Charter Communications, Inc. (CHTR) Q1 2013 Earnings Report, Transcript and Summary

Hello, and welcome to the Time Warner Cable First 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 will turn the call over to Mr. Tom Robey, Senior Vice President of Time Warner Cable Investor Relations.

Thanks, Candy, and good morning, everyone, welcome to Time Warner Cable's 2013 First Quarter Earnings Conference Call. This morning, we issued a press release detailing our 2013 first quarter results. Before we begin, there are a couple items I want 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 detailed 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. And finally, today's press release, trending schedules, presentation slide 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?

Thanks, Tom. Good morning, and thanks for joining us. The first quarter came in pretty much as we had expected. Business Services had another great quarter, growing 25% year-over-year, and that's the 12th consecutive quarter of growth over 20%. As Rob will describe in a few minutes, we're executing on our residential revitalization plan, and we've begun to see better new connect ARPU trends and better retention rates. In our quest for the efficient frontier of rate versus volume, we over-rotated last year and paid for volume. Our new pricing architecture is designed to strike a better balance between rate and volume. It's based on a simple premise: Sell people what they want and what they can afford in the first place. Further, our team has gotten a lot more sophisticated in managing churn, and I think we're just beginning to see the benefits of that. Bottom line, we expect these improvements to drive better revenue and adjusted OIBDA growth later in the year and into 2014. One of the factors driving my continued enthusiasm about the business is our One TWC management structure, which we announced in January. We've now established the right structure and the right management team for today's business. Bill Goetz and his team are beginning to transform the residential business, and we're thrilled to have Phil Meeks take the lead of an already very capable team in Business Services. Joan Gillman continues to do a great job running our ad sales business. And all of these groups are supported by Mike LaJoie, our CTO, who runs the IT, technology and network operations organization. This new structure is the culmination of an organizational transition that began more than 5 years ago. I expect it to position us well for the foreseeable future, and I'm confident that this team will execute well to the benefit of our customers, employees and shareholders. In addition to the investments we're making in the organization, we're reinventing and enhancing our products. I'll single out just a few to mention. First, we're testing our cloud-based guide and the newest set-top box in employees' homes, and they look really good. This quarter, we released our video app for Roku boxes, and we're talking to other CE companies about similar capabilities. Just last week we began to deliver on the vision of TV Everywhere, launching out-of-home access to select content on our iPad and iPhone apps. And together with other MSOs, we now have more than 100,000 WiFi access points available to our broadband customers at no extra charge. This is already the largest WiFi network in the country, and it's growing rapidly. It's early days for all these developments, but I'm excited about the potential to improve and expand our ability to help customers enjoy better. So with that, let's turn it over to Rob.

Thanks, Glenn, and good morning, everyone. I'm going to focus most of my comments this morning on the residential business because we're executing on a number of initiatives there that are starting to deliver some very encouraging results. Then I'll briefly hit on Business Services before turning the mic over to Irene for an analysis of the financial results. At an investor conference in early March, I spoke about our plan for driving better performance in our residential business. We've now been at it for several months, we're executing well, and though it's early days, we're starting to see the desired results. The plan has 4 interrelated components: the first is to get, grow and keep customers at higher ARPU and profitability; the second is to improve reliability and customer service; the third is to ensure that our products are world-class; and the final piece is to improve the overall efficiency of our operation to facilitate our delivering a better customer experience and to reduce costs. So let's drill down on each piece. The first element of the plan is to get, grow and keep customers at higher ARPU and profitability. As I mentioned on the last earnings call, we implemented a new pricing and packaging architecture in January that's designed to drive greater connect ARPU and profit. It should also generate customers who will be less likely to churn. We still advertise the same beacon prices, but the product packages are leaner, lower speeds and fewer channels and features. Once our beacon offers get the phone to ring, our inbound sales reps are trained to help customers select options that are important to them, like faster broadband or DVR. As a result, customers are up-sold into packages that better meet their needs. We're trading connect volume for better rate and retention here, meaning that we're seeking to connect higher-ARPU, more profitable, more stable subs even if that means fewer connects in the near term. The result of this approach, as you can see on Slide 3, was that Q1 subscriber net adds were down year-over-year. Last year's aggressive Triple Play offers drove significant Triple Play connect volume, which led to the highest quarterly subscriber net adds we've had over the last several years. But in large part, we were attracting discount seekers who are more likely to churn quickly. In many cases, we caused customers who didn't need or want phone to take a Triple Play offer just to get the low Triple Play rates. Our approach in Q1 of this year was quite different. By designing packages that better match customer needs, we drove more single and Double Play connects and many fewer triples. This resulted in a year-over-year decline in PSUs, especially phone, but not necessarily a decline in the amount of money a given new connect might spend with us. Many customers chose not to take phone but instead, spent their money on incremental Internet speed and other ancillaries. That's good for us and good for our customers, but these products don't count as incremental PSUs. That's probably more of a commentary on the industry reporting practices than on the health of the business. We're still working through the overhang of last year's less stable connects and have not yet seen the benefit of the more stable subs we've begun to attract. So Q1 disconnects remained fairly high. Stating the obvious, the result of lower connects and still high disconnects was a decline in Q1 net adds. The good news is that with the new approach to pricing and packaging, we've been driving real improvement in revenue per new customer connect across each of the main customer cohorts: triples, video Internet doubles, Internet singles and video singles. The year-over-year increase in revenue per new connect for doubles and triples is in the range of 15% to 20%. This improvement in revenue per new connect has started to positively impact overall ARPU per residential customer relationship. As shown on Slide 4, ARPU per customer relationship growth accelerated each month as the quarter progressed. And despite the year-over-year declines in connect volume, aggregate new connect revenue, meaning the product of new connects times revenue per new connect, actually increased over last year's Q1. And because customers chose higher-margin features like faster Internet speeds instead of phone, our aggregate gross profit from new connects increased as well. So we're really pleased that with respect to 2 key objectives of the new approach to subscriber acquisition, higher ARPU and higher profitability, we seem to be on track. As for our goal of creating a more stable customer base, it's going to take some time for the new pricing and packaging architecture to deliver results. In the meantime, we are actively seeking to reduce churn through other means, even while we work our way through the overhang created by the churning customers we brought on over the last year. We've established 4 dedicated retention centers staffed with specialized reps that we are retraining in more sophisticated retention methods and arming with new tools and processes, and we're doing a better job routing customers who are likely to disconnect to these retention specialists. Slide 5 shows the early results. We've been able to increase the save rate by 4 percentage points on average across our 4 retention centers, and importantly, our reps have been able to retain more customers even as they reduce their reliance on heavy discounting. Our early experience suggest that these results get even better over time. In addition, we're implementing a number of measures to address 2 specific sources of disconnects: non-paid churn among last year's promotional subs and churn of those same subs when they roll off introductory pricing. We expect these to help us further reduce churn later this year. We continue to be equally focused on the second element of the plan, to improve reliability and customer service. We are implementing a comprehensive plan to improve customer service, streamline product delivery and take overall reliability to a higher level. You'll hear more about this in the coming quarters, but suffice it to say that there's a lot going on here ranging from enhanced customer education to various programs to improve first-call resolution and reduce unnecessary truck rolls. The third dimension of the plan is to ensure that our products are world-class. Couple of developments are noteworthy. The cloud-based guide looks absolutely great and will offer state-of-the-art features like rich box art, value-added metadata and robust search, as well as customized recommendations. Most exciting to me is that the new platform is really flexible, so updates, modifications and add-ons can be executed rapidly and without interrupting customers. As Glenn mentioned, it's in testing in employee homes right now, and we're looking forward to launching it to customers later this year. I'm also very excited that we again have extended the functionality of our TWC TV family of apps. Last month, we released an app for Roku boxes, enabling customers to enjoy TV better. We're hopeful that Roku is the first of many such devices. And just last week, we launched our latest version of the TWC TV app for iOS, which allows iPad and iPhone customers to view a subset of the TWC TV live, linear and VOD content when they're out of the home. That's a capability that customers have been craving since the release of the first version of the TWC TV app back in March of 2011. We expect to continually expand out-of-home functionality to include more content and be available on more devices. And the fourth element of the plan, to improve operating efficiency, is well underway. Irene will touch on some of the progress we're making in taking costs out of the business. So overall, I'm pleased with the progress we're making in residential. Switching to Business Services. As I've been saying for some time now, Business Services is an increasingly important part of the Time Warner Cable story. We've now delivered a dozen straight quarters of 20%-plus year-over-year organic Business Services revenue growth. We continue to gain share in the small and very small business space, and we're making good inroads into serving midsized business customers with multiple locations. These customers tend to have more sophisticated telecom needs and buy higher-end products like dedicated Internet access with symmetrical speeds as high as 10 gigabits per second and network solutions like Metro Ethernet. We're also enjoying continued success with carriers, selling them cell tower backhaul and other wholesale transport solutions. The really exciting part is that we're still just scratching the surface. With trailing 12-month revenues of $2 billion, we're still at just 10% of what we think is a roughly $20 billion total market opportunity in our footprint. And to ensure that we can continue to drive really strong results, we're thrilled to have Phil Meeks joining us as Chief Operating Officer of Business Services. Phil is a proven leader in the commercial telecom industry, with a unique combination of telecom and cable business services experience. I couldn't be more excited to work with Phil to further capitalize on the Business Services opportunity. So in summary, we're making great strides to stabilize and improve our residential operations. Business Services continues to perform extremely well, and the organizational changes we announced in January are already providing real benefits in operations. Thank you, and with that, I'll turn it over to Irene to discuss our financials.

Thanks, Rob, and good morning, everyone. I'll start with some first quarter highlights on Slide 6. In the first quarter, we grew revenues 6.6% and drove adjusted diluted EPS growth of 8.5%. We also increased the amount of capital we returned to shareholders through dividends and share repurchases by over 60% from the first quarter of 2012 to $855 million. And over the last 2-plus years since we introduced our share repurchase program, we've returned over 110% of free cash flow in total returns to shareholders, and we're on track to meet our full year guidance. Let's go over the drivers of our revenue growth on the next slide. First quarter revenue growth of 6.6% was driven primarily by 2 additional months of revenue from Insight, higher residential HSD and Business Services revenue and revenue from the L.A. RSNs that was partially offset by a decline in residential video revenue. We continue to expect full year 2013 revenue growth in the 4% to 5% range. Let's take a closer look at Business Services, where revenue was up 25% or $108 million. Excluding $12 million of revenue from 2 additional months of Insight, Business Services revenue grew over 22%. That's our 12th consecutive quarter of at least 20% organic growth. And drilling down, these are the 3 largest drivers of the $96 million of organic growth: first, we drove HSD up 20% or $42 million. About half that growth came from shared Internet access and $18 million of growth came from dedicated Internet access and Metro E, which are sold to our larger customers; second, we posted a 49% increase in phone based on continued subscriber growth; and third, we grew wholesale transport revenue by 32%, mostly due to a $9 million or 25% increase in cell tower backhaul to $45 million. At the end of the first quarter, we had roughly 9,800 towers in service and a meaningful backlog under contract. We continue to invest in this growth opportunity and still expect these investments to drive 2013 total business services revenue growth in the 20% to 25% range. On Slide 9, advertising was up 8% in the quarter, driven by an increase in ad inventory sold on behalf of other video distributors and 2 additional months of Insight. Turning to Slide 10, first quarter total operating expense grew 9.3%, which is largely driven by 2 additional months of Insight and the L.A. RSN costs, coupled with higher programming costs and increased employee costs, including our sales force expansion in Business Services. Adjusted OIBDA increased 2.1% for the first quarter compared to last year. We still expect to see full year adjusted OIBDA margin contraction of 50 to 100 basis points. But as we highlighted last quarter, the margin pressure is greatest in Q1. Given the build and operational improvements we are making and better comparables to the L.A. RSNs, we expect the adjusted OIBDA growth to accelerate in the second half of the year. As Glenn mentioned, we are very excited about our new company structure, one that allows us to be aligned in our objectives from top to bottom and ensure consistency across the company. Through restructuring, we have eliminated over 500 positions in areas such as finance, marketing and human resources and incurred $25 million of employee severance costs. These actions should deliver run rate savings of roughly double that amount. In addition, we continue to redesign our processes and tools in other areas like customer care and technical operations to improve both the customer experience and our long-term cost structure. We move on to Slide 11. Operating income increased 1.7% to $1.1 billion in the first quarter, reflecting higher adjusted OIBDA and a decrease in merger-related and restructuring costs, partially offset by increases in depreciation and amortization. Higher D&A from Insight was partially offset by lower depreciation related to the roll-off of certain Adelphia and Comcast assets. We incurred $31 million of merger-related and restructuring costs in the quarter compared to $45 million in the first quarter of 2012, which included costs associated with the acquisition of Insight. We expect to incur some additional restructuring costs during 2013 as we continue our transformation to a more effective and efficient structure. Turning to the next slide. First quarter diluted EPS was $1.34, and adjusted diluted EPS increased 8.5% to $1.41. This excludes a couple of items affecting comparability, including $0.06 of restructuring costs. We still expect to deliver 10% to 15% adjusted diluted EPS growth for 2013. Capital expenditures totaled $770 million during the first quarter or 14.1% of revenue. We spent more in Business Services, where capital intensity was higher, at 29.6%, while residential, advertising and other capital spending as a percent of revenue declined slightly to 12.4%. And we still expect full year capital spending around $3.2 billion in 2013. Moving on to free cash flow on Slide 14. We generated $661 million of free cash flow in the quarter. Since we don't make federal income tax payments during the first quarter, there's no bonus depreciation impact. Free cash flow was down $57 million or 8%, as higher CapEx and working capital requirements more than offset an increase in adjusted OIBDA. For the full year 2013, we still expect total free cash flow to be around $2.3 billion. And let's move on to our capital return slide. In the first quarter, we returned almost 130% of free cash flow or $855 million in total to shareholders, $195 million in dividends and $660 million in share repurchases. The dividend payment reflects the 16% increase in the dividend per share that we announced last quarter, and this was the fourth consecutive quarter that we increased the pace of repurchases. We increased it by 16% compared to Q4 '12 and by 87% versus a year ago. Our reported leverage ratio is 3x our last 12 months adjusted OIBDA, and including the normal adjustments, our leverage ratio is closer to our target. Looking back over the last 2-plus years since we introduced our first share repurchase program, we have returned over 110% of free cash flow in total returns to shareholders. And we expect to continue that we will repurchase at least $2.5 billion of shares in 2013, assuming the absence of significant acquisitions or other strategic events. So in summary, we're executing on our operational initiatives and building towards 2014. We're generating a lot of cash, and we've returned that cash to shareholders at a growing pace, while still investing in our future growth. Thank you, and with that, I'll turn it over to Tom for the Q&A portion of the call.

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

First question is Ben Swinburne, Morgan Stanley.

I'll ask my one question, which is, Rob, a few years back before the Insight deal, you laid out for us how you think about acquisitions versus buybacks, thinking about different sort of free cash flow multiples and accretion, et cetera. But it's been a while, I was wondering if you could come back and talk about how the company thinks about M&A versus share repurchases, particularly given the strength in the industry seems to be clearly in commercial and I could see some strategic opportunities in that space. And at the same time, on the residential side, we have a mature industry, and so there may be some opportunities on the residential front as well. So any color and update you could give us on your thought process of the company there would be helpful.

Sure. Why don't I start. I think you're referring back to a time when I was actually sitting in the CFO chair. So I'll start and let Irene chime in as appropriate. But our philosophy really hasn't changed at all. We remain a disciplined participant in M&A. And what I've always said is that especially in the world of cable M&A, where the assets we'd be buying are largely similar to assets we already have, the buyback program actually sets a very healthy benchmark against which we can evaluate a given opportunity. So when we look at an M&A opportunity, and this is all sort of in the hypothetical because there's nothing specific to talk about right now, when we look at a particular M&A opportunity, we kind of look at the price on a synergized, growth-adjusted, tax-effective free cash flow multiple basis and compare that to a similar multiple at which we could buy back our own shares. And it's pretty formulaic in the sense that if buying back our own shares presents a more attractive opportunity on that basis, that's what we're going to do. And by and large, that's the path we've taken over the last several years, but for the Insight acquisition, which met that hurdle. As far as opportunities outside of what I would describe as traditional cable, we tend to look at everything. The bar is equally high for those opportunities. The calculation is a little bit more complicated in that the growth profile and capital intensity and other attributes of those businesses might be a little bit different from simply buying back our own shares. But the essential financial analysis is the same. So I think the short answer is nothing's changed since last time we've talked about it despite the passage of time.

And I'd say the same thing and back up Rob's comments. As far as our -- the most important thing is the discipline we've shown and the rigor around the analytics of an acquisition. We don't feel we need to get bigger, so there's not a burning need just to get larger. So it strictly gets down to the price negotiation and can we bring it on into our business, make the synergistic benefits so that the returns accrue to our shareholders and if we can return a nice ROI to our shareholders, we would do the acquisition. If we can't, then we'll end up with excess capital, and we return that to shareholders.

Next question, Mike McCormack, Nomura Securities.

Maybe just a couple comments regarding the subscriber behavior. We've been hearing a lot about subs sort of coming off promo across the industry and looking for other opportunities. And you guys have obviously pointed that out as well, but the value seekers that you're talking about, where are they going? What's the substitute for your product?

By and large, when we're talking about Triple Play disconnects, they are going to our telco competitors. When we're talking about single-play video disconnects, they, by and large, leave us for satellite. Those are not 100% numbers, but the preponderance of subs go that way. And in the video-only -- in a lot of these categories, we're increasingly finding that phone customers are dropping landline phone for wireless-only, and there are video customers who are leaving -- and HSD customers for that matter, who are leaving the category. And that's probably more of an affordability issue than anything else.

How much room, Rob, do you have to move on the voice pricing? Because it seems like you've got a pretty wide margin there to play with price if you wanted to.

Yes, we've talked a lot about the cost structure on voice and the fact that we're -- we've been improving that as we migrate subs away from the Sprint relationship and on to our own platform. So clearly, assuming we're solving for a given margin, which is not exactly the way the world works, there is flexibility here if we see fit to use price as a mechanism to optimize overall profitability. There's one other product set that's probably worth talking about on the phone side. In addition to enhancing the features of our existing phone product with things like VoiceZone and a product we have that's in the development phase called softphone, which I can come back to, we're also trying to expand the universe of potential phone customers by offering subsidized lifeline phone, which is a product the telcos have offered for quite some time. We're filing in a number of states to actually take advantage of those subsidies. So it's possible that we can expand the potential universe of phone customers with that.

Next question is John Hodulik, UBS.

Maybe just a quick question on the competitive environment. AT&T and Verizon both had some stronger-than-expected numbers in their upgraded markets. Are you seeing any change in behavior from either of those carriers that is helping them win share from you guys, Rob?

They both continue to be pretty aggressive on the promotion side. What we experienced in Q1 was that AT&T decreased the price of both their triple and their double and increased the speeds in their core package somewhat, so they've been fairly aggressive. FiOS, for its part, actually increased the speeds in its core bundle. They, in some markets and for some periods of time, actually increased the price. But I would say essentially more of the same. The good news story is that we actually experienced a modest improvement in churn in FiOS markets this quarter, still higher than non-FiOS and non-U-verse markets, but an improvement nonetheless, so I view that as encouraging.

Next question is Rich Greenfield of BTIG.

Just wanted to get a sense when -- you clearly have a superior data product. Your speeds can be well, well above where your peers are, yet there still seems like -- first of all, your data adds are down year-over-year and especially from 2 years ago, continue to trail down despite more -- with the acquisition. And I guess just when you look at the data business and then you combine the video business, it would seem like the data business not only should be growing faster just because you have something that everybody wants, which is broadband. But it seems like it should be dragging the video business along. I guess what we can't figure out is why are people taking -- or staying with satellite with DSL? There's millions of people that have satellite with DSL in your markets or even those that have U-verse. And I guess just what do you think is the thing that is stopping a far greater transition from those subscribers over to your platform?

Rich, hard to answer the question, "Why not faster?" I'm actually fairly pleased with the performance of our HSD business. The net adds this quarter were solid. We're -- the comp of last year's first quarter is a tough one. We had -- we were very aggressive in our HSD-only promotions, not to mention our Triple Play promotions in Q1 of last year. So the year-over-year comp, I don't necessarily think is a fair indicator of the performance of the business. The mix in HSD continues to be terrific, more than 100% of our net adds in Q1 were actually in Wideband or Turbo offers, with an increasing portion of that group in the highest speed tier, which is ranges from 50 by 5 in some markets to as much as 100 by 5 in others. The ARPU per HSD sub, and I know I always counsel against using product line ARPUs, but for what it's worth, the HSD ARPU improvement was pretty close to 10% year-over-year. So all in all, I feel very good about the performance of the HSD business. Could it grow even faster? I like to think so, and we're going to continue to explore ways to make that happen. To your point about HSD subs dragging along video, one of the things that we've focused on is approaching both video single plays and trying to sell them high-speed data. But also high-speed-data-only is trying to sell them video, which is the point you're focused on. And the number of HSD-onlys to HSD video doubles, that migration pattern was actually up year-over-year. So that's a good sign as well. So hard to answer why not faster, but we're diligently trying to improve the HSD business even further. But overall, I'm happy.

Do you have a sense of how many people take satellite with DSL in your footprint, as well as satellite with Time Warner Cable in your footprint?

So the -- of our HSD-only customers, so there's about 2.3 million or 2.4 million of those. The lion's share of them that do take a video product takes satellite. Of the -- I think we have 3.2 million video-only customers, that's kind of a mixed bag as to where they get their HSD.

Got it. But it's certainly a significant number take non-Time Warner HSD?

Yes.

Next question is Jessica Reif Cohen, Bank of America Merrill Lynch.

Okay, how do I ask my one question as a 2-parter? So I guess, 2 topics, one is I'd love to get your comments on Google Fiber now that they're going into a second one of your markets. What are you actually seeing on -- what are your expectations? It's hard to believe that they're going to fully build out across the country. And the second question is I just want to go back to this churn issue -- I'm sorry, not the churn, the ARPU. Rob, you mentioned balancing subs versus revenue in your prepared remarks, and it just seems that if not for the data surcharge, ARPU would have been down or close to down across all the products. What are you expecting as the year progresses across all 3 products in terms of ARPU?

So Jessica, this is Glenn. I'll take the first one, and Rob can take the second. I think it's -- Google Fiber is an interesting thing because that company has been so successful, and they have a glow about them. But at the end of the day, what they're doing is not any different than an over-builder, and we've had over-builders for the last several decades in this business, so that's what they appear to be doing. They appear to be very aggressive on price. They're even giving some tiers away essentially for free, and we'll see where that goes. Despite all the glow and all of that, the products are essentially the same as others are offering today in a practical sense. And these are all AT&T markets by the way, I might add. So the practical products are the same, the video is the same and the speeds for the last little bit of a plant are faster. But they connect to the same old Internet, where most of the servers are actually slower, so it's an over-builder. I think -- who knows what their intentions are. They have to speak for themselves. I would question the economics of this and therefore, what the motivation is, but we'll have to see what they do.

Just to give you a sense of size, you asked sort of, "What are you seeing?" The reality, Jessica, is this is such early days. I think they've passed something like 4,000 homes altogether in our footprint. That's probably 2,000 of our customers. So it's -- it really is very early days, and the number of defections we've seen is de minimis at this point. And if you take Casey [ph] and Austin [ph] together, I think we're talking about in the neighborhood of 2.5% of our HSD and video customers, just to give you a sense of the magnitude of impact we're talking about.

One thing I would add to this because it sometimes gets lost, there's obviously a public relations intent to depict the cable and traditional phone industries as sort of stuck with old technology and resisting change and whatever, and we may have gone too fast, so I want go back to it. In the business market where there actually is demand for much higher speeds, we are pulling tons of fiber, we're offering speeds up to 10 gigabits per second, not just one. So we're doing that where there's demand, and that's what we've always done. So I think the imagery painting is very effective but maybe not reality.

So Jessica, on your question about ARPU, I guess I would focus on a few things. In my prepared remarks, I was very explicitly focusing on the trend in ARPU among -- or revenue among new connects. And obviously, overall ARPU per customer is a function of multiple things. One is what kind of revenue you're bringing on in the form of new connects, one is what kind of revenue is leaving you with disconnects and then what's happening to the big middle where they're neither coming on or leaving you. And the trend in new connect revenue is terrific, and I think that's a real important indicator of where the future is going. At the same time, I'll add, and I didn't comment on it, the revenue associated with disconnects is actually improving as well. So the gap between what we're bringing customers on at and what they're leaving at is actually a very, very positive trend. I -- your point about the modem fee, I think it's worth addressing because the modem fee is a rate increase by all accounts. It takes a different form than usual. But I wouldn't somehow discount it or push it off to the side and say, "Without that, you wouldn't have grown revenue -- ARPU." It's very much a part of the overall revenue generation program. So I feel very good about the trend and the trade-offs we're making between volume and rate, and I think that you're going to see that manifest itself as the year progresses.

And Rob, I'd add one more point, which is the modem fee was last quarter. So if you look at the slide that Rob presented, Slide 4, showing the ARPU improvement in January, February and March, that's without any impact of that modem fee increase.

Next question is Bryan Kraft, Evercore Partners.

Rob, you've talked about the sales channels performing pretty well and the problem has been basically churn. I guess first part of the question is have you benchmarked your churn and your connect rates against other MSOs that give you the confidence that, that is the case? And second, are the sales channels still performing at the level you want, given that now you've got it sounds like somewhat slower connect volumes since you've changed the offer structures?

Yes, actually, it depends what time frame you're talking about. So what I -- I'm not sure it's fair to characterize this as 100% about a churn issue. In Q1, the net add decline was actually driven more by a lower connect than it was about lower disconnects -- than it was about higher disconnects. The -- if you go back to last year, we were driving tons and tons of connects. And in the interest of managing churn, as well as revenue and profitability per sub, we've changed our approach to front-end packaging and pricing. So your characterization kind of depends on what time frame you're talking about. As far as whether or not we benchmarked our churn against other players in the industry, very difficult given that no one really publicly discloses churn rates. The satellite guys tend to, but it's a different animal in that remember that satellite doesn't experience the same churn associated with moves and transfers within footprint that cable does. They just don't count it as churn because you can take your dish with you. So it's very hard for us to benchmark ourselves against other industry players.

Do you think that you might need to increase your marketing expense in order to bring the connect volume up?

Yes, it's an interesting question. So in Q1, our marketing expense was about 2.7% of revenues. I think if you look at that our historical marketing spend, generally it hovers around 3%, maybe a little bit on -- a little bit higher than 3%. I think for the full year, we'll likely be consistent with our historical pattern. So that means as a percentage of revenues, we're likely to spend a little bit more in the back half of the year, and I think that should help on the connect side.

Next question is Philip Cusick, JPMorgan. Philip Cusick - JP Morgan Chase & Co, Research Division: Following up on that, can you walk us back to 1Q and 2Q '12 and help us think about when did the sort of unusual level of promotions start to roll off? And then when does that churn risk start to roll off through 2Q? And would you argue that 2Q is a tough comp as well?

So I would say the really aggressive Triple Play and HSD-only promotions began in Q4 of '11, and the truth is we continued to execute those promotions through the better part of 2012. So there's 2 dynamics going on: one is the promo roll, which is generally driven by the first anniversary of the promotions because most of our promotions were full 1-year promotions. But also, by attracting more price-sensitive, less stable subs, we increased the likelihood that customers would go non-pay in the nearer term, in other words, more quickly after we brought them on. So it's not just a 1-year phenomenon, it's sort of -- it occurs in 2 different buckets, maybe in the 3- to 6-month range and in the 12-month range. And the good news is that we have identified the risk, and we have taken steps, as I described, to manage the churn that as those -- as that big chunk of subs rolls through the risky period. So while we have to grapple with the overhang all year, my expectation is that we will continue to do better at it as the year progresses, and the early returns are that we're already doing better. Philip Cusick - JP Morgan Chase & Co, Research Division: And in terms of the 2Q comp?

2Q comp, I think the answer is yes, we had those aggressive promotions in 2Q. So from a connect perspective, it's a challenge, although Q1 tends to be a bigger connect quarter than Q2. And -- but all of my general comments apply to Q2 as well. We're working through that churn, I think, more effectively than we have in the past.

Next question is Jason Bazinet, Citigroup.

This is Chris Lo on behalf of Jason. So if we kind of take a look at programming costs per video sub, the programming cost of Time Warner Cable and Comcast appear pretty similar despite sort of difference in scale. Can you sort of comment on what that -- what might be driving that?

Sorry, I didn't hear the last part of it. What that might look like in?

Just the sort of difference in scale that -- what might be driving pretty -- what appears to be pretty similar programming costs per sub at Time Warner, as well as at Comcast.

We typically see our costs per sub a little bit higher than Comcast on a general basis. As far as the percent increase, we're expecting around 10%. We know that some others that announced after us announced increases slightly north of that. But it really depends on what contracts are coming up for each company that you're renewing, plus the contracts that you're -- have automatic increases in them. So you will see variations between companies on programming costs.

Okay. And could you provide sort of a quick update on your sort of view on consumption-based pricing?

Yes. This is Glenn. There really isn't anything new. We have in place in almost all of our footprint the option for people to pay less money if they wish to really consume less. We did that last year, and we think that's the right way to do it. People who want to keep getting unlimited and pay for that, can do that. So we really don't have anything new. It is in place in our whole footprint, I think, except one location.

And we said this before. The take rate on that offering has still been fairly modest, but we think it's a very important principle that there's a relationship between usage and the price that customers pay.

Next question is Doug Mitchelson, Deutsche Bank.

A fun one for Glenn. In 2011, you extended your contract for an extra year to year-end 2013. And as that date approaches, you can imagine there's been a lot of interest in your and the board's succession planning. I was hoping you could update us on that and when would you be prepared to announce whether or not you'll be entering into a new contract beyond '13? And quickly for Rob, while Glenn thinks about that. Rob, you said most of your high-speed-data-only subs have DVS video service, what percentage of your high-speed-data-only customers do not take any video products from anyone?

Well, I'll do the first one. Doug, it's obviously a little amusing because as I came up from my corporate career, I spent many hours scrutinizing the leadership of the various companies and trying to figure out who was going to retire when and who was going to replace them and all of that. Obviously, under the SEC rules, when the board makes decisions, we have to report that in a very short time frame. That also implies we don't report decisions that haven't been made yet, which is the case here. Obviously, as good governance, we discuss succession in various feats of strength [ph] and what have you all the time, but it's not really a public thing. Thanks for the question.

Doug, with respect to where our HSD customers get video, so I mentioned that we have about 2.4 million residential HSD-onlys. And about 20% of those don't take video at all based on our survey work.

Next question is Laura Martin, Needham & Company. Laura A. Martin - Needham & Company, LLC, Research Division: This one's for Irene. Could you talk about -- so there's about 160 basis points of margin pressure in the quarter. Could you size for us how much of that is coming from the Lakers channel? Because I think those valuation metrics on return on capital are much higher than your core business. And as we think about next year, Irene, remind us what quarter the Dodgers start impacting the P&L, please.

Sure. The impact on our margins for the first quarter was impacted, of course, by the L.A. RSNs. And we do think, as we go through the year, we're going to see some changes in those, the comparables, in that we launched the RSN in the fourth quarter of last year, so the comparables obviously get better. We're also looking at phone migrations in the last part of the year, which will also take off the pressure off margins, as well as the building effect of the initiatives that Rob laid out for us on the operational side, as well as on the marketing and sales side. As far as the Dodgers, they probably won't hit our P&L until really the first quarter of '14. Laura A. Martin - Needham & Company, LLC, Research Division: Okay. So just trying to push you a little bit on the first answer, so the Lakers, is it 100 basis points that it's putting pressure out of the 160 of margin pressure? Is it more? Is it less? How much of an impact are the RSN Lakers having on the income statement right now?

We're not pulling out the RSN impact from our financials, but it is a big part of the driver of other revenue increase and other expenses on our core side.

Next question is Jason Armstrong, Goldman Sachs.

Maybe just a follow-up on the programming cost question, maybe just thinking about the growth over the course of the year. You did mid-7s this quarter. You've stuck with the 10% guide for the year, which obviously got a lot of attention last call. Are there stair steps in the process that we should think about in any given quarter? Or would you expect this to be more of a sort of fairly linear acceleration through the year?

Sure. There's obviously some large contracts coming due this year, which will have an impact, and then we have a number of smaller contracts and retrans agreements being negotiated throughout. So if you look at where we ended up this quarter at $33.16, if you're looking at the average last year, the average this year up 10%. That'd be another $1 or so on that cost. So it should be coming -- I won't talk specifically quarter by quarter, but there are ongoing contracts which are being negotiated [ph] throughout.

And so Irene, when you talked about accelerating EBITDA growth towards the back half of the year, does that imply maybe some of the -- more of the pressure is actually front half of the year, which would, I guess, be 2Q?

No, I wouldn't assume that. I think the drivers of the OIBDA increase are the ones that I laid out, so the phone migrations, the lapping of the RSN startup and those operational efficiencies and revenue drivers.

Jason, this is Glenn. If I can help a little help on the programming. We actually had something like 300 programming agreements, and some of those are under contract for a long time period, with known increases; some are out of contract and in negotiation, and we're trying to predict what the outcome might be; and some have fees associated with them, which have catch-ups when they eventually get settled. We know that some are upcoming for negotiation later this year. So this guidance is our best estimate of that whole amalgam of things, and it doesn't lend itself to an easy simple set of answers because there's so many of them.

Next question is Vijay Jayant, ISI Group.

I got 2 questions, if I could. Any color on the Dodgers RSN affiliate deals and how that's sort of trending and how much you've locked up given the costs you paid for that license deal? And second, given that the FCC is now allowing you to encrypt the analog part of your network, is that something you're doing? Are you seeing any lift from the reduction in piracy?

I guess I'll take both of them, Vijay. Dodgers, we haven't yet begun the process of seeking affiliate deals. That tends to happen much closer to actual launch of the networks. Based on our experience with the Lakers, really all the action happens almost in the couple of few months leading up to launch. As far as the basic analog encryption, I think we mentioned on a prior earnings call that in New York City, we're actually going through the process of encrypting our -- what we call our basic tier of service, our BST tier of service. But we haven't yet completed the going all digital on that piece of spectrum. So too early to give you feedback on what the impact has been. We are, of course, all digital on the rest of the New York City lineup, but this will be sort of the last piece of the puzzle to make us 100% all digital.

Next question is Tuna Amobi, S&P Capital IQ. Tuna N. Amobi - S&P Equity Research: So I wanted to use my question for Glenn. So regarding the recent developments on aerial, which I'm sure you've been watching pretty closely, can you help us philosophically define how that might impact your long-term relationship with the broadcasters and any kind of leverage you might see or any other actions you might take? And I know that might be profound as a result of that. And then separately, on the MPEG to IP set-top boxes, I wasn't sure if your CapEx outlook includes any significant spending related to IP set-tops. And what will it take, Glenn or Rob, to kind of lead that transition from MPEG to IP? What do you see as a gating factor beyond the cost and the technology? Because I would imagine as you're testing all these applications, there's potential upside there. And how would you kind of view your strategy in that light?

Okay, thanks. I'll try both those. Aerial, I'm assuming that everybody on the call is familiar with what that is, so I won't try to describe it. Obviously, the -- to those who've been following it, the courts will determine whether that is legal under the copyright laws or not. There has been some early activity around temporary restraining orders, which I think most lawyers would agree are hard to get and maybe not dispositive about the ultimate outcome. There also are conflicting circuit court decisions on this technology between the California Ninth Circuit and the New York Second Circuit. So my guess is this will be in the courts for some time, possibly even going to the Supreme Court, and it ultimately will be adjudicated. If it is found to be legal, then I think it has very interesting implications for the whole broadcast and broadcast network ecosystem and for the future of retrans. Obviously, it would give people a route to receive the signals that are otherwise free through the air without paying retrans fees. And at least one head of a big entertainment company has said that he would turn his broadcast network into a cable network if that happens. So I think this is all speculative at this point, and all the various people who run the PR machines try to read the tea leaves of each and every judicial decision. But I think it's going to go on for quite a while. On the IP -- MPEG to IP thing, I think the important thing to keep in mind is that one of the things we do is try to make our video offering available to all of the TV devices you have in your home. And at the moment, those use all different kinds of technology, some analog, some MPEG, digital, some IP, and we serve all of those, some are HD sets, some are -- et cetera. I do think over some time period that most things in the world is shifting to IP simply because that's where most of the engineering development work is taking place. And of course, so we have an IP feed. The set-top that we talked about earlier that works with the new cloud-based guide is actually the first of a new generation of boxes that the output of that will be all in IP, and so that means if you have a device in your house that knows how to receive IP, you'll get it directly perhaps via WiFi or through a cable technology called MoCA. If you have an older TV, you may have this set-top I'm talking about, which is kind of a gateway, and you may have a slave device, very small cheap set-top in front of your older TV. So we see that as a way to help evolve to what I am pretty sure will ultimately be an all-IP world. But people keep their devices and TVs for many years, so it's going to be a lengthy transition. Tuna N. Amobi - S&P Equity Research: Okay. So no near-term impact on CapEx on that?

No, this is -- all of this is embodied in our guidance for CapEx, all this activity.

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, our next quarterly conference call, which will reflect our second quarter results, will be on Thursday, August 1, 2013, at 8:30 a.m. Eastern Time. Thanks for joining us.

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