Charter Communications, Inc. (CHTR) Q3 2011 Earnings Report, Transcript and Summary

Hello, and welcome to the Time Warner Cable Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. And 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 Third Quarter Earnings Conference Call. This morning, we issued a press release detailing our 2011 third 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 announcement 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. [Audio Gap] 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 detail in Time Warner Cable's SEC filings, including its most recent annual report on Form 10-K and quarterly reports on Form 10-Q. Time Warner Cable is under no obligation to, 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 release, trending schedules and 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, October 31. And with that covered, I'll thank you and turn the call over to Glenn. Glenn?

Good morning, and thanks for joining us. Time Warner Cable continued to post steady results in the third quarter with year-over-year revenue and adjusted OIBDA growth of just under 4%. Our free cash flow remains very strong. We generated more than $600 million in the third quarter and almost $2.4 billion year-to-date through September. We drove stronger residential video and broadband subscriber metrics compared to the year-ago quarter, and we posted business services revenue growth of 35%, including NaviSite. And ad sales did fine, although it's feeling the impact of a wobbly economy and the absence of 2010's election-year political advertising. Since our last call, we announced the acquisition of Insight Communications. We’re excited about the opportunity to buy a well-run company in the business we love at an attractive price, and we look forward to serving Insight's customers and bringing them our innovative capabilities over time. We continue to expect the transaction to close in the first half of next year. Disciplined balance sheet management continues to be a top priority. The announced acquisition of Insight increased our pro forma leverage. As a result, we slowed the pace of our share repurchases as we actively managed our balance sheet to meet our targeted leverage ratio and cost of capital. The slower pace notwithstanding, we still bought almost $600 million worth of shares in the third quarter. [Audio Gap] [indiscernible] maximizing our opportunity in our 2 most promising areas, residential broadband and business services, while continuing to deliver both the content and innovation our customers expect in our video product. Broadband is a powerful service for which there appears to be unquenchable consumer thirst. We have a great story here. We're winning share while increasing ARPU. Over time, we'll devote much more of our plant's capacity to broadband, and we’ll allocate more capital to this service, as we continue to enable customers to access innovative and increasingly bandwidth-intensive Internet applications. Business services is mostly about share shift. But I think we can also grow the category by applying new technology, including the capabilities we acquired with NaviSite. I can see the opportunity to grow this business even faster if we make more investments in expanding our sales force and extending the plan to increase serviceability in certain parts of our footprint. Video is a very good but mature business. We're striving to deploy resources thoughtfully to build on our strength. When you think about it, nearly everyone watches TV, and they watch a lot of it. Cable has always been about offering access to more TV and providing greater convenience. We’re building on this legacy by bringing our video product to a variety of consumer electronics devices. We're consistently updating our iPad app every few months, and we're planning to bring similar functionality to existing -- to additional devices later this year. We introduced whole home DVRs across our footprint earlier this year, resulting in a better consumer experience yet having a very modest impact on costs. Next, we'll begin installing home gateways, which we expect to further improve our service while actually reducing CPE capital and some configurations. And last, I'd point to our user interface. We have no illusions that we can make all of our 14 million legacy set-top boxes sing and dance like an iPad. In fact, it isn't all that easy to invent a simple way to serve hundreds of channels with a remote control that isn't a keyboard. However, we're making incremental investments in the most recent generations of set-tops, that is those with fast processors, a DOCSIS connection and home networking capabilities. As a result, we have now employed our first generation of cloud-based guide functionality in parts of Syracuse, Los Angeles and Dallas. It provides advanced search and box [ph] for on-demand content. We expect to roll it out broadly in the next several quarters. We also need to refocus on the voice product. While cord cutting continues apace, we still have considerable opportunity to grow, although it may require new promotions and packaging to attract new customers. So in summary, we continued to post steady financial progress in the third quarter powered by residential broadband and business services. And we're particularly pleased by stronger subscriber results in August and September. So let me turn it over to Irene and then Rob to give you additional background.

Thanks, Glenn, and good morning, everyone. I'm excited to be here for my inaugural earnings call this morning and to be part of the Time Warner Cable team. Let's start off with our third quarter highlights on Slide 3. Third quarter revenue grew 3.7% over last year as residential services revenue increased 2% and business services revenue grew almost 35%, while advertising revenue declined 3%. As you know, the third quarter 2011 includes the results from NaviSite, which we acquired in the second quarter of 2011. NaviSite accounts for roughly 70 basis points of total revenue growth and about 40 basis points of adjusted OIBDA growth in the quarter. Operating income was up 8.1%, and free cash flow was up almost 55% to $613 million or $1.86 per diluted share. Excluding the benefits from the economic stimulus programs which are detailed in our trending schedules, free cash flow grew nearly 19%. Diluted earnings per share increased 8% to $1.08, and we returned $731 million to our shareholders in the third quarter through share repurchases and dividends. And finally, with 3 quarters of the year behind us, we remain on track to meet or exceed all other elements of our full year financial guidance except for advertising revenue. We are moderating our expectations a bit. And I'll touch on that in a few minutes. Let's move on to our Q3 subscriber trends on Slide 4. Subscriber net adds improved on a year-over-year basis for the first time in a while, despite facing headwinds from a still weak economy. Once again, the performance varied across our footprint with Texas and the Carolinas doing relatively better than the rest of our footprint. We continued to grow our high-speed data subscribers with 105,000 net adds in the quarter, over 4x the HSD net adds reported last week by AT&T and Verizon combined. We finished the quarter with nearly 10.2 million total HSD subs. That's a 4.7% increase in our HSD subscriber base compared to last year. Our residential HSD subscriber mix continued to improve with more customers taking higher-speed tiers. We added 79,000 Turbo and 43,000 Wideband or DOCSIS 3.0 customers, offset somewhat by a net loss of basic and light subscribers. At quarter end, Turbo and Wideband subscribers together comprised over 18% of our residential HSD customer base. Wideband subscribers nearly doubled from the second quarter and increased tenfold from the third quarter a year ago. Consistent with our focus on targeting new customers, we added 97,000 residential HSD, Single Play subscribers. Business HSD net adds accelerated for the fourth consecutive quarter to 16,000, representing our highest quarterly net adds ever. Third quarter video sub losses were 126,000, a 29,000 improvement from last year's third quarter and the first improvement in video net adds in almost 2 years, as disconnects were down from the prior-year period. We actually gained video subscribers in September. We continue to do well with our Spanish language offering, especially in Texas and Southern California. In fact, we've increased the number of El Paquetazo subscribers almost 75% from the third quarter of 2010. We continued to see some growth in voice. Net adds were 5,000, and we ended the quarter with over 4.6 million voice subscribers, a 4.6% growth rate versus the prior year. The overall gain in voice subscribers was driven by business net adds of 13,000, which were partially offset by residential losses of 8,000 in the quarter. Customer relationships were largely flat with the second quarter of 2011. Our renewed focus on nonvideo customers resulted in record nonvideo net adds of 118,000, which mostly offset video-only and Triple Play losses in the quarter. At quarter end, 60% of our customers were either Double or Triple Plays. Churn was flat to down year-over-year in each PSU category. Before we move on to the financials, let me give you an update on fourth quarter subscriber trends. It's still early in the quarter, but in the first few weeks of October, video and broadband net adds are in the same zone as a year ago. But voice net adds continued to be weaker. And turning to our financial results on the next slide. Total third quarter revenue increased 3.7% year-over-year to $4.9 billion with total ARPU for customer relationship increasing 4%. Excluding NaviSite, revenue grew 3%. In dollar terms, total revenue was $177 million higher with $83 million of that growth coming from residential services, $66 million from organic business services growth and $34 million from NaviSite, partially offset by a $6 million revenue decline in advertising and other revenue combined. Let's focus first on residential services revenue on Slide 6. Residential revenue grew 2%, driven by a combination of HSD and voice subscriber growth and improved ARPU per PSU, partially offset by video subscriber losses. Residential HSD revenue grew by 7.8%, contributing $81 million of the growth, and residential voice contributed $15 million with a 3.1% growth rate, partially offset by a $14 million or 0.5% decline in residential video revenue. Switching to Slide 7. As I mentioned earlier, we did a good job of retaining customers during difficult economic times. This, coupled with our efforts to move existing customers up the value chain to realize higher ARPU, helped to drive revenue growth despite the tough economy. Turning to Slide 8. The residential video revenue decline reflects a 3.3% increase in ARPU, which largely offset a decline in video subscribers. The ARPU increase was driven by price increases, a more favorable video subscriber mix, increased equipment rental installation charges and a 10% increase in DDR revenue, offset by declines in premium channels and transactional video-on-demand revenues. Premium channel revenue was down $12 million from Q3 2010 and accounted for most of the decline. Transactional video-on-demand revenue declined $7 million with the drop-off being fairly even across the movies and adult categories, and events were flat. Flipping to Slide 9. Residential HSD revenue growth was driven by subscriber increases, as well as a 3.1% improvement in residential HSD ARPU. This is the tenth consecutive quarter of year-over-year residential HSD ARPU improvement as we continued to benefit from price increases and the improved HSD subscriber mix that I mentioned earlier. On a sequential basis, HSD ARPU was a couple of pennies lower than the second quarter in part due to seasonality. Most of the connects are backend loaded as students return to college. And often, students enjoy discounted bulk rates. In addition, as part of our effort to win over more DSL subs, we offered Single Play HSD promotions at $29.95. Moving on to Slide 10. Residential voice revenue improvement was driven by subscriber growth, which was slightly muted by 0.9% decrease in ARPU. And moving to Slide 11. Organic revenue growth from business services accounted for over 35% of the company's overall growth versus last year. NaviSite contributed nearly 20% of the growth. Combined, business services accounted for over 55% of our overall revenue growth this past quarter. And for the quarter, business services revenue was up 23% organically and almost 35% including NaviSite. Of the $66 million of organic growth, HSD contributed over 40% or $28 million. Voice provided more than 25% or $18 million, and wholesale transport contributed about 20% or $14 million. Business HSD revenue increased close to 18%, driven by growth in shared and dedicated Internet access. Business voice revenue increased over 50%, driven by subscriber growth, and wholesale transport revenues of $39 billion (sic) [$39 million] increased more than 55% and was driven by growth in cell tower backhaul. Cell tower backhaul revenue was $34 million, a 55% increase from last year's third quarter. At quarter end, we had an installed base of roughly 7,200 revenue-generating radios and a meaningful backlog under contract. So we are well on our way to achieving full year organic business services revenue growth in excess of 20% and over 30% revenue growth including NaviSite. On the next slide, you will see advertising revenues of $216 million decrease $7 million or 3.1% as the expected drop in political advertising and weakness in the overall ad market in our footprint was only partially offset by revenue from third-party rep deals. Pricing in another way, the media and automotive categories had relatively strong growth offset by the decline in political. Given the soft advertising trends we saw in the third quarter, coupled with the $42 million of political advertising we sold in the fourth quarter of last year, we expect fourth quarter 2011 advertising revenues to decline on a year-over-year basis and that full-year advertising revenue will be down slightly from 2010. Let's turn to Slide 13. Third quarter adjusted OIBDA grew 3.9% to $1.8 billion, and our margin increased 10 basis points. Excluding NaviSite, adjusted OIBDA grew 3.5%, and our margins increased 20 basis points. Operating income rose 8.1% to about $1 billion, and our operating income margin improved 80 basis points to 20.4%, driven by a decline in amortization expense related to the customer relationships associated with Adelphia and the TKCCP partnership being fully amortized in the third quarter and at the end of 2010, respectively. Total third quarter operating expense, which included $27 million from NaviSite, grew 3.6% compared to last year. Employee costs were up 6.4%, driven by annual salary increases across all of our businesses and higher headcount, primarily in business services, which includes NaviSite. Business services employee costs increased over 38%, while the rest of the company was up around 3.5%. Programming expense increased 3.5% in aggregate and 7.4% on a per subscriber basis. The increase was driven by contractual rate increases, higher retransmission consent expense and programming adjustments that increased growth by about $5 million, which were partially offset by the decline in video subscribers. Even with these increases, the video profit contribution per subscriber increased. We expect programming cost per sub growth for the full year 2011 to be in the same ballpark as in 2010. Voice costs were down 19% in Q3 as the benefits from the in-sourcing of our voice support functions continues to accrue. As of the end of Q3, we have migrated almost half of our phone customers and have largely completed this year's moves. Our Q3 monthly residential voice cost per sub dropped over $3 versus a year ago to $9.06. And our total gross -- voice gross margin improved nearly 800 basis points year-over-year. Fourth quarter voice cost per sub should be similar to the third quarter as we have fewer subscriber migrations left this year. For 2012, we will benefit from a full year of cost savings for the subs we migrated during 2011. Most of our remaining voice subscribers will be moved in 2013. And when we're all done in 2014, we expect to see our pre-migration voice costs cut roughly in half. Third quarter marketing expense of $163 million was constant at 3.3% of revenue. And during the third quarter, we continued to invest in new business initiatives, including wireless and our new home security offering. In Q3, the combined losses from these initiatives were approximately $20 million, up $5 million from the third quarter of 2010. We plan to continue investing in these new initiatives during the fourth quarter and still expect our total 2011 startup losses to be in the range of $75 million. Consistent with the update that we provided you at our conference in September, Q3 adjusted OIBDA growth decelerated from the second quarter, and we expect growth will accelerate in the fourth quarter as we benefit from in-sourcing our voice support function, the expected cost savings from our strategic sourcing initiative and some onetime expenses that reduced Q4 2010 adjusted OIBDA, including an executive severance charge and a reclassification of certain amounts previously recorded as depreciation. Operating income growth moderated in the third quarter since we lapped a portion of last year's improvements in amortization expense, which will also affect fourth quarter operating income growth. Nonetheless, we continue to expect to generate double-digit operating income growth for the full year. Turning to the next slide. Third quarter diluted earnings per share of $1.08 increased 8%, primarily due to an increase in operating income and the benefit of our share repurchases, which were partially offset by higher net income tax and interest expenses. Last year's Q3 book taxes were reduced by about $23 million related to the partial release of our valuation allowance for deferred tax assets, resulting in an effective tax rate of 34.7% compared to 40.4% in the third quarter of 2011. Through the first 3 quarters of 2011, diluted earnings per share was $3.24, up 27% over the same period last year. We continue to expect that 2011 full year diluted EPS will be in the range of $4.25 to $4.50, including the additional carry on the bonds we issued earlier this year. Turning to capital spending on Slide 15. Through the first 9 months of the year, CapEx was just under $2 billion or 13.6% of revenue, down from 15.3% in the first 9 months of 2010. Third quarter CapEx was down 6.5% year-over-year to $632 million. The decline in capital spending has driven depreciation growth rates down to 0.4% -- sorry, 0.04% for the first 9 months. Total CapEx continued to benefit from our strategic sourcing initiative, which is helping to reduce our per unit pricing and enhance the efficiency of our supply chain. Business services capital expenditures were $117 million, largely flat with last year's third quarter. And roughly half of the B2B CapEx was attributable to line extensions and expanding our cell tower backhaul footprint. Q3 residential capital expenditures were 12% of residential revenue and were down to $508 million due primarily to lower CPE upgrades and rebuilds and scalable infrastructure. As we mentioned last quarter, we are spending on projects that will help us to rapidly deploy product enhancements and improve our customers' experience, including data centers in Charlotte and Denver, our conversion to all-digital in Maine and the continued rollout of DOCSIS 3.0. We also expect to continue to invest in business services growth. So while capital intensity in the first 9 months of the year was our lowest ever, we expect to spend more in the fourth quarter, and we continue to expect that full year capital spending will be in the $2.9 billion to $3 billion range, consistent with our 2010 level. Moving on to cash flow on Slide 16. We continued to grow our cash flow strong double-digit rates in Q3. Free cash flow for the quarter was $613 million, up nearly 55% over the third quarter of 2010. Excluding the bonus depreciation, free cash flow was still up nearly 19%. For the first 9 months of 2011, free cash flow was almost $2.4 billion, up over 45% from the comparable period in 2010. Excluding bonus depreciation, 9 months free cash flow grew 2.9%. Before we move on to our capital returns, let me remind you that we expect cash taxes will increase next year. As we detailed for you last quarter, if 2012 CapEx were similar to this year's expected level, cash taxes would be approximately $700 million higher in 2012 than in 2011. This is due to the reversals of benefits received in prior years in the economic stimulus legislations. And let's finish up with our capital return slides. We ended the quarter with net debt and preferred equity totaling $21.2 billion, an $826 million increase in year-end 2010. Our leverage ratio was 3.0x our last 12 months adjusted OIBDA. This quarter, we returned $731 million to shareholders through our share repurchase program and dividend. We bought back 8 million shares of common stock for $573 million and paid out $158 million or $0.48 per share in dividends during the third quarter. Since quarter end through October 25, we’ve repurchased 1.4 million -- 1.5 million additional shares. Since we launched the repurchase program in November 2010, we have repurchased approximately 40 million shares or 11% of what would have been outstanding at an average price of $70 per share for a total of roughly $2.9 billion. This leaves about $1.1 billion remaining on our authorization. So to summarize, we had another solid quarter where we continued to drive strong growth in broadband and business services, which lifted revenue growth and drove healthy free cash flow. We continued to return capital to shareholders in excess of our free cash flow, as we prudently manage our balance sheet to our target leverage ratio and cost of capital. Thank you. And with that, I'll turn it over to Rob.

Good morning, everyone. It's great to have Irene on board to bring a fresh perspective to our organization and, not incidentally, to enable me to devote my full attention to our operations. I'm pleased that we continue to grow the business nicely despite a pretty tough economic and competitive environment. That said, I always believe we can do better, and we've already taken meaningful action in a couple of areas. We've talked a lot about improving our marketing capabilities, and we made good progress on that front during the third quarter. Over the past couple of years, we built a strong research-based foundation in marketing with significant progress in understanding customer segmentation, customer lifetime value and pricing theory. We're now building an action-oriented marketing organization on that foundation that is focused on getting, keeping and growing subs, in other words, basic blocking and tackling. On the getting or acquisition side, we're focused in a few core areas. First and foremost, we’re focused on selling our most differentiated product, broadband. We are targeting the 3.7 million residential subs who subscribe to our video services but don't buy broadband from us. We estimate that more than 2 million of these customers buy broadband from the phone companies, and the lion's share of them probably buy DSL. In my mind, there's no reason for a customer who already does business with us to buy an inferior broadband product from someone else. So we're devoting a lot of cross-channel ad inventory to appeal to these customers with messaging specifically tailored to DSL winback. In addition, we’re redoubling our efforts to sell broadband to households that don't currently subscribe to any of our services. We have increased and refocused our broadcast ad bodies to reach this audience. It's early, but the results are encouraging. A key measure of marketing effectiveness is gross connect volume, and broadband connects were up year-over-year across the board in Q3. HSD Single Play connects increased the most, but HSD Doubles and Triples were up, too. Another aspect of the acquisition process is targeting the right product to the right customer. And we've been more aggressive here, too. At the high end, we've effectively relaunched our Signature Home offering. If you live in our footprint, you've probably seen the new Signature Home commercials. They're certainly more provocative and more engaging than anything we've done in the past, portraying our product in the context of a luxurious lifestyle. Call volume and connects have increased since we first aired the new campaign, and Signature Home customer ARPU is over $230 a month as compared to our average Triple Play customer ARPU of about $150. So we're very pleased with the early results of the relaunch. As we discussed at the September conferences, we're also focused on addressing the needs of more budget-conscious consumers. TV Essentials, which is our smaller, less expensive video package, is now available in New York City and Northeast Ohio, as well as upstate New York. And we plan to launch it in most of the rest of the footprint by year end. We've also just launched a TV Essentials Light HSD Double Play. One interesting observation is that while the TV Essentials product has generated lots of interest, the vast majority of customers who call about the offering end up taking a more robust video package. The one soft spot on the acquisition front this quarter was in our phone product. It's no secret that overall voice lines are declining, but at 17% penetration, we still see upside here. We've concluded that we need to put more marketing muscle behind voice and probably need to be somewhat more aggressive on price. Recently, we've devoted more of our cross-channel inventory to a 1995 bolt-on phone product for Double Play customers. We think this can drive incremental revenue and gross margin dollars. I'm not promising an immediate turnaround, but I do expect that we can do better than the recent trends. As I mentioned, we're focused not just on getting subs, but also on keeping and growing them. In particular, we're taking steps to better manage our customer relationships through the key junctures in their life cycles with us like price increases, promotional roll-offs and potential disconnects. We're proactively reaching out to customers in anticipation of these events, and we’re applying segmentation techniques, treating differently tenured customers differently. And rather than simply offering discounts, we're offering customers more value so we can keep the customer and preserve ARPU and margin. We're continuing to make good progress on the product front as well. We are pressing our advantage in broadband by adding even more speed. DOCSIS 3.0 or Wideband is now available in roughly 3 quarters of our footprint. And as Irene mentioned, we nearly doubled our Wideband subscriber base in Q3. We're also adding mobility to our broadband product. In Los Angeles, we've deployed more than 750 WiFi hotspots in some of the most highly trafficked zones of the city. All standard tier and above customers now get free access to these hotspots. And our Wideband 50 customers also get 2 gigabytes of 4G, 3G mobile broadband for no additional monthly charge. For Turbo plus and Wideband 30 customers, they can get the same 4G, 3G capability for an incremental $10 a month. And for standard and Turbo customers, they can get it for an extra $20. We just started marketing this capability last month, but we've seen an almost immediate uptick in the take rates for our higher-end broadband tiers in LA. So early indications are that this approach to mobility resonates more than some of the earlier efforts we've made to sell stand-alone wireless broadband. We're also continuing to drive improvements in our video product. Version 2.5 of our iPad app introduced last month enables parental controls and search by title or episode. In the fourth quarter, we're planning to add on-demand content, as well as local broadcast in other channels in New York City, in addition to even better search capabilities. We'll then add local channels in other cities during 2012. We also have teams working to make our video product accessible on Android devices, game consoles, smart TVs and PCs. I would be remiss if I closed without saying a word or 2 about our best performer, business services. The core business, selling to small- and medium-sized businesses, is strong with Q3 revenue growth of 23%. The investments we've made in an expanded sales force are paying off as newer salespeople gain enough tenure and experience to carry full sales quotas. Early success at NaviSite further boosted overall business services growth to 35%. All in all, business services continues to be a significant engine of our overall growth. So in closing, we're taking a machine that runs well and renewing our attention to detail to drive even better performance. We're pleased with the results, although we recognize that there's more work to be done. 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 conference call. [Operator Instructions] First question, please.

Our first question comes from Douglas Mitchelson, Deutsche Bank.

One question. There's a pretty strong message on the call around broadband. So for Glenn, I guess my one multipart question, you talked about the power of broadband, allocating more capital and more plant capacity. I don't think you've heard -- I've heard you put it quite that way before, so I was hoping for more details on that comment. For example, increased capital spend on broadband. What would that entail? And would that drive your overall CapEx spending back to increasing rather than the flattish outlook you've given in the past? And when you talk about plant capacity and allocating more capacity there, are you concerned about Internet video usage driving declines in traditional video? Or do you just add capacity and let the chips fall where they may? That would be helpful.

Doug, there's a whole a lot of questions in there, so let me just make a few general comments. In a way, there's nothing really new here. I think you've seen this trend for a while. Our broadband product is very strong. As most people know, the usage of broadband is skyrocketing, as it has been for some time. And that means that we will need to spend more money on it. We have been already, both in capital and operating expenses. And I think as people -- the great thing about the Internet is lots of third parties dream up lots of new applications that require more speed and more bandwidth. And we anticipate that we're going to have to devote more capacity to that over time. We will do that by gradually removing our analog signals from our -- our analog TV signals from our plan. We've been doing that over the last several years by migrating to digital using Switched Digital technology. And over the next several years, we'll be going all digital in the TV space. I don't see this driving a dramatic change in our cap spending, I think, to the core of your questions. The spending has been going on for a while, and I think you're seeing a change in mix. The video spending is going down over time. The business services is going to go up, although it didn't this quarter. And you're going to see the spending on broadband going up. But I don't think the overall trajectory is mutually different. I think that answers most of your questions.

Doug, I'll just chime in on the second part of your question. We’ve said for a long time, we embrace video consumption online, as well as any other applications that take full advantage of the robust infrastructure and broadband capability that we deliver. So no, we don't approach it with concern about video consumption declines on the traditional platform.

Next, Jessica Reif-Cohen, Bank of America.

Actually along the lines of Doug just asked, I wanted to hone in on a comment Glenn made on the call. On SME, where you said you would increase investment in both sales and plant, is there anything new there? And if there is, could you just give us some color? And can you drive growth further? What are the plans? And then as my multipart part of this, I don't know if Irene or Rob, but if you could comment on some of the stuff in the trending schedule. DVR penetration went down for the second quarter in a row, and bad debt expense went up more than 20% sequentially. I'm just wondering, are they connected? Is it the economy again? Or is there something else going on?

Jessica, I'll take the first one. We do think -- we are very excited about the business services space. And I think the 2 comments, specifically, we have already seen evidence that if we hire more salespeople, we can get more business, and we've been doing that. And I think we can do it some more. Obviously, there is a financial consideration there. You hire people, and they're not productive day 1, so there's a hit to the P&L until they are productive. But we see opportunity there. And the comment on plant, we've been -- as I think everybody in the call knows, cable was originally a residential business, and business areas were not necessarily built out very much. We have been focusing on selling businesses that are very close to our plant or maybe on our current plant. And there is the opportunity to construct in places where we're not so robust and get customers there. So that's what that comment was. Irene, you want to take the other?

I'll mention on the bad debt that we had. We have a normal seasonality in our bad debt. And as college students tend to leave, it spikes up a bit. But I would also point out that it's a very small number on a very large revenue number. So we're talking about $41 million on $4.9 billion of revenue. So when it changes a little bit, it seems to change as a large percentage but not when you think about this changing on such a large base.

Jessica, on the DVR question. If you dissect our video sub losses, about 65,000 of the 120-some-odd thousand video sub losses were actually digital video subs. And if you look at our DVR penetration of digital video subs, it's roughly 50%. So the DVR losses were pretty much proportionate to the losses within our overall video sub base. That said, I would say that, certainly, the economy has got to have an impact on some of the ancillary products like DVRs and like premiums. So I think it's proportionate. But certainly, your point about the economy is probably right.

Next, we have Richard Greenfield, BTIG.

Single question, 3 parts. When you look at the medium downstream bandwidth, can you give us a sense on where that kind of stands for your standard Road Runner/extreme home, as well as for your Wideband customers? How much are they actually consuming on a monthly basis? And then just a follow-up on Rob's point, why does somebody take Time Warner Cable video and Arbok [ph] DSL? And then could you just discuss your marketing approach to how you both capture that wide-end -- Wideband customer and how you recapture the DSL? You said it's a focus, but what are you actually -- what's the message you're trying to get across to get those people over?

Rich, I think both of those are for Rob.

I was writing very quickly. So downstream bandwidth utilization, I think we're in the -- somewhere in the 7 gigabytes a month of downstream bandwidth on a median basis. The average is much higher given the disproportionate usage by our high-end users. I'm not going to go through on a speed tier by speed tier basis, what the usage is. I just don't have that handy. But it is the case that the higher-speed tiers do over-index. I think that's a conversation you and I have had before. With respect to the question of why a Time Warner Cable video customer would take HSD from the phone company, if it wasn't completely evident from my remarks, that's a question I ask around here every day. I find it to be kind of inexplicable and unacceptable. So that is sort of what's given rise to our renewed push on winning those customers back. My suspicion is that those were initially telco voice customers, and they were faced with the prospect of -- and cable video customers and they were faced with the prospect of adding HSD to 1 of those 2 products. And for historical reasons, which I don't think still apply, they chose DSL. The messaging really is for a long time now, our selling proposition was more speed. I think what we've discovered without really giving away any secret sauce is that the naked speed message has been insufficient to win those DSL customers over, and what we need to do is do a better job explaining what speed translates to in terms of the usage experience, in other words, no buffering on video consumption, the ability to have more devices connected in a single home without a degradation in the experience. So messages that puts some customer behavior color on what speed offers. So that's generally the pitch, Rich. I don't know. Was there another piece? You said 3...

No, that was it.

Next, Jason Bazinet, Citi.

There's a quick question for Mr. Marcus. The last time I checked with you guys, it seemed like the number of customers that took data-only subs sort of from '08 through '09 was sort of flat. And it seems like it actually began to move up fairly significantly a few quarters ago. Have you been working internally on sort of winning back some of these data-only subs more significantly over the last few quarters and you're just now sort of making it overt to the street? Or would you say something was happening sort of at the consumer level that you're now following up with a more concerted effort?

So I would say, yes, we've been working harder at gaining noncustomers period. And we've been doing it by focusing on HSD, on the theory that it's where we have our greatest value proposition and that there may be some customers out there who, for various reasons, might not be attracted by our video product, at least initially, who might be potential HSD customers. So yes, we've been pushing hard on it. It doesn't mean we're not ultimately trying to upsell those customers into more products. But yes, we've been focused on that.

Phil Cusick, JPMC. Philip Cusick - JP Morgan Chase & Co, Research Division: You mentioned a few times the commercial potential out there. And I also noticed you're imploying a pretty heavy run rate -- or acceleration on the run rate for CapEx in the fourth quarter. Can you talk, one, about sort of whether that is what the driver is for the CapEx acceleration? And number two, sort of what's the potential to take that growth rate up next year? You're sort of growing organically around 20%. Is there a real acceleration to be had to 25% or 30%? Or should we think of it as a little less?

Phil, let me address cap spending. Irene reiterated our guidance for capital spending for this year, and that's where we think we're going to come in. Within that, we are focused on one big number that could sit [ph]. But there are literally thousands of projects that are encompassed in that number, plus CPE spending, which obviously is volume-driven. And suffice it to say, we have projects underway that add up to the number we are telling you about. Can we guarantee that we will spend every dollar of that exactly to the penny or under or over? No, but directionally, that's what we think we're going to do and what our operating people think we're going to do. I wouldn't characterize it, we're already partway into the quarter, as being driven by any particular part of our business or not. Again, it's across the board. And then for next year, I think we're not quite ready to give any guidance yet. Stay tuned for the year-end earnings release. That's when we usually do that. Philip Cusick - JP Morgan Chase & Co, Research Division: Okay. But in your early comments, you talked about the potential to accelerate the growth in that business. Am I looking at this wrong?

Growth in SME.

Yes, look, I'll chime in. We’re not going to be specific, Phil, about '12 guidance for commercial. But implicit in our comments is a hope that we can actually continue to drive really robust growth in that area through incremental investment, both in the plant and in the people.

Craig Moffett, Bernstein. Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division: A question for Glenn. I know that the book is not yet fully written on the T-Mobile deal with AT&T. But does that, the developments on that front, affect your perspective at all for what you want to do with your AWS spectrum and your wireless strategy? I wonder if you could just comment a little bit on what you're thinking about wireless these days.

Our strategy really hasn't changed. We continue to see if there is a market proposition around wireless that makes sense for us recognizing the existing structure of the wireless business with 2 very large players and then a couple of smaller players and some other much smaller players. To that end, we haven't found anything wonderful so far in terms of reselling other people's capacity. We've talked about that before. We have gotten very interested in packaging in mobility with our wirelines broadband offering and, in particular, using WiFi because the data usage seems to be heavily close to home. And to that end, we've turned up a bunch of WiFi sites in Los Angeles, and that's going pretty well. So we have a theory that by building WiFi, we can cover a lot of people's mobile data needs and supplement that by accessing capacity on a wholesale basis from some of the other carriers, which, of course, is the deal we have with Sprint and Clearwire. So that's what we're doing today. And obviously, like all of us, we read the paper, and we follow AT&T and T-Mobile, but that's not really changing our strategy at this point.

The only thing I'd throw in, Craig, is that a lot of the discussion around that transaction have simply highlighted 2 things: one, the importance of capacity and the shortage of spectrum, and that really, in my mind, shines a bright light on the value of 2 assets. We've got, one, our wireline broadband plant, which continues to be a superior means of delivering broadband and anything that can be done wirelessly and, also, incidentally, the value of our wireless spectrum. So in those respects, I think that does inform our thinking about our asset base.

Thomas Eagan, Collins Stewart.

I gather that the revenue from premium was down, and I guess that, that was because of the economy. But what are you seeing so far on video-on-demand and revenue from pay-per-view? And are you seeing any impact from the decline in the subs out of Netflix?

Good question. I think there's 2 big pieces of revenue that you're talking about there. And one is the subscription premium services, and the other is the paid video-on-demand. Obviously, we have a lot of free video-on-demand and the subscription that goes with the other services, too. I think the subscription premium services are clearly impacted by the economy as consumers try to cut back. We always think we could do a little better job of marketing, and we're focused on that. So it's not totally the economy, but I think that's certainly an element. I also think for both the premiums and video-on-demand, although it's not measurable, there may well be some impact from the over-the-top, so called over-the-top services. But nobody that I know has been able to measure it yet. On the pure video-on-demand, there's 3 parts to it. There's events, adult and movies, and I think what we see is the movie part is very dependent on how many titles are released and perhaps how they did in the box office. And this quarter saw a little bit fewer new -- I think one fewer very new title, and some of the movies were weaker than they were a year ago. So that -- we've seen that in the past. As I said in the last quarterly results, adult's been in decline for quite a while, and events actually were pretty good this quarter. So that's what's going on there.

Ben Swinburne, Morgan Stanley.

I wanted to ask 2. Irene, I don't know if you can comment on the buyback pace and the leverage. If you guys gave the pro forma leverage, for instance, I might have missed it. I think it's around -- my math, around 3.25. And when I look at the October -- September, October buyback pace of about -- I think about $100 million a month, that would seem to have you guys delevering slightly over the course of Q4. So I don’t know if you had any comment on that. And then Rob, I wanted to ask you, going back to your comments on the broadband business and all the marketing initiatives there, that residential data’s growth rate, the revenue growth’s gone from about 12% last year. It's now under 8%. It's still quite healthy. I'm wondering if you think you can accelerate that business into next year and beyond because it would seem like your market share is probably pretty healthy in data. I know there's a lot of Time Warner Cable video subs with DSL. My guess is there's probably a lot of DIRECTV subs with Time Warner Cable data. So I'm just curious if you think there's a big market share opportunity in your footprint in broadband. Or help us think about what that business looks like over time.

Ben, I'll take the first part of it before Rob answers the second part. On the share buybacks, as we mentioned with the acquisitions we have planned on Insight and NewWave, we build those in. We haven't given a specific pro forma number, but I think we're in that range, nearing our 3.25. So we have slowed down our pace. As we said, we want to maintain our solid investment grade rating and achieve our -- the optimal cost of capital. So we're managing to those numbers. And we have -- in September, you'll see in the Q, we bought back $126 million, so a little bit higher than the number you mentioned. But this is really to manage our balance sheet and keep our solid investment grade rating, and that's consistent with what we've said, that we will reinvest in the business as we see opportunities at the right price, which we did with Insight and NewWave, and we'll include that as we're forecasting forward on our obligations and keep that in mind as we determine our share buyback pace.

On the broadband marketing, Ben. I think I would simply agree with your thesis. There's a reality of life we've got to deal with, which is that there are -- given the penetration of broadband as percentage of total Internet customers, there's just fewer and fewer customers that are coming into the category from dial-up, which used to be a significant source of growth. So I think what this is about for us, as you correctly point out, is gaining share. We've done it pretty effectively. I'd like to think we can do it even better from DSL. So...

Do you know what your share is now in your footprint? Is it 55%, 60% or so?

That's the exact zone, yes.

Next, Tuna Amobi, S&P. Tuna N. Amobi - S&P Equity Research: So I guess my question, first, for Glenn, as you think about the Google-Motorola deal, Motorola Mobility, I was wondering if you've had any preliminary thoughts on how that deal might affect your overall transition -- overall time frame for transition to the IP-based architecture versus traditional set-top boxes. In other words, what approach do you think Google might bring to this whole transaction given particularly your contrasting position on net neutrality? And then quick clarification, I think I heard Irene said that the September video losses actually increased, and I think she proceeded to say as well that the first 2 weeks in Q4 were the same as last year. So I guess the question is just to kind of clarify what the September month for 2010, if you can remind us what -- how that compares to this September and also the first 2 weeks of Q4 last year, how that compares, just to get a better sense of how those subs are trending.

Tuna, Google and Motorola, I’ll remind you, first of all, that we actually buy a lot more from Cisco and Samsung than we do from Motorola, although we certainly do have markets that are Motorola. I don't think that transaction will have any impact on our migration. If you really think about what we do, we take consumer devices that use all sorts of different standards, and we provide usable video to them. And the only reason we have set-tops is that, historically, the consumer electronic devices have not been able to display all of our services. They haven't been capable of 2-way things. They're not capable of decrypting signals. And they don't have intelligence, so they can't display program guides. So those are essentially the 3 reasons we have set-tops. With the newest devices that are increasingly IP capable and increasingly have intelligence, the devices can do those 3 things. So whether it's the smart TVs that we demoed our services on at the last CES or an iPad or PC or the list goes on and on, those devices can receive IP video without a set-top. So that's the transition we're going to be making over the next several years. But we still are going to have to serve all of the hundreds of millions of devices that are out there that don't have those capabilities. And so we're going to keep doing that because that's what customers demand. And I don't see this transaction as particularly affecting that or changing that. Irene, the other question's for you.

Sure, Tuna. On the trend, what we were saying is that we've had a few, just a few, weeks in October where the trends look like they're in the same zone as what we talked about for Q3. And then specifically in September, we mentioned that we had video adds during the month of September. But we really haven't given any more detail on the monthly numbers. And suffice it to say that we're seeing trends that are similar in these first few weeks than what we saw last quarter.

Good. I think that's probably all we have time for this morning. Thanks, everyone, for joining us. And to give you a little advance notice, Time Warner Cable's next quarterly conference call, which will reflect our fourth quarter and full year 2011 results, will be on Thursday, January 26, 2012, 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.