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…

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…

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…

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.