Charter Communications, Inc. (CHTR) Q2 2011 Earnings Report, Transcript and Summary

Hello, and welcome to the Time Warner Cable Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Mr. Tom Robey, Senior Vice President of Time Warner Cable Investor Relations. Thank you. You may begin.

Thanks, Candy, and good morning, everyone. Welcome to Time Warner Cable's 2011 Second Quarter Earnings Conference Call. This morning, we issued a press release detailing our 2011 second quarter results. Before we begin, there are several items I need to cover. First, we refer to certain non-GAAP measures, including operating income before depreciation and amortization or OIBDA. In addition, we refer to adjusted OIBDA and adjusted OIBDA less capital expenditures. Definitions and schedules setting out reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release or our trending schedules. Second, today's announcements includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations and beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to various factors, including economic, business, competitive, technological, strategic and/or regulatory changes that could affect our business. These factors are discussed in more detail in Time Warner Cable's SEC filings, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. Time Warner Cable is under no obligation, and in fact, expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. And finally, today's press releases, trending schedules, presentation slides and related reconciliation schedules are available on our company's website at timewarnercable.com/investors. A replay of today's call will be available beginning approximately 2 hours after the call has ended and will run through midnight Eastern Time, August 2. And with that covered, I'll thank you and turn the call over to Glenn. Glenn?

Good morning, and thanks for joining us. Before I begin, I want to welcome our new CFO, Irene Esteves, who joined us a couple of weeks ago and is here with us today. Irene is rapidly coming up on the learning curve, and you can expect to hear from her on the third quarter call. In the meantime, Rob Marcus will cover the financial results one last time this morning. I'm pleased to report that our core business is healthy despite competitive pressures and the continuing weakness in the economy. We're continuing to make investments in our Residential and Business Services to drive growth. Second quarter revenue and adjusted OIBDA each grew by more than 4% year-over-year. We generated a record $1.1 billion of OIBDA, less CapEx, which drove very strong free cash flow, and our earnings per share growth topped 30%. We returned more than $1 billion to shareholders in the second quarter. Our Business Services results were very strong. And with the addition of NaviSite in the most recent quarter, Business Services revenue growth was 35%. NaviSite has won a couple of very significant contracts since the acquisition closed in April, reinforcing our enthusiasm for the acquisition. Growth in Residential Services moderated in the second quarter, driven by seasonal weakness in subscriber net additions and accentuated by the weak economy and the intensity of competition. While we're working on enhancements to our products at the high end, we're also looking at lower cost alternatives to address a growing affordability problem amongst low-income customers. But we're focused not just on products, we recognize that we also need to do a much better job of telling our story to consumers. There's several important trends and developments I'd like to highlight this morning. The Broadband business continues to benefit from the accelerating usage trends. We're seeing more demand for our higher speeds and pricing remains strong. As Broadband becomes increasingly important to our customers, we think we can create additional value by making it available to them everywhere. We're continuing to deploy Wi-Fi capabilities in Los Angeles. And we're exploring how we might sell broadband packages that would bundle our wireline service with Wi-Fi and wireless service for a single attractive price. You'll be hearing more about our plans in the coming months. In video, technology is giving us the opportunity to dramatically improve the utility of our products. The second release of our iPad app is a great example. We now have over 100 live channels, and the ability to use the iPad as a remote control using an enhanced program guide. The next version, which is a month or so away, will bring full keyboard-enabled search and we're hard at work bringing similar functionality to many other popular consumer electronics devices such as Smart TVs. We're investing in our businesses, so that they remain strong and competitive. We recently announced the pending construction of a new data center on our Charlotte, North Carolina campus. That facility will enable us to more rapidly deploy video, high-speed data, voice and business services by having storage and network elements in a shared environment. It will also house 1 of 2 national super headends. Over the next 2 years, we plan to migrate the origination and distribution of our video service to this facility and to a matching one in the Denver area, generating operating cost savings and enabling us to more completely standardize the provision of services across our footprint. Our nationwide IP feed, which today serves iPads and which will feed other devices such as Smart TVs over time, already originates in the Denver facility. Through our deployment of Switched Digital Video over the last several years, we dramatically expanded our capacity for high-definition and broadband services. As I've said for some time, our long-term plan is to supplement Switched Digital Video by gradually going all digital. Consistent with that plan, we have embarked on an all-digital transition in Augusta, Maine, extending our existing all-digital footprint beyond New York City and parts of Los Angeles. Augusta is our first deployment of digital transport adopters or so-called DTAs. Our plan is to migrate our remained systems to all-digital over the next 5 years or so. And we continue to expand our DOCSIS 3.0 deployment, which now covers roughly 60% of our footprint. We expect to complete that rollout next year. As I mentioned earlier, we returned more than $1 billion to shareholders in the second quarter. We also continue to be interested in extending our cable footprint, when we can do so at the right price. In the second quarter, we announced the acquisition of systems serving roughly 130,000 PSUs from NewWave Communications for $260 million. This acquisition highlights our disciplined approach to capital allocation and M&A. Taking into account a full tax step-up and significant operational synergies, it enables us to expand our cable footprint at a purchase price that compares favorably to the repurchase of our own shares. In summary, our business continues to perform well. We are thoughtfully deploying capital to improve our customer's experience with our products and to acquire a cable footprint and business service capabilities that will enable further growth. And we continue to show significant -- we continue to return significant amounts of capital to our shareholders. So before I turn the call over to Rob, one last time in his role as acting CFO, I'd like to extend our thanks for the terrific job he's done as our CFO for the last 3.5 years. Rob?

Thanks, Glenn. Welcome aboard, Irene, and good morning, everyone. As usual, I'll jump right in to our second quarter highlights on Slide 3. Second quarter revenue grew 4.4% year-over-year as Residential Services revenue increased 2.5%, Business Services revenue growth accelerated to almost 35%, and advertising revenue grew over 4%. Adjusted OIBDA grew over 4% in the quarter, and operating income was up almost 16%. Adjusted OIBDA less CapEx, increased almost 11% to a record $1.1 billion, and free cash flow was up almost 43% to $815 million or $2.40 per diluted share. As you know, we closed our acquisition of NaviSite in April. And NaviSite accounted for roughly 50 basis points of total revenue growth and about 40 basis points of Adjusted OIBDA growth in the quarter. Diluted EPS increased over 30% to $1.24. We returned over $1 billion to our shareholders in the second quarter through dividends and share repurchases. And finally, with half the year behind us, we remain on track to meet or exceed all elements of our full year financial guidance. Let's move on to our Q2 subscriber trends on the next slide. As expected, subscriber performance showed typical seasonal weakness. And due to continued economic headwinds and increased competitive intensity, subscriber net adds were somewhat softer than last year. That relative weakness has continued into the early part of Q3. That said, performance varied across our footprint, with subscriber performance in Texas and Southern California notably better than the rest of the footprint. We continue to grow our HSD subscribers with 67,000 net adds in the quarter, more than the HSD net adds reported last week by AT&T and Verizon combined. We finished the quarter with 10.1 million total HSD subs. That's a 4.7% year-over-year increase in our HSD subscriber base. Our residential high-speed data subscriber mix continued to improve, with more customers taking higher-speed tiers. We added 125,000 Turbo and 25,000 Wideband or DOCSIS 3.0 customers. And at quarter end, Turbo and Wideband subs comprised over 17% of our Residential HSD customer base. Our Wideband subscribers, while still a small portion of the total, more than doubled during the second quarter. We now have deployed our DOCSIS 3.0 technology in about 60% of our footprint. And we will complete the footprint-wide rollout next year. Business HSD net adds accelerated for the third consecutive quarter to 13,000 representing our highest quarterly net adds ever. We continued to see growth in voice. Net adds were 45,000, and we ended the quarter with over 4.6 million total voice subscribers, a 5.3% year-over-year increase. Included in net adds were 13,000 business voice net adds in the quarter, an all-time high. Second quarter video sub losses were 128,000, about 17,000 more than we lost in last year's second quarter. Once again, a disproportionate share of the losses came from analog, single-play video customers. We actually added digital and bundled video customers. We continue to do well with our Spanish-language offering, especially in Texas and Southern California. We more than doubled the number of El Paquetazo subscribers we had just 5 quarters ago. In addition, we just launched an El Paquetazo Triple Play featuring a 1,000 minutes of international calling. We're in the process of adding 25 Spanish-language channels to our iPad app. And we're formulating a version of Signature Home for Spanish-speaking customers to be launched later this year. Customer relationship net losses were 74,000 in the quarter, as we lost video-only single-plays and a modest a number of doubles and triples among our lower-income customer segments and added double and triple plays among our higher-end segments. All in, we were able to grow our Triple Play base by 38,000 in the quarter. At quarter end, 60% of our customers were either double or triple plays. During Q2, we nearly doubled the number of customers taking Signature Home, our high-end Triple Play, coupling our best products with customized service. We ended the quarter with about 17,000 Signature Home subs, paying an average of $220 per month. Turning to our financial results on the next slide, as you can see from our press release, we've made some changes this quarter in how we present our revenues. The new presentation is more consistent with the way we think about and run the business. In short, going forward, we'll be talking about revenue in 4 major categories: Residential Services, Business Services, Advertising and Other. Other captures a number of items, most notably commissions from Home Shopping Networks and amounts we received from Bright House Networks for the provision of HSD and various management services. Once we launch our L.A. Lakers RSN next year, affiliate fee revenue associated with those networks will also show up in other revenue. You can get more detail on the new presentation in our 10-Q and our trending schedules. Second quarter revenue increased 4.4% year-over-year to $4.9 billion, with total ARPU per customer relationship increasing 4.8%. In dollar terms, total revenue were $210 million higher than in Q2 of last year, with $105 million of that growth coming from our Residential Services, $93 million coming from Business Services and $12 million coming from Advertising and Other revenue combined. Let's focus first on Residential Services revenue on Slide 6. Residential revenue grew 2.5% year-over-year, driven by a combination of year-over-year HSD and voice subscriber growth and improved ARPU per PSU, offset by video subscriber losses. Of the $105 million of year-over-year Residential revenue growth, HSD contributed over 80% or $87 million. Residential HSD revenue increased 8.5% over Q2 of last year. The year-over-year growth was driven by subscriber increases, as well as a 3.5% improvement in Residential HSD ARPU. This is the ninth consecutive quarter of year-over-year Residential HSD ARPU improvement as, we continue to benefit from price increases and the improved HSD subscriber mix I mentioned earlier. Residential voice revenue grew 4.4% year-over-year due to continued subscriber growth, as Residential voice ARPU was pretty much flat year-over-year. And Residential video revenue was essentially flat year-over-year as a 3.8% increase in ARPU offset a decline in video subscribers. The ARPU increase was driven by price increases, a more favorable video subscriber mix, increased equipment rental and installation charges and a 10% increase in DVR revenue, offset by declines in premium and transactional VOD revenues. Transactional VOD revenue declined $14 million, with the year-over-year drop being fairly even across the movies, events and adult categories. Let's move on to Business Services revenue on Slide 7. We had another very strong quarter in Business Services, which accounted for almost 45% of our total year-over-year revenue improvement in Q2. Business Services revenue for the quarter was $361 million, up almost 35% over Q2 of 2010. As I mentioned earlier, we closed our NaviSite acquisition on April 21, which contributed $26 million of revenue in the quarter that's included in our other Business Services revenue category. Even without NaviSite, Business Services revenue grew 25%, our sixth consecutive quarter of accelerating year-over-year organic revenue growth. Of the $67 million of year-over-year growth from our non-NaviSite business, HSD contributed about 40% or $27 million. Wholesale transport contributed around 30% or $19 million, and voice provided about 25% or $17 million. Business HSD revenue increased 18%, driven by growth in shared and dedicated Internet access and Metro Ethernet revenue. Wholesale transport revenue of $39 million, nearly doubled from Q2 of last year, and was driven by growth in cell tower backhaul. Cell tower backhaul revenue was $34 million, twice our cell tower backhaul revenue in last year's second quarter. At quarter end, we had an install base of roughly 6,900 revenue-generating radios and a meaningful backlog under contract. Business voice revenue increased almost 60% driven by subscriber growth. So we're well on our way to achieving full year organic Business Services revenue growth in excess of 20%, and over 30% revenue growth including NaviSite. Moving on to Advertising revenue on the next slide, ad revenue of $225 million increased $9 million or 4.2% year-over-year, as the expected drop in political advertising was more than offset by revenue from the Verizon files rep deal that we discussed on last quarter's call. Second quarter ad revenue was driven by particular strength in the media and entertainment category. Automotive, which fueled our growth last year and in Q1, increased just 4% year-over-year, in part a reflection of the after effects of the earthquake and tsunami in Japan, and in part a reflection of the broader economy. We still expect that full year ad revenue will be greater than in 2010. But remember that the comps get much tougher as the year progresses, given that we generated $55 million from political advertising in the second half of last year. Let's turn to Adjusted OIBDA and operating income on Slide 9. Second quarter Adjusted OIBDA grew 4.2% to $1.8 billion, and our Adjusted OIBDA margin fell 10 basis points. Excluding NaviSite, Adjusted OIBDA grew 3.8%. Operating income rose 15.8% to nearly $1.1 billion in the second quarter, and our operating income margin improved 210 basis points year-over-year to 21.5%, driven by a significant decline in amortization expense. Total second quarter operating expense, which included $19 million of operating expense for NaviSite, grew 4.6% compared to last year. Employee costs were up just over 5% year-over-year, driven by annual salary increases across all our businesses and higher headcount, primarily in Business Services including NaviSite. Business Services employee cost grew 34%, while the rest of the company was up less than 3%. Programming expense increased 4.1% in aggregate and 8% on a per subscriber basis. The increase was driven by contractual rate increases and higher retransmission consent expense, which was partially offset by the decline in video subscribers. We expect programming cost per sub growth for the full year 2011 to be in the same ballpark as 2010. Voice costs were down 9.6% in Q2, as we benefited from the insourcing of our voice support functions. The insourcing process is going very well. And as of the end of Q2, we had migrated almost half our phone customers, and have largely completed this year's moves. As a result of these efforts, our Q2 monthly Residential voice cost per sub dropped nearly $2 year-over-year to $10.30. And our voice gross margin improved over 500 basis points year-over-year. We expect voice cost per sub to decline further in the second half as we benefit from full quarter of savings for each migrated sub. Most of our remaining voice subscribers will be moved in 2013. And when we're all done in 2014, we expect to see our premigration voice cost cut roughly in half. Our net bad debt expense declined 15% to $34 million, reflecting the better quality of receivables and better collections. Second quarter marketing expense of $160 million was $4 million higher than last year, and remains relatively constant at 3.2% of revenues. During the second quarter, we continue to invest in new business initiatives, including wireless and our new home security offering. In Q2, the combined losses from these initiatives were approximately $15 million compared to $10 million in the second quarter of 2010. We plan to continue investing in these new initiatives over the course of the year, and still expect our total 2011 startup losses to be in the $75 million range. Looking forward, we expect that Adjusted OIBDA growth will accelerate in Q4, as we benefit from insourcing our voice support functions, the expected cost savings from our strategic sourcing initiative and some one-time expenses that reduced Q4 2010 adjusted OIBDA. Operating income growth will actually moderate in the second half, as we lap last year's improvement in amortization expense. Nonetheless, we continue to expect to generate double-digit operating income growth for the full year. Turning to capital spending on Slide 10, through the first 6 months of the year, CapEx was under $1.4 billion or less than 14% of revenues, down from just under 16% in the first half of 2010. Second quarter CapEx was down 4.9% year-over-year to $700 million. Q2 Residential capital expenditures were 13.3% of Residential revenue, and were down year-over-year to $572 million due primarily to lower CPE, upgrades and rebuilds and line extensions, partially offset by higher scalable infrastructure. Business Services capital expenditures were $118 million, flat with last year's second quarter. Roughly half of the B2B CapEx was attributable to line extensions and expanding our cell tower backhaul footprint. Total CapEx continued to benefit from our strategic sourcing initiative, which is helping to reduce per-unit pricing and enhance the efficiency of our supply chain. As Glenn mentioned, we are spending on projects that will help us to more rapidly deploy product enhancements and improve our customers' experience. Specifically, our data centers in Charlotte and Denver, as well as our conversions to all-digital in Maine. And we continue to rollout DOCSIS 3.0 across our footprint. We also expect to continue to invest in Business Services growth. So while capital intensity in the first half of the year was our lowest ever, we will spend more in the back half of the year and expect that full year capital spending will be in the $2.9 billion to $3 billion range, consistent with the 2010 level and still below $3 billion as we said at the outset of the year. Moving onto cash flow on the next slide. We continue to grow our cash flows at strong double-digit rates. Adjusted OIBDA less capital expenditures for the second quarter was $1.1 billion, an almost 11% year-over-year increase and a new all-time high. The $109 million of growth was the result of the $73 million increase of Adjusted OIBDA and a $36 million decrease in CapEx. For the first 6 months of 2011, Adjusted OIBDA, less CapEx grew nearly 12.5% to just under $2.2 billion. Free cash flow for the quarter was $815 million, up nearly 43% over Q2 of '10. Free cash flow per diluted share rose 51% to $2.40. The $244 million of year-over-year free cash flow growth was largely driven by an improvement in adjusted OIBDA less CapEx, and a roughly $150 million decline in cash taxes, due in part to bonus depreciation benefits that I'll cover in more detail in just a moment. For the first half of 2011, free cash flow was over $1.7 billion, up 42% from first half of 2010. Again, aided by bonus depreciation related to declines in cash taxes. First half free cash flow per share grew 48% to $5.06. We've gotten lots of questions over the last several quarters regarding the impact of economic stimulus legislation on our cash taxes and free cash flow, both historically and going forward. So we thought we'd lay it out in some detail. If you turn to Slide 12, you can see that the blue bars represent the gross stimulus benefit in each year. While the dark gray bars highlight the reversal of prior year benefits in each year. The green line tracks the net benefit, or detriment, to cash taxes and free cash flow in each year. So you can see we benefited from the bonus depreciation provisions of various federal stimulus acts since the beginning of 2008. Current law provides for 100% bonus depreciation in 2011, which when netted against reversals of prior year benefits, yield the current year net cash tax benefit of roughly $600 million. Next year, the current law provides for 50% bonus depreciation, which will yield roughly $300 million of gross benefit. But that led to the reversal of past benefits resulting in a net negative impact on cash taxes. The exact amount depends on 2012 capital spending. But if 2012 CapEx were similar to this year's expected level, we would see a negative impact on cash taxes and free cash flow of roughly $100 million. So we're looking at a swing of approximately $700 million in cash taxes and free cash flow for 2011 to 2012 related solely to the effects of economic stimulus legislation. As you can see, assuming bonus depreciation ends after next year, the net negative impact of the Economic Stimulus Act is greatest in 2013 and then moderates thereafter. Of course, we'd be happy to go through all of these in more detail offline. Let's turn to the next slide. Second quarter diluted earnings per share of $1.24 increased over 30% from $0.95 in Q2 '10 primarily due to an increase in operating income and the benefit of our share repurchases, which were partially offset by higher book taxes, net interest expense and loss from equity investments. Both this year and last year second quarters were impacted by a number of items highlighted in our press release. Through the first 2 quarters, diluted EPS was $2.16, up almost 40% over the same period of last year. We continue to expect the 2011 full year diluted EPS will be in the $4.25 to $4.50 range. As usual, let's finish up with the balance sheet on the next slide. We ended the quarter with net debt and preferred equity totaling $21 billion, a $600 million increase from year-end 2010. Our leverage ratio ticked up slightly to 2.99x. This quarter, we returned over $1 billion to our shareholders through our dividend and share repurchase programs. We paid out $163 million or $0.48 a share in dividends and bought back 11.5 million shares of common stock for $863 million during the second quarter. Since quarter end, we've repurchased 3.3 million additional shares. And since we launched the repurchase program in November of 2010, we have repurchased approximately 35 million shares at an average price of $71 per share, for a total of roughly $2.5 billion. So this leaves about $1.5 billion remaining on our original authorization. So to summarize, another solid quarter marked by exceptionally strong growth in Business Services and continued healthy free cash flow, coupled with the methodical execution of our balance sheet and return of capital strategy. Thank you. And with that, I'll turn it over to Tom for the Q&A portion of the call.

Thanks, Rob. Candy, we're ready to begin the Q&A portion of the call. [Operator Instructions] First question, please.

First question is from Ben Swinburne, Morgan Stanley.

For Glenn or Rob, I wanted to ask about the Hispanic household market. I think, it's one that Time Warner Cable sort of significantly over-indexed in terms of footprint and it's a focus for you guys. Other companies getting into that space have had sometimes issues with churn. I'm just curious, how you're positioning and marketing the product? And if there's any way to size up the opportunity there to help us think about the upside to your video business, that would be helpful. And I'm curious what the competitive landscape looks like there? Are your -- is your success with El Paquetazo coming largely from customers new to Pay TV or just coming out of satellite? Or any color there on that piece of the story would be helpful too.

I'll let Rob answer that.

Yes, Ben. I'm going to give you very rough ballpark numbers. I think that the total U.S. Hispanic population is somewhere in the order of 16% -- Hispanics represent approximately 16% of the total U.S. population. We over-indexed and in particular, we over-indexed in our Southern California and Texas markets. I think in those markets, based on the most recent census that we could push into the 30-plus percent of the population being Hispanic. Bigger amongst younger people and somewhat smaller among adults. Really, what we're doing to focus on that market is ensuring that we've got the right products that could appeal to what it is that the Hispanic audience is looking for. And as a result, that's why we're introducing this new Triple Play, which not only focuses on Hispanic-oriented programming, Spanish-language and otherwise, but also focuses on the telecom needs of that market. And by throwing a robust international calling plan into the package, we think we're going to satisfy another need of that audience. There's also a fair amount of opportunity even at the higher end of that market. And as a result, we're tailoring a Signature Home version for Hispanic customers. And as I've mentioned, we're also adding Spanish-language channels to our iPad app. So we're doing a lot on the product side. And a lot of this has to do with ensuring that the message gets heard, and our marketing focus is getting somewhat more aggressive in making Hispanic customers aware that we have this product. I'm pleased with the growth in El Paquetazo. But just to put it in perspective, I think, our total El Paquetazo subs now roughly 130,000. So we don't have huge numbers, and I don't have great stats on exactly who those subs are coming from.

Next question, Stefan Anninger, Crédit Suisse. Stefan Anninger - Crédit Suisse AG: Earlier in the commentary this morning, you mentioned that you'd like to do a better job of telling your story to consumers. Can you discuss what you mean by that in greater detail? And how you might alter both your marketing approach, and sort of your approach to retention as well?

Let me make a couple of comments and then Rob will want to jump in, too. I think that we can always make our marketing better. This industry as a whole has a long history and a long evolution of becoming more competitive. And I think the comments are in that context. I would say we have focused heavily on products and maybe less at marketing than we should. And we have some wonderful features that we really don't tell people about very well, and they have to sort of discover it on their own. So I think we can do that a lot better. And we're making some management changes to that end. And Rob, you might want to talk about that.

Yes. I'll make a couple of comments. One, to amplify what Glenn said, a lot of our marketing focus over the last several years has been on selling Triple Play bundles, and we've done that to great effect. But in the process of focusing on the fact that we're selling 3 products, and I've said this before, I think we probably didn't take as much time and focus on the underlying virtues of the individual products that comprised those bundles, and we're definitely committed to doing just that. Over the last several years, I'm very pleased with the improved level of sophistication that we've brought to the marketing function. We've focused on customer segmentation, we've paid attention to customer lifetime value. We've gotten much more scientific about our approach to pricing. But obviously, we made a management change recently. And I feel very, very confident that Jeff Hirsch, who's our new CMO, is the right guy to take us to the right next level. Jeff brings not only marketing expertise to the function, but also has the benefit of a vast experience in actually running cable systems. So what I expect out of him is to bring some of those really cool, sophisticated marketing tools to the very practical issues of acquiring, retaining and upselling our existing customer base. So I think you can expect to see just a much more nuts and bolts approach to marketing going forward.

Next, Craig Moffett, Sanford Bernstein. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Could you talk a little bit about your wireless strategy? I just got off listening to the Sprint call. There, obviously, the Clearwire network is only about half built, and there are still questions about its funding going forward. How should we think about that as it relates to Time Warner Cable?

Craig, this is Glenn. Our strategy really hasn't changed. I think you should look at it as one of optionality. We have this idea, we've had it for some time that bundling wireless broadband and with our other products to create a so-called quadruple play might be interesting to consumers. And the reason I say might is that we're not sure, and the marketing evidence is mixed. So what we've been trying to do is create the ability to experiment with that through market testing, et cetera, without investing or risking huge amounts of money. And all of our move to dates -- or our moves to date are in that context. As we said on a couple of calls, our results in terms of actual customers so far are not terribly exciting, so the evidence so far is there is not a big profit for the quadruple play. So I think the strategy we've had is the right one. Where we go from here, I think, is more of at the same. We're not really ready to say, that this is a non-starter. Maybe we're just not doing it right. But we're also not ready to make huge additional bets. So that's, again, is consistent with where we've been. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Should I read into that, that you'd be unlikely to make additional investments into Clearwire or how do I think about that?

Yes, it's tricky for us to say anything about Clearwire. It's obviously a public company with its own dispersion policies, et cetera. Suffice it to say, we are not obligated in any way to make any additional investment. And I think, that's again consistent with what we've said.

Next question, Doug Mitchelson, Deutsche Bank.

Glenn, I was hoping to get a sense of when you might launch usage-based pricing, which I think you have said is inevitable. And others like Charter have discussed openly. And as part of that, given the dispersion of broadband bandwidth usage where a small number of your customers are very, very heavy users. I'm curious, if you would expect that launching that would only impact those few customers in terms of a price increase? That will be great.

I was reading the transcripts of the 2 big phone companies, Verizon and AT&T. And I forget which one but more in the context of wireless, one of those managements said this was inevitable also. So I'll stick with that. We have not announced any plans to do anything specifically. I'm not going to use this occasion to make any announcements. But I would say that the right way to look at this and to our way of thinking is that there should be, there should remain an unlimited plan for those who want to buy that. And we're more focused on the affordability and lower-income people, who might be light users and might seek to pay less because they use less. I think that's a much better context than the usual, oh, these people using all the bandwidth and caps and all that stuff. In effect, I don't anticipate at the moment. If we were to do this, I don't think we would have caps across-the-board. As I said, I think there should always be an unlimited plan. So that's the context for us. But we don't have any specific announcement at this point.

So when I'm thinking about ARPU growth for high-speed data, I should pay attention to your annual increases, and then it's more sub growth that would be driven by a usage-based pricing, Glenn?

I'm sorry, you cut out a little bit at the end. But I think you were saying, you should look at ARPU growth and the sort of steady increase on people buying higher speeds, and that indeed is what's happening.

Next, Bryan Kraft, Evercore Partners.

I just had a question about the DVR subscriber trend. It looks like they declined in the quarter. And I just wanted to understand what's driving that? Do you think you've maxed out on penetration? Is it demand driven? Or have you decided to promote the product less? And also, how does that jive with the subscriber losses being concentrated at the low end?

So, Bryan, there's a couple of things going on there. One, certainly penetrations of DVRs to digital customers has been pretty terrific. So there's undoubtedly some maturation of the product offering. Two, I think you're seeing some of the effects of some promotional offers that we've made available. Last year, we've put in place some Triple Plays that were -- that featured a free period of DVR. So in terms of the year-over-year impact, you're seeing the absence of that. And you're also seeing some customers who, after the free period, are rolling off. And then not surprisingly, given the still stagnant economy, one of the places that we find customers were strapped cutting back is to eliminate the DVR. So I think there's a bunch of different things going on, but those things all have an influence.

Jessica Cohen, Bank of America Merrill Lynch.

Glenn and Rob, you both mentioned competitive intensity. Just wondering, I mean, it's always pretty competitive or has been for a while. Is there anything unusual that you're seeing in the second quarter or going into the third quarter? And then separately, Rob, I was hoping you could break out advertising. If you take away the rep deals that you have in place, what was your underlying advertising? And do you think that you're actually growing faster than the local markets? Are you in line?

Okay. I had a little bit of trouble hearing, Jessica, but I think I got the essence of it. On competitive intensity, really, I think the most market change from the past is just an increasing aggressiveness of the offers we're seeing from our competitors. So the satellite guys, DIRECT in particular is offering a pretty aggressive video package, I think, $29.99 but including a free Sunday ticket offer. The phone companies are going out with very aggressive triples. Verizon has gone to a no contract, $99.99 with free MR DVR for life. And U-Verse has got a -- also an aggressive triple, I think an $89.99, with a pretty significant cash back offer. So it's really just a progression of more aggressive offers. In addition, based on our estimates, FiOS has also spent a lot more marketing dollars in our footprint than they have in the past. So that's the essence of what we're seeing on the competitive intensity side. On the ad front, I think, what I heard you say was you're looking to figure out what portion of the total advertising revenue is associated with the FiOS deal?

Well, yes. I mean, if you take away your rep deals. You have FiOS and I think you also have U-Verse?

Yes.

If you take away the rep deals, what is your underlying advertising growth?

Yes. So U-Verse hasn't yet ticked in, that's a fourth quarter deal. So it's just FiOS at this point. That accounted for about $15 million dollars. And what I kind of look at is a more normalized ad revenue growth. So back out political, back out the rep deals, and we had slight ad revenue growth year-over-year.

So that's probably in line with the broadcast market?

Honestly don't know the answer to that.

Okay .

The only thing I would add on competitive intensity is, we are seeing more aggressive sort of introductory beacon price offers. Everybody in the space still reports consistently high ARPUs. So I think as you look at the ads, you can -- we need to pay attention to reported ARPUs also. Because the ads may be more aggressive than what's happening in real life.

Next, Richard Greenfield, BTIG.

Just wanted to ask a question on -- a follow-up on Craig's question related to wireless. You have the spectrum, co-spectrum, you haven't really done anything with it, in terms of -- how do you think about the use of that spectrum and the time frame for either monetizing or doing something with it? And then two, you mentioned that transactional VOD was down. It seemed like it was a pretty big number. Is that due to Netflix? I mean, I realize you don't have HBO Go launched yet. So I assume, is that really just a function of Netflix growth in the quarter? Any color would be great.

Okay. On wireless, as I've said, we've been trying to make sure we had options if we find the magic marketing formula. So Clearwire and the spectrum is in that context. As I think you know, there's a fairly long time period for build out associated with that spectrum despite some of the political comments people making around this in Washington. So we're going to keep trying to find out if there's some formula for quadruple play that works. If we find the magic formula, we'll go from there. If we don't, then we'll take some other action. But again, nothing to announce at this point. On VOD, I'll let Rob handle it, other than to say that there's -- one of the things going on in VOD is there's been a fairly steady trends over some time period now for adult to go down, largely because there's that kind of material available on the Internet for free. And that's pretty high margin. And so that's been, not just this quarter, but going on for some time period. Rob, what do you want to say?

As Glenn points out, the biggest piece of the year-over-year decline was in fact in the adult category, more than 1/3 of it was there. But movies-on-demand and event were also down. Event is very much hit driven in a sense that as the events go, when there are fights, there is events revenue. So you can expect to see a pop, when you have a Pacquiao or Mosley and sometimes, when you don't get, you see a little bit of the downturn. MOD, we did see a decline in buys. And we did not see a concomitant increase in revenue per buy. So could that be in part a function of alternative availability of movies? I guess, yes. It also could be a matter of the slate. So I wouldn't draw any conclusions quite yet.

Does that impact in any way your thoughts around HBO Go and whether you ever choose to license it?

I think we've said repeatedly that we think the HBO Go was attractive. And we think we'd like to deliver to our customers, and we're merely working through the structure of the deal to make that happen.

Next, Jason Bazinet, Citi.

I have a question for Mr. Marcus. I think on the earnings guidance that you've laid out at the beginning of the year, the Street gravitated towards the high end of that number, closer to the $250 million. I was a bit surprised that you didn't raise sort of the lower end of that today given that your earnings have been pretty much in line with where the Street is. Is this something that the Street is missing? Because it seems like your model is pretty deterministic. So any color you can provide.

I assume what you meant, Jason, is the $4.25 to $4.40 EPS. Look, I think our approach has generally been to set out guidance at the beginning of the year and not on every call revise it, whether up or down. And that's really what's driving the thought process here. I will point out, and I tried to highlight it in our prepared remarks, that you should be cognizant of not simply multiplying first half by 2, and then assuming growth because we do have the lapping of the amortization benefits we saw starting in Q3 of last year. But I wouldn't read anything into the fact that we didn't revise guidance.

Next, Jason Armstrong, Goldman Sachs.

Sorry to beat a dead horse at wireless. But maybe just one more, maybe throw out a scenario for you and just to get your reaction to it. If what's important here is preserving optionality in the future, Clearwire obviously has some problems this year and the buildout is stalled. You talked about not making considerable incremental investments from here, but you have sort of assets that you could contribute into something else just for swap stakes. I'm wondering, why you wouldn't think about packaging a Clearwire stake plus the spectrum co-spectrum and trying to swap into equity in Sprint, if the goal really long-term optionality?

Well, interesting question. I think this space and creating optionality, we've seen more different ideas and those deals and structures, whatever they need to shake a stick at. And obviously, we've done what we've done to date. But we keep thinking about new things, hearing about new things. But again, nothing really to report or announce at this point.

John Hodulik, UBS.

I guess, in your prepared remarks, Rob mentioned that the economy had some impact as well, competition and the economy. And I guess, we've addressed the competition section. I mean, with the PSU metrics being maybe a tad weaker. And then I think you said something about the DVR penetration might be being affected by weakness in the economy. Is this something sort of more of the same of what we've been seeing to date? Or is this maybe an increased competition sequentially due to some sort of economic air pocket we've had, and how do you see that progressing forward?

I think we're seeing what we've been seeing for several quarters now. Obviously, we have seasonality on top of that. The specific impact of the economy and of actions of the various competitors changes each quarter. But we're seeing lots of competition, and we're seeing a weak economy and that has stayed in place. As I said before, I think, the kind of unique housing-driven nature of what we've been going through for a couple of years has affected our business in a different way than previous downturns. And I think until we work our way through this and housing starts rebound and people start occupying vacant houses, we're going to see a similar trend. And the population keeps growing, so inevitably, we will work our way through that. But reading all of the pundits, it takes longer than other kinds of downturns.

And just a quick follow-up. You said -- I guess, you guys mentioned that you didn't think that over the top, video options were affecting VOD. Do you see it affecting -- do you think it showed up at all in the video net add losses? Or do you see it affecting that video business more dramatically this quarter than it has in the past?

To the best of our market research ability, it's consistent with what others seem to find. It's -- the effect right now is very, very modest and it's very hard to measure, but it's so small.

Laura Martin, Needham & Company. Laura Martin - Needham & Company, LLC: Yes. Glenn, I'd love to have you update us on where you on TV Everywhere and the status of that. And then yesterday, I was at a cable conference, and they were talking about incremental bandwidth cost of $0.40 or $0.50 a gig. Is that -- and many of these systems as you know, other systems are starting to do rate based or caps. And does that sound like about the incremental bandwidth costs or it's just lower, which is why you don't really need to talk about metered billing on the VoIP side?

Okay. Bandwidth cost, and the first question was TV Everywhere. Okay, I'm sorry. We have a bad connection on the set. The TV Everywhere, we are very big advocates of that, have been from the very beginning. As you recall, we were still part of Time Warner when this idea first came about. I think it makes also the sense in the world. It is not the easiest thing to pull off in the deal sense, the technology is not that complicated. But negotiating deals one at a time with different programs, well, it's very complicated. Though the concept seemed simple, everybody has slightly different ideas of how we should work when you get down on the details. And by the way, not everybody -- not every network has all the rights for all their programming to do this to begin with. So I think it's progressing actually pretty well. With Disney and ESPN, we actually did the first big TV Everywhere deals. And I think you will see more from us and other people as time goes by. Again, the technology is not complicated. It's all the details. I still think it's a great idea, and we're all for it. Bandwidth cost, I actually don't even know the answer. But I think the conversation about usage-based pricing should not be tied to a conversation about costs. This is not a rate of return regulated monopoly industry like AT&T was before 1984, and I think there's a tendency to think the world still works that way. We have a lot of different products, we have a lot of different offerings, and we're aiming at different segments and different combinations. And the pricing will relate to that. This is not a strict cost base thing. So those facts are interesting, but not terribly relevant to pricing.

Candy, I think that's probably all that we have time for this morning. Thanks everyone for joining us. And to give you a little bit of advance notice, Time Warner Cable's next quarterly conference call, which will reflect our third quarter 2011 results will be on Thursday, October 27, 2011, at 8:30 a.m. Eastern Time. Thanks, and have a great day.

Thank you. That does conclude today's conference. You may disconnect at this time.