Charter Communications, Inc. (CHTR) Q3 2013 Earnings Report, Transcript and Summary

Hello, and welcome to the Time Warner Cable Third Quarter 2013 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 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 2013 third quarter earnings conference call. This morning, we issued a press release detailing our 2013 third quarter results. Before we begin, there are several items I need to cover. First, we refer to certain non-GAAP measures. 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 and 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. Actual results may vary materially from those expressed or implied by the statements herein due to various factors, which are discussed in detail in our SEC filings. 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. Third, the quarterly growth rates disclosed in this presentation are on a year-over-year basis, unless otherwise noted as being sequential. And finally, today's press release, trending schedules, presentation slides and related reconciliation schedules are available on our website at twc.com/investors. With that covered, I'll thank you and turn the call over to Glenn. Glenn?

Good morning, and thanks for joining us. Many of you have reached out after hearing of my health issues, and I want to thank all of you for that. It really, really means a lot. As you know, I'll be retiring at the end of the year, so this will be my last quarterly earnings call. We're far and deep into the long-planned, well-thought-out transition. So I'll leave the details of the third quarter to Rob and Artie. But I'd like to take a few minutes to look at our industry from a broader perspective and maybe even to philosophize a little bit. When I first graduated from business school in 1972, I was attracted to the cable industry because I thought it represented a new industry with new technology that had a chance to challenge all the incumbent ways and transform the media and communications industries by -- really, by adding entertainment choices and adding to the diversity of voices in the public policy debates that, of course, are essential to our form of government. I also recognized that these were daunting aspirations and that the odds of pulling it off were slim. But I was young, and, like many others, I took a chance. I think that, by any measure, this industry has fulfilled those dreams. The media and communications landscape is immeasurably different than it was 41 years ago. And if you think that more choice, more voices and more transparency are good, then we have really accomplished something. But why are all these nice sentiments relevant? They are relevant because what we do every day is important to people. We have a physical and human infrastructure that provides services that people really wants. And that means we have and will continue to have a very good business as long as we continue to satisfy our various constituencies. In that context, I thought I'd talk to you about a handful of things that really matter over time in this business. They have been consistent over my 41 years, and they aren't always the things that I focus on quarter-to-quarter. So they are, in no special order, products and competition; technology choices; timing of capital spending and sourcing of capital; public policy and regulation; and, maybe as a follow-up from the others, M&A. So first, products and competition. The products we've offered over the years have changed dramatically. When I first got involved in the industry, no one could figure out what to do with planned capacity for 12 channels television. Well, guess what, the industry financed the creation of new networks and new content to fill those channels because the public had an insatiable appetite for more. Even in those early days, we dreamed of all sorts of things, including things we now do on the Internet. In 1993, most people thought that consumer broadband was a pipe dream, and that assumes they'd even heard of the Internet in the first place, which most people haven't. When we're through -- so we brought consumer broadband to the United States, and we led the way for the world. We also brought real competition to the voice market for the first time. And now we are revolutionizing B2B and moving into home automation. The point of all this is that we should not think of our world as a static place or attempt to turn the clock back 20 years. Regarding competition, well, duh, we have competition. I say that because when I first got this job 12 years ago, I think the cable industry as a whole, including our company, was in denial that we had real, viable competition. And I still hear some of my peers saying dismissive things about our competitors. And certainly, each of them has strengths and weaknesses, just as we do. However, they are around to stay, and we need to keep getting better at competing. The current form of competition in this entire sector is essentially focused on promotional pricing, which allows customers to jump from provider to provider to get the best deal. We need to wake up and learn more sophisticated marketing techniques. Anyone can gain share by starting a price war. Profits and happy customers, over the long run, are something else. My last point on competition should be obvious, but it often isn't. For the most part, cable companies don't compete with each other in the consumer marketplace. None of us has a national footprint, even though some of us are very large companies. We do compete with companies that are much larger, and in some cases, they do have a national or even a global footprint. As a result, the cable industry tends to cooperate on things like technology and public policy. There also is a regular crossflow of employees who move among the companies in order to maximize their career opportunities, and they bring ideas and operational techniques with them. In addition, we all use pretty much the same vendors and the same consultants. Though having watched this for many years, I can say that the history will tell you that the larger, geographically diverse cable operators tend to perform similarly and gravitate towards the same technologies over time. So why bother saying that? Well, we do compete for investment dollars, and there are not many public vehicles to invest in. So management is trying to tell you that they each have some secret operational formula or some magical technology that will make them better. But the reality is there is no secret formula or secret technology. Instead, there are lots of details. Now this doesn't mean that we all look identical at each moment. Sometimes, a company has performed very well, and then the others catch up, so their second derivative numbers look better. But at the end, if you look back and look over time, you will see very similar performance, and, with few exceptions, that performance has been very good. Moving on to technology. We are a business driven by technology. There are many examples over my 41 years where we used new technology in ways that have not been efficient to provide new services or to enhance existing ones. There is a tradition in the industry of people trying to do things. Some of them work very well and then are adopted by everyone else. Some fail. That is a good and healthy process. Again, I would urge caution before you get enamored by some solemn statement that someone has some new secret technology that will propel them to the top of the heap. Ask a few questions, like how do you know this will work? Has it actually worked in deployments? Will it scale? If it works, why won't all the other cable companies also use it? And what will you do if it doesn't work? With technology, it's also important to get the timing right. For many years, the industry went through cycles of intense capital investment, followed by relatively low capital spending until the next new thing came along. Once the initial investment was made, the investment story was alluring in the following low CapEx years. There are 2 problems with this strategy. First, smart investors figured out that it was really, really important to predict the timing of the next investment cycle. Second, the pressure from the first problem tends to cause managements to postpone investments and, perhaps, to cling too long to old technology. This can be a real problem in a competitive world. We, at Time Warner Cable, have pursued a different strategy, which has been to invest in the latest technology on a steady and regular basis. This is a more sensible engineering solution, and I think it actually makes us more predictable for you as investors. However, we frequently get questions because we always seem to be running either higher or lower capital spending than those who spend in a more lumpy way. Our slow and steady approach is the right way, I think, but it does create communications challenges. Do we get all of this right all the time? No, of course not. But over time, I think we do get it right. Regulation. We are a heavily regulated business, and all of the businesses in and around our sector are either directly subject to regulation or deeply affected by it. This thicket of laws, regulations and rules was formed over several decades. In today's policy circles, incumbent industries and companies are generally thought to be bad, and the role of government is to help challengers to the established order. I find it an interesting idea because it is the complete opposite of what the policy world was like during the first 15 years of my career. In those days, the communications and broadcast sectors were highly regulated, and much of the rest of the media sector was also pretty tightly controlled. The policy establishment and incumbent companies actually thought this all worked pretty nicely. And the whole system worked to discourage new entrants and challenges -- challengers to the established form. The reason this is important is that the vast majority of the laws, regulations and rules that we live under today were put in place when cable was seen as an undesired upstart, and that was despite obvious consumer demand for our products. Probably the best example of this is the 1992 Communications Act, which passed really towards the end of this intrusive protective era, but it is still the law of the land today. Although the Telecom Act was updated slightly in 1996, it is safe to say that today's entire television business and maybe even the entire entertainment business structure came out of this legislation and its consequences, both intended and unintended. The problem with this is that an awful lot has changed since 1992. And over time, there have become parts of the industry that have become clearly advantaged and parts that have been disadvantaged in ways that could not have been foreseen at the time. Naturally, those who find themselves at an advantage claim that this is all the free market at work, and those who are disadvantaged point to the legislation. It's worth spending some time to understand this stuff because it is an artificial construct of a policy process. It has changed in the past, and it will undoubtedly change in the future, although publicly not in the near future. Let me touch on sources of capital for a moment, a subject that, of course, is near and dear to the hearts of everybody on this call. This is a capital intensive business, and it requires a huge ongoing capital base to support it. Time Warner Cable, as an example, is not a national company. Yet, when you compare the size of our balance sheet, our number of employees and our revenue to many companies that are, perhaps, better known around the world, you will see that we are very large; actually, surprisingly large. The nature of our business allows us to finance a large portion of that capital base with debt. However, we are dealing with very large numbers. And over time, there are economic cycles, financial market cycles and government-induced dislocations in the financial markets. So we've run the company in a way that we think is prudent and that will enable it to survive these inevitable cycles. We, of course, are well aware that in the current market, high leverage seems very alluring, but we also think, on close examination, that everybody, except those with a fairly short time horizon, might think twice. Let me finish with a couple of comments on M&A. I read in the press, sometimes directly and sometimes by innuendo, that I am not interested in consolidation and that after I retire, Time Warner Cable might have a more enlightened attitude. The implication is that, somehow, I've been interested in entrenching myself and my colleagues. If you think about it, that is obviously absurd. We have demonstrated repeatedly that our job is to make money for our owners. And in M&A, we are open to deals that do exactly that. I personally have a great deal of my net worth tied up in Time Warner Cable stock. And after December 31, I won't be the CEO anymore. I care a whole lot about maximizing value. Rob and Artie can speak for themselves, but I believe they share my motivation, even though they're younger than I. However, my perspective has also been shaped by 2 very large corporate mergers in the past: the merger of Time Inc. with Warner Communications in 1990; and the Time Warner-AOL merger in 2000. Despite widely touted strategic and industry merits, both deals were very lopsided and in favor of one set of shareholders. So you shouldn't be surprised that we are focused on making money for you rather than just on some fuzzy notion of industry consolidation. Consolidation can be a good thing, but the terms really matter. Over the years I've been in this business, there's been a steady consolidation from many cable companies to few. The deals that work have always been driven by one of a few reasons. For example, sometimes, families decide it's time to sell because the children have no interest in the business. Another example, for smaller companies with few economies of scale, it's often possible for a larger company to pay them a price much higher than the economics they could realize by continuing on their own but -- yet less than the larger company's valuation. These are true win-win deals and has been many of them. Other companies in the past, including some large ones that practiced lumpy capital spending, and they leverage themselves to the hilt, have found that they could not finance the next capital cycle, and so they had to sell. In some cases, those sellers were able to earn spectacular returns on their original investments. Although you can always debate what would have happened if they had stayed in the business and if they'd been more conservatively financed. There's also been a few examples of companies that got into serious financial trouble because of being overly aggressive in the acquisition market. Delphi and Charter both come to mind in that kind of way. When we first spun off from Time Warner, I think there was widespread expectation that we would go on an acquisition spree and consolidate the industry so that the eventual structure would be 2 large cable companies. So far, I guess, we have disappointed those who believed in that particular story. And why is that? Well, we certainly believe there are benefits to consolidation. However, we also believe that those benefits are pretty finite and easily knowable. Among the large companies that you are aware of and that you follow, the managements and boards are sophisticated, and they are well aware of those finite benefits. The reality is that they only wanted to do deals in which they receive all of those benefits. But those win-lose deals would not be good deals. To state the obvious, win-win deals are good deals, and I expect that, over time, we will see more of those. In the meantime, we remain dedicated to maximizing the return for our owners, and that includes Rob, Artie and me. I'm really pleased with our succession process, which I started discussing with our board a few years ago. Rob Marcus is a brilliant executive, and he knows how to lead. He understands business, and he understands our business. Perhaps most important, in my view, he has great judgment and a whole lot of common sense. I'm really confident that he and his team will lead Time Warner Cable very well. I also want to thank you. To our investors, thank you for your support. Almost 7 years ago, we set out to make this a different sort of company, one that is transparent and shareholder-focused, where we have an ongoing dialogue and learn from each other. So thank you for making us better. To our customers, thank you for your business. Thank you for trusting us with services that are very important to you and your families. I believe the best is yet to come. And to our employees, thank you for working hard every day to serve our customers and communities. But enough with the philosophizing. Let's get to Rob and quarterly results. Rob?

Glenn, thanks very much, and good morning, everyone. Before I begin my formal remarks, Glenn, I'd first want to wish you my best on your health and, second, want to acknowledge this as your last earnings call before your retirement at year-end. There will undoubtedly be plenty of time to celebrate your impressive 4 decades in this business, but I do want to take this opportunity for some thank yous. On behalf of our more than 50,000 employees, I want to thank you for your leadership. On behalf of our customers, I want to thank you for your vision and your tireless efforts to deliver truly innovative, incredibly valuable products and services. And on behalf of our investors, I want to thank you for your steadfast commitment to creating tremendous shareholder value. And personally, I want to express my gratitude for your guidance and mentoring over the last several years. I aspire to be a worthy successor. On the operations front, there are a lot of things I could talk about this morning, but I'm going to limit my comments to the 3 that I think really matter: first, the performance of residential services, including the impact of recent programming disputes; second, our ongoing success in business services; and third, what I'm focusing on as we complete our CEO transition at Time Warner Cable. Starting with residential. Clearly, the issue this quarter was subscriber volume. Some metrics were much worse than we planned due, in part, to the trio of programming blackouts we endured during the quarter: CBS in New York, L.A. and Dallas; Showtime across our entire footprint and Journal Broadcasting in Milwaukee and Green Bay. We estimate that these blackouts elevated customer relationship disconnects by a couple of percent and also drove a roughly 10% increase in doubles and triples dropping video. The blackouts also reduced connect volumes and caused a spike in our in-calls to our call centers, which interfered both -- with both our sales and care operations. Unfortunately, the impact of the disputes bled over into HSD and voice, as we lost some video HSD Double Play and Triple Play customers. The CBS and Journal disputes clearly resulted in short-term pain for us. But as I've said before, the issues at stake had long-term, far-reaching implications for our business. So I really believe we had little choice but to stand firm on behalf of our customers. In the end, the deals we reached were far better than where we started. But the programming disputes are only part of the story. I'm still not satisfied with the subscriber results being generated by our current programs. In particular, while our new pricing and packaging architecture is continuing to drive dramatic improvement in recurring revenue per newly connected customer, in Q3, it had a greater-than-anticipated impact on connect volume. We saw fewer customer relationship connects, fewer PSUs per connect and, notably, fewer upgrades from singles and doubles to triples. To a great extent, these are expected outcomes of our pricing and packaging strategy and the trade-off between ARPU and volume, but I'm confident we can do better on volume without giving up the ARPU benefits we've been achieving. In the near term, to drive more unit growth, we've got a couple of things in the pipeline. First, next week, we'll launch our holiday offer, which includes a free Samsung tablet loaded with all of our apps, including TWC TV, with the purchase of higher-end packages. I think this will generate lots of interest and really highlights TWC TV and the value it adds to our service offerings. Second, we're going after DSL. We estimate there is still 4.5 million DSL customers in our footprint, 1/3 of whom take video from us. Given the superiority of our broadband offerings to DSL, we find that inconceivable and unacceptable. It's an opportunity we must capitalize on. To that end, in the next couple of weeks, throughout our DSL overlap markets, we'll begin aggressively marketing our new 2-by-1 HSD tier offered at the everyday low price of $14.95 to appeal to more price-sensitive, value-oriented DSL customers in a way we haven't done before. I've challenged our team to convert at least 0.5 million DSL subs to Time Warner Cable broadband over the next 18 months. I think this is both important and achievable. And over time, as these customers' speed and capacity needs increase, we'll be well positioned to sell them higher-end products. This quarter's subscriber volume issues notwithstanding, the pricing and retention initiatives we put in place over the last 9 months are delivering. Once again, this quarter, aggregate new connect revenue, meaning, total new customer connect times revenue per new customer, was up meaningfully over last year. Although only about 20% of our customers have the new packages, we're already seeing the improvement in new connect ARPU drive improvement in overall ARPU per customer relationship. Over time, as more customers are in the new packages, we fully expect that the positive impact on overall ARPU will be even more pronounced. In addition, efforts to improve retention are yielding results. As you know, we've been particularly focused on doing a better job retaining customers rolling off promotions. In Q3, disconnects among customers rolling off promotions were flat year-over-year, despite a year-over-year spike in promo roll-off volume. Going forward, we'll have fewer customers rolling off promotions, and we'll continue to do a better job keeping them. So this should further reduce churn. Artie will go into the details on these initiatives in a few minutes. Let me turn to business services, where we continue to deliver outstanding operating results. Since Phil Meeks took the helm 5 months ago, we've completely restructured the business services organization, hired a new Head of Business Services Sales and announced the $600 million acquisition, DukeNet. Also, in Q3, we connected record numbers of new buildings and cell towers to our network, providing the foundation for future growth. And we accomplished all this while growing quarterly revenue by $100 million on a year-over-year basis. We are committed to further success in this area and fully intend to continue investing in our network and people to achieve our goal of at least doubling business services revenue over the next 4 to 5 years. And to be clear, that goes for organic growth. DukeNet and any other business services acquisitions will generate additional revenue on top of that. It's worth noting that, increasingly, business services line extensions are fiber rather than HFC. And in mixed commercial and residential areas, the prospect of deploying fiber to the home is looking more attractive from a financial perspective, enabling multi-gigabit-per-second HSD speeds as needed. Let me turn to the third item I'd like to discuss with you this morning, which is what I'm focusing on as we move into 2014 and I take over as CEO. During this year, we've been hard at work establishing our one TWC organization and ensuring that our management team is aligned around our key priorities for the future. Foremost among those priorities is recommitting to putting customers at the center of everything we do, with a particular emphasis on reliability and service. Throughout 2013, we've been making great strides in customer service, rolling out one-hour appointment windows throughout our footprint, facilitating more self installs and self care, improving the troubleshooting capabilities of our care reps and enhancing customer education. I'm very pleased with the progress we've made and continue to make on the service side. But there's more to be done. Over the last 90 days, as part of the transition process, I've been working with the leadership team to develop a plan to further improve the customer experience. We're working through a 2014 budgeting and planning process right now, but I'd like to share at a high level a couple of the initiatives we're working on. First, in recognition of the fact that we're only as good as our network, we are implementing an enhanced reliability program across our entire footprint to ensure it's capable of delivering what we and our customers expect. Our newest monitoring tools enable us to identify those nodes in our network that are driving the most customer calls, so we can proactively target our network maintenance efforts. Second, beginning next year and proceeding over the next several years, we're going to designate selected markets as what we've codenamed TWC Max Markets. In each TWC Max Market, we will completely revamp the customer experience. We'll go even further to drive best-in-class reliability and service, we'll go all digital and replace modems with state-of-the-art D3 modems and advanced wireless gateways, so we can meaningfully increase HSD speeds. And by the way, we're not talking about tweaks here, but rather quantum changes to our speed tiers. We'll also replace standard definition and older HD set-top boxes and roll out new DVRs, better UIs and more advanced versions of our TWC TV apps to fundamentally improve the video experience. Of course, New York City is on the verge of becoming our first 100% digital market. And we've been steadily reclaiming spectrum through our analog reclamation program over the last several years, so we've got a good head start. While these are ambitious plans, we firmly believe that the potential benefits over time will be significant: a happier, more stable subscriber base; an even more robust platform on which to grow and innovate; and an even stronger competitive position. And we think we can execute these plans without departing from mid-teens capital as a percentage of revenue. Our commitment to generating strong free cash flow and returning capital to shareholders remains unchanged, and we intend to manage the pace of our investments accordingly. We'll share more about network -- our network reliability initiatives and TWC Max as they take shape. Once I'm in the CEO seat, we plan to hold an Investor Day both to introduce our team and to discuss our strategic and operating plans in more detail. Finally, given all the swell in the press, I can't help but comment on M&A speculation. Glenn and I are 100% on the same page here. I want to be very clear, we are and have always been unequivocally committed to creating value for our shareholders, whether that's by allocating capital prudently, operating our businesses effectively and efficiently or by participating in M&A as a buyer or a seller. Any decision on consolidation hinges on just one question, does it maximize value for our shareholders? And with that, I'll turn it over to Artie for his discussion of the quarterly financial results. Artie?

Thanks, Rob. My best wishes as well, Glenn, and good morning, everyone. I will start by saying we had another good financial quarter. Let me just walk you through for what, for me, the noteworthy items. Business services growth remained very strong, with revenues up over $100 million from last year. This was the 14th quarter in a row of 20%-plus revenue growth. Business services is now closing in on becoming a $2.5 billion run rate business. And as Rob said, our goal is to at least double the revenue of this business over the next 4 to 5 years, and that's without acquisitions like DukeNet. Residential customer relationship ARPU was up $2 year-over-year to $105, the highest absolute dollar growth in ARPU this year, even with the mix shift away from Double and Triple Plays to HSD-onlys. Despite the decline in customer relationships and PSUs, the strong ARPU growth drove overall organic residential revenue growth of 0.7% year-over-year, which represents an improvement over Q1 and Q2. Overall residential revenue growth was driven by a 14% increase in HSD revenue via a combination of the modem lease fee and the very strong growth in selling higher tiers of HSD service. Growth in our wideband tiers, meaning our 30-, 50-, 75- and 100-megabits-per-second services, accelerated this quarter with over 100,000 net adds. We now have over 700,000 wideband subscribers, up 100% year-over-year. Revenue is also benefiting from our new pricing architecture, as we currently have approximately 20% of our subscribers on the new pricing architecture, up from approximately 10% a quarter ago. Our investments and retention efforts are also showing meaningful improvement in terms of both maintaining ARPU and volume. While the operating and subscriber impacts of the CBS and Journal disputes were significant, the in-quarter financial impact was small. Revenue for the quarter was reduced by these disputes by approximately $15 million, and adjusted OIBDA and operating income were roughly $5 million lower. We expect that Q4 financial impact from lower Q3 subscribers, plus the customer credits issued in Q3, will result in a full year reported revenue growth rate of 3% to 3.5%, somewhat lower than previously anticipated. I am pleased that we saw modest operating leverage with adjusted OIBDA growth of 3% on a total revenue increase of 2.9%. The Q3 margin improvement was a bit better than expected. There were quite a few ins and outs on the margin front. Year-over-year margin improvement resulting from the [indiscernible] and continued migration-related reductions in voice costs were offset by higher marketing costs, including marketing costs related to the programming disputes, and lower margins on ad sales revenue. We also had higher employee costs, particularly in business services, where we continue to invest in salespeople to drive revenue growth. We are keenly focused on managing our operating expenses. For example, over the last few months, we have restructured billing and collections, IT, human resources, ad sales and finance, resulting in meaningful run rate operating efficiencies. I continue to expect full year margins will be around 36%. And as we head into 2014, cost control will continue to be an area of significant focus. Adjusted diluted EPS growth remained strong at up 20% in Q3 to $1.69. The growth came from 12% adjusted net income growth and the ongoing reduction in shares outstanding, as weighted average diluted shares were down 21 million or 7% year-over-year. On a reported basis, year-over-year comparability was impacted by the 2012 AWS and Clearwire gains. I also want to point out that EPS did benefit this quarter from a lower effective tax rate, due in part to the remeasurement of certain deferred tax liabilities at the state level. There was a similar lower effective tax rate in Q3 of 2012, so the tax rate did not have an impact on the year-over-year growth rate. Third quarter free cash flow increased 4% to $440 million due, in part, to higher adjusted OIBDA and lower qualified pension plan contributions that were partially offset by higher cash taxes and net interest payments. The increase in cash taxes was primarily due to both lower Insight tax benefits and lower pension contributions in 2013. And the higher interest payments were related to the timing of coupon payments on bonds issued and retired in the last year. For the full year, we continue to project $3.2 billion of capital expenditures and $2.5 billion of free cash flow, though there could be a little bit of upside to our free cash flow guidance. We still intend to repurchase at least $2.5 billion of stock in 2013. Let me spend a few minutes on CapEx because there are some important takeaways. While CapEx was flat year-over-year for the quarter at approximately $775 million, we continue to see a mix shift with the residential and other CapEx down roughly $50 million related to lower video CPE and business services up about $50 million related to higher line extensions. In the third quarter, we added more buildings and cell towers to our network than ever before, with over 18,000 new buildings on net and almost 1,300 new towers added. Consistent with our longstanding practice in residential, where we add capacities [ph] prior to selling services, we have been building out business service line extensions to high-opportunity areas before we have new customers signed up in those buildings. We just completed a review of all these proactive line extensions over the last few years, and I'm extremely pleased with the financial and operating results. We have customers in over 70% of the buildings we have attached to our network. We have an average of 3 to 5 customers per building out of an average of 10 to 12 tenants per building. And relative to the cost of bringing these buildings on net, we are generating very healthy returns on a monthly recurring revenue basis, with meaningful opportunities for upside as we continue to penetrate new buildings on net, increase penetrations in existing buildings and continue to roll out new products and services for existing customers. While we see great opportunities for organic growth in business services, we are also interested in M&A opportunities in this space. Earlier this month, we announced our agreement to acquire DukeNet. This acquisition allows us to expand our fiber footprint to reach more transport customers. Approximately 80% of DukeNet's fiber miles are in our footprint, and about 90% of monthly recurring revenue is from transport, with 70% from cell tower backhaul alone. So this deal fits very well with our business services strategy and is a good example of our disciplined approach to M&A. We bought a really attractive business services asset at a relatively low residential-type multiple. We expect to close DukeNet in the first quarter of 2014. Given the increasing importance of business services, we plan on expanding our segment reporting when we report our Q4 results in early 2014. We are still finalizing our exact breakdown of segments, but my expectation is business services will be its own reportable segment. On the balance sheet side, we had approximately $23.9 billion of net debt for a leverage ratio of just over 3x and $4.6 billion of combined cash and equivalents and available borrowing capacity. As we move towards Q4 and 2014, a few items to keep in mind. We now expect full year 2013 programming cost growth sub to be around -- per sub to be around 9%, which implies a fourth quarter growth rate in the double-digit range. Before you carry that growth rate forward into 2014, I want to point out that our current estimates for Q4 programming cost growth are boosted by about 200 basis points related to onetime reductions of programming expenses in Q4 of last year. I'd also point out that our forecasts typically include estimates for new services that may or may not get added, so we could come in slightly below 9% for the full year. With 3 quarters of the year behind us, we now expect to deliver adjusted diluted EPS growth for 2013 somewhere around the midpoint of the 10% to 15% range we guided to at the beginning of the year. We are in the middle of our 2014 budget season, and we'll have a more robust readout on the fourth quarter call, but a few items I wanted to put on your radar. If there's a silver lining to the higher interest rate environment, it is the fact that our pension is now estimated to be overfunded by over $400 million in 2013, so we do not expect to make any contributions to the qualified plans in the fourth quarter or in 2014. In addition, the IRS recently issued regs retroactive back to 1/1/2012 that will allow us to do immediate expensing for tax purposes of capital items that cost $200 or less. We expect to take this benefit in 2014. We currently expect that the combination of no pension contribution and new IRS regs will generate a free cash flow benefit of approximately $300 million in 2014. I think it's fair to assume that CapEx will increase as we fund our enhanced network reliability initiatives and our TWC Max Markets implementation that Rob noted in his remarks. However, I still expect CapEx to be in the mid-teens range as a percentage of revenues, and we should be able to fund much of the incremental capital with the tax- and pension-related cash flow benefits I just referenced. More to come on this as we finalize 2014 budgets. And with that, I'll turn it back over to Tom for the Q&A portion of the call.

Thanks, Artie. Candy, we're ready to begin the Q&A portion of the conference call. [Operator Instructions]

[Operator Instructions] And our first question comes from Jessica Reif Cohen of Bank of America Merrill Lynch.

Obviously, I want to add to everybody's comment on Glenn, wish you just the best of luck at your retirement and a healthy, healthy recovery. As far as the question, just if anyone could comment on any lingering impact on basic subs from the CBS dispute or any of these programming disputes. And can you just -- I guess, kind of a general comment on how long do you think it will be before you expect to stabilize subscribers and the pull-through that it's had across your other services?

Jessica, this is Glenn, and thank you for your thoughts, and, actually, many people have reached out, and I really, really appreciate that. It means more than you could know. I think on the substance of your question, I will refer that to Rob.

So, Jessica, maybe it makes sense for me to attack this one by walking through the different components of subscriber performance that were actually affected by the programming disputes. So not surprisingly, we saw some customer relationship disconnects. We also saw a suppression of customer relationship connects. And maybe the easiest way to highlight how much of that was generated by the subscriber disputes is to point out that in July, prior to the disputes, customer relationship net losses were basically flat year-over-year. So all of the action or all of the difference in customer relationship losses occurred in August and September, which is when the disputes were going on. In addition, what we saw clearly was some downgrade activity, bundled customers who dropped video, and that added to the PSU net loss function. I would point out that when we lost customer relationships, whether via disconnects or the absence of connects, in many cases, that carried over to high-speed data and voice. I think the biggest year-over-year delta actually came in Triple Plays. So we had 3 units associated with that. In addition to the direct impact, there's no question that the disputes resulted in a whole lot of call volume coming into our call centers. That had the impact of clogging up not only the care queues but some overflow into inbound sales. And unfortunately, in some cases, that made it hard for customers who, otherwise, were inclined to connect with us, it made it hard for them to actually get through to our sales agents. So the machine, clearly, was impacted by the disputes. There was no question that, that had a hangover impact that extended beyond the actual settlement of both CBS and Journal, although you'll recall that Journal extended for another couple of weeks after we resolved CBS around Labor Day. I'm not going to get into Q4. We came into this year with a change to our disclosure practices, which I think is a wise one, which is to not provide interim subscriber performance, less people jump to conclusions based on small periods of data, so I'm not going to go beyond that. On overall subscriber performance, I would take the opportunity to point out that the results we're seeing on promotional roll-offs is positive. We're doing a much better job keeping promotional roll-off customers. The actual disconnects associated with promo rolls, as I've pointed out, were flat, in spite of the fact that we had a very large spike in promo rolls coming through the system. Two good things going forward is that promo roll volume is going to decline, and I think we should expect that our performance in keeping the promo rolls that do come through will be at least as good as they were in Q3. So I feel good on the disconnect side going forward.

Next question, Craig Moffett of MoffettNathanson.

Glenn, let me just offer the same. I wish you a very long, happy and, especially, very healthy retirement. I can't thank you enough for all the support and tutelage over the last 10 years or so. Let me ask a question about broadband pricing, if I could. Your broadband ARPU, and I know there's limitations with how accurate your individual product ARPUs can ever be because of bundling, but your broadband ARPU is up 12% or so year-over-year, and that's obviously been the primary reason you've been able to sustain margins. That can't be sustainable, though. What's the sustainable growth rate, in your mind, for broadband pricing and broadband ARPU? And how do you shift away from a reliance on price so heavily in the broadband market?

Craig, this is Glenn. Let me tackle that, and then I'm sure Rob and Artie will jump in. Broadband is amazing, and you are right to point out that within the Triple Play that revenue was allocated, so it's -- maybe it's not as quite as precise as you'd like to pretend because of that accounting standard. But the reality is when we started this business in 1996, I think it was, we priced it at $40, and it was -- I think it was 1.5 megabits per second or some speed like that which seemed enormous at the time. The speeds have steadily increased. And although the price has gone up a bit, it has not gone up, quite frankly, as much as inflation and it has not gone up nearly as much as utility in the service. So I think that's the context. We clearly are seeing, number one, the people who are upgrading to faster speeds, and that's a big piece of the ARPU that you're talking about, and we have raised prices recently in the form of modem rental fees. But that's really just a broadband price increase. So I think that just says this is a strong product, there's a lot of demand. And that to think that for many, many, many years, it's going to get better and better and better and not keep up with inflation is an erroneous assumption. In fact, the opposite is true. But Rob, you might want to give the specifics.

Craig, let me address a couple things. One, clearly, the 14% growth in HSD revenue, which I would argue is pretty terrific, was largely driven by the rate side of the equation, which is not 100% about price increases, as Glenn points out. Mix had something to do with it, but let's assume that it is very heavily driven by rate. Going forward, my expectation is that we have a much more balanced growth profile, with more of the growth coming from volume. And as I pointed out in my remarks, I'm specifically focused on aggressively attacking that kind of static DSL base that still sits in our footprint, which I continue to find kind of unacceptable, given the better product we're offering. So we're going to go aggressively with a product that is priced, we think, in a way that's very compelling for those maybe more price-sensitive customers that have continued to take DSL. So that's piece #1, which is a focus on ramping up volume. The other thing I would point out is, while the bundles do tend to cloud individual product ARPU, one piece of the sub story that we didn't highlight is that HSD-only net adds were actually up about 150,000 in the quarter. And those are customers who are taking broadband at the stated price in a way that's not, in any way shape or form, skewing ARPUs. So I continue to believe that the price-value equation for our broadband product is right. And I guess, it's also worth noting that we're continuing to add value to the broadband service. We just put out a press release over the last week or so highlighting the fact that in New York, L.A. and Hawaii, we're increasing our top-end broadband speeds and taking people that are in our 50-megabits-a-second tier of service and increasing their speeds to 100 megabits a second. So I think you're going to continue to see the value of the product increase, whether by speed or by incremental proliferation of WiFi hotspots, and I think that justifies continued growth in ARPU.

Next question, Ben Swinburne of Morgan Stanley.

Glenn, of course, wishing you the best and a speedy recovery. I just had a quick one for Artie on the credits. I didn't know -- it sounded like you're expecting more credit hit to revenue in Q4, so I just want to confirm that. And if you had a number in your mind you wanted to share for what that was on the Showtime front, that would be helpful. And then my real question, I guess, to Rob and the team around Time Warner Cable Max or All Digital. Can you help us think through a couple of things? Are you considering D-to-As? I'm guessing no, just given your historical view on that approach. Any sense for how many TVs out there in your customer base require or will need boxes to move the network over? And at a high level, it sounds like you guys are excited about the opportunity. Why not go as fast as sort of humanly possible here? Are you trying to manage this within the balance of your capital return plans and historical buybacks stuff? Is there something else you're seeing that causes you to pace it more?

Ben, let me hit on the credits issue. The credits is really just a Q3 issue, and I think that was covered in my proactive remarks. And as it relates to pace of buybacks, I wouldn't read anything into it. In slowing the pace, we're still focused on the $2.5 billion for the full year.

Ben, on Max Markets, first, I'm not sure what philosophy you're referring to with respect to D-to-As. We've actually been deploying D-to-As in connection with our analog reclamation program over the last several years. And as we go All Digital in Max Markets, I would fully anticipate using D-to-As as the terminal device for television that don't currently have a set-top box. So we have no philosophical aversion to D-to-As. As we've talked about in the past, we've been deliberate in our spending of capital on D-to-As, one, because we've been interested in writing the cost curve down before we needed to unlock additional bandwidth; and two, our expectation is that we're going to reach a point in time where video is more frequently delivered in IP, so an IP terminal device is more interesting to us. I think we've reached, though, a point where we think it makes sense in certain markets to unlock even higher HSD speeds by reclaiming even more bandwidth. So that's where we are in D-to-As. In terms of boxes, it's tough to say. I'll tell you that, so far, in our analog reclamation work, we've experienced the customers, on average, take a couple of D-to-As in addition to whatever set-top boxes they have in the home. But that varies depending on what channels are reclaimed. So in an All Digital scenario, and New York was a little bit of an anomaly because we've historically always scrambled our expanded basic lineup, so we have many more set-top boxes there to begin with, so I think we're still going to learn as to how many D-to-As customers take. But I think rough guess [ph] is 2 to 3 per home is a reasonable working assumption. And then lastly, I think that you asked why we wouldn't go as fast as possible on the Max initiative. The goal here is, really, to fundamentally change the customer experience in a given market. So rather than spread our efforts like peanut butter throughout the footprint, I'm very anxious to deliver a complete experience, meaning not only going all digital but also ensuring that we have state-of-the-art modems in every customer's home, ensuring that they have the best video CPE and that the overall experience is really optimal. So we're going to concentrate market by market rather than take individual components and run them through the entire footprint.

Next question, Richard Greenfield of BTIG.

I think most investors out there that we talked to seem to believe that you are pretty misguided in your battle with CBS because, at end of the day, it felt like it was more about regulatory or hoping for regulatory reform. But I think a lot of them view the fact that even if you got regulatory reform, CBS would ultimately -- in that case, could become a cable network and could charge you ESPN-like dollars, given their viewership levels. So you really wouldn't have been in a better place even if you had gotten what you wanted. I was hoping -- especially given how much Glenn has kind of put his neck out on these issues over time, would love to hear you explain the differences between negotiating with cable networks, like a Discovery or an MTV, compared to broadcasters who are covered by those '92 regulations that Glenn mentioned.

Rich, I'll make a couple of comments. First of all, there's obviously been a lot of people making a lot of comments in the press, and we don't go into details about deals. We do think that we are better off with CBS than we would have been if we had not had this fight. And just suffice it to say that, that doesn't mean the deal is cheap, it doesn't mean it's wonderful, but we do think it is better than it would've been in a meaningful way. And I think, in a way, that maybe answers your question. We did not do this just to suffice in the regulatory arena. I mean, obviously, we have been working on that for some time. And as I said in my comments, I don't think this is on the top of anybody's agenda in Washington. Obviously, there's lots of other things they have to worry about. I do think it is way overdue to look at it after 20 somewhat years. And some time, they will, and my guess is the rules will change at that point in ways that we can't necessarily anticipate. But that's for later. Unfortunately, I think you're going to see these fights continue. My last comment is, and I know people say, "Oh, we'll just change from a broadcast to a cable network." That is not -- and certainly, I think it's something somebody could do. I think if you examine the rights that they buy, the number of hours they program a day, their relationship with the broadcast affiliates and the political implications of that, I think that is all easier said than done in a theoretical sense, and it's not going to happen so fast. Again, we can talk about it more offline or anybody else who wants to talk.

We typically end at 9:30. This morning, because of the length of the prepared comments, I think we'll take a few more questions.

Next question is Doug Mitchelson of Deutsche Bank.

Glenn, what a remarkable career. Our team's thoughts and best wishes are with you. Your prepared remarks, Glenn, suggest to investors they should be patient, and I'm hoping you could educate me further on how the Board of Directors handle the situation like this one between Charter and Liberty and Time Warner Cable. And if I postulate that shareholders generically decide they'd be willing to sell at some price, say, pick $140, and if Charter and Liberty decide that they're willing to buy Time Warner Cable for whatever that price is, but the board shares a view, that such an offer does not create sufficient value, how does the board balance shareholders' views versus the board's personal view of value and value-creation potential?

Doug, great question, and I'm a little bit at a loss to answer at any specificity, other than to say that the world of M&A is one that is well documented over decades, and there's legal standards and court cases and what have you about what boards do and their obligations. We are well aware of those things, we are well advised by the top law firms, and we behave accordingly. And then beyond that, I don't think I should comment.

Next question is Laura Martin of Needham Capital. Laura A. Martin - Needham & Company, LLC, Research Division: First, to Glenn, 20 years ago, when I went to First Boston, I started following your leadership. And there is no leader in this ecosystem more responsible for the tremendous economics that we have today and the industry structure. So I would like for all of us at Wall Street to thank you for 30 years of leadership that has been characterized by integrity, candor and brilliance. And just wish you the best, and our -- all of our thoughts and prayers are with you as you fight here for your health this year.

Thank you for that, Laura. Thank you very much. Laura A. Martin - Needham & Company, LLC, Research Division: And it's really hard then to ask you a question about the income statement because it just doesn't seem to matter. But, Artie, you did a great job cutting costs at AOL, adding 100 to 200 basis points to margins, if I recall. When you think about this company, which is much larger, what do you think the margin expansion could be here as you think about targets of your cost-cutting efforts?

Thanks, Laura. Look, I'm not going to get too far into it, other than to say we're -- we continue to be really focused on costs here. I noted in some of my proactive remarks some of the restructurings we undertook in Q3, and my expectation as we head into '14 is costs are going to continue to be an area of renewed focus for us, and I'd probably just leave it at that.

Our last question is from John Hodulik from UBS.

Best wishes to you, Glenn, for a speedy recovery. It's been great working with you these last few years. Maybe back to the sub trends, if we could. Rob, did you guys see increased competition from U-verse in the quarter? Did that add to some of the pressure you've seen? Yours had some solid numbers here this quarter. And then, secondly, on the $15-per-month plan, when do you expect to have that in the market? And is -- am I correct in understanding it will be across all your markets that you'd be offering that price point?

John, I apologize. I heard the words U-verse in the first question.

Yes, they had some strong numbers. Did that impact the numbers as well? I mean, obviously, we're all very focused on the programming disputes.

Right.

But did you see some increased competition as well in those numbers?

Okay. So look, if you kind of look at the footprint overlap on a year-over-year basis, I think what we're up to now is basically 40% of our footprint is overlapped by either FiOS or U-verse. It's about 27% U-verse, 13% FiOS, which I think, if you boil it down, that's about 1 million homes more than we were faced with a year ago. And that naturally translates into more competition, and that's something we've been experiencing over quite a few quarters now, so definitely has an impact. We highlighted the programming disputes because it was kind of a unique element in the quarter, but many of the same factors that we've been grappling with over the last several quarters continue to persist in Q3 as well. So yes, definitely had a factor. The second question -- and I apologize, we're having a little sound trouble here. What was the second one?

Just on the $15 high-speed data offer, when is that going to be in the market? And are you going to have that available across all your markets?

Yes, the answer is yes, it will be available across all our markets. We'll be aggressively marketing it in the DSL overlapped footprints, meaning that 60% of the footprint that is not FiOS and U-verse, but it will be available everywhere. And it's going to be in the market, I believe, in the next week or 2. November 4 is in my head, but it may be maybe a week after that.

I think that's probably all we have time for this morning. Thanks to everyone for joining us. And to give you a little advanced notice, Time Warner Cable's next quarterly conference call, which will reflect our full year and fourth quarter 2013 results, will be on Thursday, January 30, 2014, at 8:30 a.m. Eastern Time. Thank you for joining us, and have a great day.

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