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Dear Fellow Shareholders:
Beyond our immediate control, of course, 2002 was anything but predictable. In our industry and in the broader market, the weak economy, corporate bankruptcies and scandals, management turnover and funding issues were a considerable concern and distraction. However, these issues did not directly affect Cox. Our employees exhibited remarkable focus in the face of tremendous potential distractions. Their attention remained unwaveringly on serving customers well and executing our operating strategies, and the year's results prove their efforts successful. In difficult environments, the foundation of a company matters most and becomes clear to all. In Cox's case, that foundation is one of integrity, corporate responsibility and a high standard of ethics, as it has been since the founding of our majority shareholder, Cox Enterprises, in 1898. Those attributes are at the center of Cox's culture. In such uncertain times, Cox employees demonstrate clearly and unequivocally the critical value of the company's culture, diversity, stability and strategic assets: our management strength, superior network, excellent customer service, robust product offerings, integrated IT platform and localism. The end result is credibility, consistency and industry leadership that our stakeholders know they can depend on from Cox. We are demonstrating to the industry and the market in general not only what Cox Communications can become, but what broadband can become...how to successfully tap the potential of this powerful technology...how to deliver services seamlessly and efficiently...and how to create an unmatched package of choice, value and convenience for customers. Financial and operational highlights Cox achieved solid financial and operational growth in 2002. Total revenues grew 18% to $5.04 billion. Operating cash flow (operating income before depreciation, amortization and loss on sale of cable systems), which we consider a key indicator of our financial performance, increased 25% to $1.78 billion. This reflects the inclusion of a one-time non-recurring net charge in 2001 of $150.2 million, associated with the continuation of Excite@Home high-speed Internet service and the transition to Cox High Speed Internet following the bankruptcy of Excite@Home. Excluding the impact of the high-speed Internet transition-related charge, operating cash flow increased 14%. We also reduced capital expenditures by approximately $270 million over 2001. Operationally, we grew our total customer relationships by more than 2% in 2002, with record growth of our high-speed Internet and telephone services and solid growth in basic-cable and digital cable customers. In all, we added a record 1.2 million revenue generating units (RGUs) of our advanced services: digital cable, high-speed Internet and telephone. Cox Digital Cable grew by more than 413,000 customers, ending the year with a total of 1.8 million customers. Its penetration to total basic-cable customers grew from 22.2% in 2001 to 28.6% in 2002. We added a record 524,000 high-speed Internet customers in a year in which we transitioned customers to our own Cox-managed Internet protocol (IP) backbone and data services with minimal disruption. We ended the year with 1.4 million high-speed Internet customers, increasing the penetration of customers to Internet-ready homes from 9.8% to 14.4%. We also experienced tremendous growth of Cox Digital Telephone, which grew by more than 58%, ending the year with 718,000 customers and penetration to telephony-ready homes of 17.5%. Growth in our core basic-cable customers was about 1%, marking an improvement over 2001. We continued to pursue development of new services that can be leveraged over our powerful broadband networks and enhance the convenience, value and choice we deliver customers. We expanded our entertainment on demand (EOD) service within two markets, launched high-definition TV (HDTV) in five markets, introduced digital video recording (DVR) in two markets in early 2003, continued development of new products including home networking, home security and voice over Internet protocol (VoIP) telephony, and actively pursued other new technologies, services and product features. In a historic partnership, the cable and consumer electronics industries announced a groundbreaking agreement that paves the way for plug-and-play TV sets that will allow customers access to HDTV and digital cable without the need of a separate set-top box. Cox's commercial business revenues grew 52% in 2002 to $218.8 million. We continue to deliver an expanding range of voice, data and video solutions to our business clients. We now have agreements in place with all major long distance carriers to provide local access to their customers on our fiber network, increasing carrier revenue significantly over 2001. Advertising sales rebounded from 2001, with a 12% increase to $378.1 million. In early 2003, our advertising sales division changed its named from CableRep Advertising to Cox Media. The new name is a reflection of the expanding array of advertising solutions Cox Media offers, as well as the reputation it shares with Cox Communications for high-quality products and superior customer service. We achieved a significant benchmark in 2002 that
no other major broadband services company has matched. At the end of the
year, we had as many RGUs - Banking on the bundle 2002 was an excellent year for bundling, surpassing even the tremendous results of 2001, and we foresee continued growth in 2003. In 2002, the number of bundled customers grew by 53% to 1.7 million, and 25% of Cox customers now subscribe to more than one of our three major services (cable, high-speed Internet and telephone). But Cox's bundling "triple play" is about more than impressive statistics and growth. It's about re-defining the company as a multi-product provider that is adding value to customers' lives by being a "Friend in the Digital Age," as our brand promise states. Cox remains the only major broadband operator offering the full bundle of services, supported by a single, integrated back-office platform. This gives customers the flexibility to make one call regarding any and all of their services, receive a single bill for all services, and receive multiple services at a discount. The bundle has increased penetration and operational efficiencies, reduced customer churn, and provided us a clear competitive advantage that other providers can't match. Notably, bundling - as not just a marketing campaign, but as a fundamental operating philosophy - has diversified our company and made us less reliant on one single service. In 2001, for instance, revenue from our non-video services accounted for 25% of total revenues. In 2002, that number increased to 32%, indicating an important shift in our company several years in the making. When we first began offering advanced services in 1996, our goal was to leverage the power of our broadband networks to create multiple revenue streams. Our success since then, clearly defined by our 2002 achievements, strongly validates that strategy. 2003 Environment and Goals The successes of 2002 provide tremendous momentum
as we approach 2003 and beyond. That momentum will be critical as we face
continuing challenges. One of our biggest challenges is the pressure of
soaring programming costs, particularly for sports programming. Cox The new year is further clouded by the overhang of a continued weak economy, concerns about war and terrorism, intense competition and close scrutiny from Wall Street on quarter-by-quarter performance. We hope that the market focus can broaden to once again show appreciation for basic business fundamentals and the long-term strength and growth potential they deliver - not just short-term results and the issues befalling other companies in the broader market. With challenges come opportunities, however, and Cox historically has demonstrated a keen ability to capitalize on opportunities. Success in doing so this year will be dependent upon our continuing to focus on clear business strategies. The metrics Wall Street uses to measure our industry are ever changing - moving now toward free cash flow and reduced capital expenditures, and away from growth in operating cash flow. We have told Wall Street that we expect to be free cash flow positive for all of 2003. We will achieve this goal by continuing to focus on four critical areas: 1) growing our customer base, 2) enhancing our competitive position, 3) controlling costs, and 4) concentrating on customer service. It is clear, then, that the theme for the year will be balance. Balance of executing today and planning effectively for the future...of funding our operations and growth of new services while generating free cash flow...of innovation and thorough preparation...of taking care of customers while enhancing our margins. We will capitalize on opportunities for vertical
growth by layering new services onto our broadband networks and creating
innovative ways to bundle and price Cox has proven to be a robust competitor in providing local and long distance telephone services. In 2002, Cox Digital Telephone grew by an average of 5,093 net additions per week, 26.8% greater than in 2001. Penetration of customers to telephony-ready homes is now 17.5% companywide and greater than 30% marketwide in Orange County, Calif., and Omaha, Neb., our first two telephone markets. Phone service is available to more than 40% of homes passed and will continue to increase in 2003 as we drive the service deeper into existing markets and launch our 10th phone market, Kansas, in the first half of the year. We continue to increase the breadth and depth of our phone offerings, as well as the margin on our phone product. On the competitive front, we have seen virtually no significant impact on our net additions in markets where additional competitive telephone companies have entered the market. Long distance penetration among our telephone customers actually increased to 76.4% at the end of 2002 despite long-distance entry from the regional Bell operating companies in all but one of our telephone markets. In short, we are winning profitable market share despite competitive pressures. In 2003, we will continue to explore cost-effective ways to expand our phone service footprint, including VoIP technology. In our core video business, we continue to add basic customers and have seen digital cable stem the growth of satellite TV in our markets. Satellite penetration in Cox markets is about half the national average, which we attribute to our upgraded network, strong customer relationships, three-product bundling strategy and the ultimate value of our products. However, satellite continues to present a strong competitive challenge to cable. Our ability to meet this challenge is dependent largely upon our focusing on the competitive advantages of our products and making those advantages relevant to customers - including the benefits of our local service, our ability to bundle products, and the price and programming parity of digital cable versus other video options. Additionally, we view entertainment on demand as a strong competitive asset and will continue to drive it deeper into existing markets and apply our experience as we expand it into new markets. HDTV is now available to approximately 50% of homes passed, with the remainder of our markets scheduled to launch upon delivery of the boxes and software. We see EOD and HDTV, as well as digital video recording, as attractive services to complement and drive demand of our video offerings and enhance their value to consumers. Blueprint for our continued success Our approach to business in 2003 and beyond will
not be radically different than it has been over our years of solid growth.
Consistency is key. We have a Thank you for your trust in our ability to harness that foundation for continued growth and long-term success. Sincerely,
March 4, 2003 |
In
so many ways, 2002 was the defining year we had projected, highlighted
by strong growth and excellent execution of Cox's business strategies.
In fact, the company registered unprecedented achievement in several areas,
including phenomenal growth in "bundled" customers, with a record
number of Cox customers now subscribing to multiple services. It was a
year which, more than ever, demonstrated that the cumulative effect of
our long-term growth initiatives is paying off. Our consistently strong
performance clearly differentiates us from our peers and competitors.
subscriptions
of analog and digital cable, high-speed Internet and telephone - as homes
passed: 10.2 million. We also surpassed 1 million total RGUs in two individual
markets, Phoenix and San Diego. For an industry that traditionally defined
itself by basic penetration, Cox's RGU achievements highlight a new reality:
The digital bundle is the growth engine of our company, now and in the
future. Our success in bundling, in addition to other areas of industry
leadership, contributed to Cox's being named Operator of the Year by two
industry publications, Multichannel News and Communications
Technology.
pays the owners of cable networks for the right to deliver the networks
to our customers, and the price of those networks has increased dramatically
over the past few years. In 2002, for instance, our programming expenses
increased 12%, while the price we in turn charged our customers increased
by an average of about 5%. The pressure to keep our prices competitive
while programming expenses rise unabated continues to mount not only for
Cox, but for other cable companies and other competitors. Controlling
these costs will be critical to the ongoing success of our company and
to the value equation for consumers. We hope that our programming suppliers
will work with distributors such as Cox to control costs for the mutual
benefit of operators and programmers, but, most importantly, consumers.
them,
and continuing the solid growth of our existing services. In the Internet
business, for instance, we continue our strong market share, with seven
out of 10 high-speed customers in our markets choosing Cox over DSL. With
high-speed Internet now available to 96% of Cox's homes passed, our focus
is on increasing penetration and emphasizing the value of this unique,
"always-on," reliable high-speed product. We'll also continue
to improve margins and incremental returns by offering customers the convenience
of self-installation and modem purchase, and managing our own IP backbone
to drive down costs.
strong
platform and strong people, and we leverage the power of both to maximum
advantage for our company, employees, customers and shareholders. We listen
to and care about customers, and are committed to delivering them choice,
convenience and value. We are also committed to cultivating diversity
in our workforce, product offerings and supplier relationships. We employ
a measured approach to innovation - striking a balance between innovating
and risk taking. And we focus intently on creating significant, sustained
long-term value. We have a strong, flexible balance sheet and are intently
focused on the fundamentals of our business. Our attention is on executing
our proven strategy and moving ahead with our disciplined approach to
growth. We're a high-road company. We run our business ethically. We're
strong and stable. 
