue grew 4% and RCN Metro segment revenue grew 91%. Pro forma for the NEON acquisition, 2008 revenue grew 6%, including RCN Metro segment revenue growth of 11%.

2008 EBITDA of $194 million grew 24% as reported from $156 million in 2007; 2008 EBITDA margin increased by nearly 200 basis points to 26%. Residential/Small Business segment EBITDA grew 7% and RCN Metro segment EBITDA grew 137%. Pro forma for the NEON acquisition, 2008 EBITDA grew 14%, including RCN Metro segment EBITDA growth of 38%, and total EBITDA margin expanded by nearly 200 basis points.

Capital expenditures for 2008 were $126 million, as reported, compared to $119 million in 2007, reflecting the accelerated investment in Project Analog Crush(SM) and increases in success-based investments such as additional commercial growth and advanced digital set top boxes. Residential/Small Business segment 2008 capital expenditures were $99 million compared to $100 million in 2007; RCN Metro segment 2008 capital expenditures were $27 million compared to $18 million in 2007. Pro forma for the NEON acquisition, 2007 capital expenditures were $133 million, including RCN Metro segment capital expenditures of $32 million.

RCN Corp.

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