Charter Communications, Inc. (CHTR) Q1 2014 Earnings Report, Transcript and Summary

Hello, and welcome to the Time Warner Cable First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. (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. Thank you. You may begin.

Thanks, Candy, and good morning, everyone. Welcome to Time Warner Cable's 2014 First Quarter Earnings Conference Call. This morning, we issued a press release detailing our 2014 first 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 conference call 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 sequential. Fourth, today's press release, trending schedules and presentation slides are available on our website at twc.com/investors. And finally, following prepared comments by CEO, Rob Marcus, and CFO, Artie Minson; Rob, Artie and our COO, Dinnie Jain will be available to answer your questions. With that covered, I'll thank you, and turn the call over to Rob. Rob?

Thanks, Tom, and good morning, everyone. Let me start by saying that I'm very pleased with our performance this quarter, and I'm exceptionally proud of the professionalism and commitment exhibited by the Time Warner Cable team since the announcement of our merger with Comcast. As we worked to secure government approvals and plan for the successful integration of TWC with Comcast, our entire team has remained laser-focused on executing the operating plan we established the end of last year. The priorities we outlined on our fourth quarter call are no less relevant today than they were before we agreed to merge with Comcast. And we've not taken our eye off the ball as a result of the announcement. As we entered 2014, we committed to revitalizing our residential business, and our residential team, lead by Jeff Hirsch and John Keib is making great progress. In Q1, we delivered on our promise to drive stronger subscriber trends. In fact, this quarter marked our best subscriber performance in the last five years. Driven by solid connect volumes and a dramatic improvement in churn, we added 148,000 residential customer relationships in Q1, a significant step toward our aspirational goal of adding a million residential customers by the end of 2016. Residential triple play, HSD and voice net adds were all very strong, and our video net loss of only 34,000 subs was as good as we've seen in quite some time. And we are well on our way to achieving our challenge of winning back half a million DSL customers from the Telcos by April of next year. The bottom line is that the foundational work we did last year to enhance our subscriber acquisition and retention capabilities is bearing fruit. We also committed to significantly improving reliability by investing in our network…

Thanks, Rob, and good morning, everyone. Let me start by echoing Rob's remarks that we are off to a great start to the year. Our subscriber trends are the strongest they've been in years, and we are on track for all aspects of our 2014 financial guidance. Let me walk you through the key Q1 highlights. I'll start with residential subscriber performance. We are reaping the benefits from the 2013 initiatives that we invested in. And as a result, we are seeing improvements in churn and connect volumes. Our first quarter overall residential subscriber performance driven by the 148,000 customer relationship net adds was the best in five years, particularly noteworthy is the fact that we drove a dramatic improvement in bundling performance. We added 82,000 triple play and 31,000 double play subscribers. The net add trends for video and HSD were also the best in at least five years, and we were very pleased with the fact that phone net adds were back above 100,000 for the quarter. In HSD, we are particularly pleased with our ongoing segmentation efforts; 40% of HSD connects to turbo and above in Q1 and turbo and above customers now comprise 32% of our HSD subscriber base, up from 24.5% this time last year. We're also very encouraged by our efforts to take share among more price sensitive customers. Our everyday low price HSD tier accounted for 15% of new Internet connection in the first quarter, helping us to take customers from DSL. Since Rob put out the challenge to convert 500,000 DSL subs to our HSD platform, we have added over 300,000 HSD subscribers, largely from DSL, putting us well ahead of pace of Rob's goal. On the video side, our ultimate goal is to get back to video subscriber growth, and we…

Thanks, Artie. Candy, we are ready to begin the Q&A portion of the conference call. We would ask each caller to ask a single question, so that we can accommodate as many callers as time permits. First question, please.

Thank you. Our first question is from Jessica Reif Cohen of Bank of America Merrill Lynch.

So, on the SME margins, this 60% pre-shared services; I mean the margin seem very high. Can you just talk about, give us some color on -- can you scale further and how will entering the enterprise business affect these margins? And because we don't know the shared services, you know how much of the shared service is part of SME? Is there any way you can give us some color on the shared functions? How much of that is corporate and how much of it is facilities?

Hi, Jessica, this is Artie. Let me help you out with those. With respect to the margins on business services, you rightfully point out that the operating margins tend to be very strong. That has a lot to do with frankly the mix shift that's in there. You will see it's very HSD-centric in the products. And as you know we completed our (indiscernible) phone migration this quarter and that did also benefit business services. As that business continues to drive in a mix shit towards more HSD like services, I think there continues to be really strong overall profit trends and margin trends in the business. As it relates to the $2.8 billion of shared services, we are probably not going to break it out much further. I will give you a little bit more color, and there is some good disclosure in the queue around it as well, but it does include some items, for example, things like facilities, things like IT, things like technical operations that do support multiple lines of business. So it isn't obviously just finance and legal. It has broader overall operating support functions in there as well.

So Jessica, this is Rob. One additional item of color, we had somewhere just north of 30% growth in our wholesale transport business including cell backhaul, and that also adds to the positive margin effect just based on mix. So it just gives you a little bit more sense.

Great. Thank you so much.

Next question, please.

Thank you. Next question is Ben Swinburne of Morgan Stanley.

Thanks, good morning. You guys laid out your new plan not that long ago, and you are seeing some pretty rapid results. So I was curious if you could just help us with how much of the strong subscriber growth this quarter came from churn versus sort of connected marketing activity? I know this marketing was up year-over-year, and also the timing of price increases you mentioned that are happening now in Q2. So is there an expectation that some of the momentum shift a bit out in the second quarter because of the difference in timing of price increases? And along the lines of marketing, Artie, you mentioned the expense growth was really modest this quarter despite stepping on the gas and marketing. Is that something that you can continue to help sort of grow marketing while maintaining your profitability as you look at sort of efficiencies this year?

I can deal with the marketing first, and then I will turn it over to Dinnie. On the marketing front what I would just point out, Ben, is that this returns us to almost a more normalized level marketing. I think part of the growth is a function of Q1 last year. It was a little bit late. The second item I would just point out is that increase in marketing obviously wasn't just on the residential acquisition side; it was also driving business services. It also included a healthy increase in our investment and retention marketing. And Dinnie, I will turn it over to Dinnie and he will talk a little bit about how that had an impact on churn.

Yeah. Hi, Ben, this is Dinnie.

Hi, Dinnie.

I think that looking at our sub-performance, it was driven about two thirds by churn reduction and about one third in improvement in connect. A lot of that churn reduction came from the back-end processes that we talked about in the last quarter call in retention and our retention efforts. I think that both -- improvements in both areas are sustainable throughout the year. As Artie said in his comments, in the second quarter that's a seasonally weak quarter for us typically, and also this year as you pointed out we are doing our rate increases in the second quarter, so second quarter won't look the same as the first quarter. But I think that year-over-year we are already seeing improvement as Artie mentioned in April.

Dinnie, is there a marked difference in connects and the Max versus non-Max markets yet or still too early?

It's still way too early. I mean we are launching Max in New York and L.A. at the end of the year. So we won't be able to give you anything meaningful in terms of differences between performance until late in the year, if not in the next year.

Just the level set on Max, so we have now actually effectuated speed increases in four hubs, two hubs in each of Los Angeles and New York City; the number of customers affected by that are in the low tens of thousands, so we are still in the very early stages and we don't expect to see meaningful retention benefits until much later.

And Ben, the only thing I would add to is we talked a little bit about how the connect trends have been better, the disconnect trends have been better. What's also been better and which helped the overall PSU net add trend which I talked about April-over-April is having existing subs add a unit. So that's also been an area where we are seeing some positive momentum.

Got it. Thanks for the color.

Thanks, Ben. Next question, please.

Thank you. Next question is Doug Mitchelson, Deutsche Bank.

Thanks so much. Good morning, so just a clarification from Artie and a question for Rob. Rob, if press reports are accurate and the FCC will formally allow broadband companies like Time Warner Cable to change a fee right in our companies for last mile fast lanes, I know it's early, but if it's accurate, what changes over time might result from such regulatory clarity as you see it? And then Artie, when you say April PSUs are 80,000 better than last year and it's only April 24th. You tend to close the month out a week or two early, right, so that April comment should be considered a full reportable month of April, not a partial month?

You have a very good memory, Doug. And yes, that is a full month of April for people who on the call may not know exactly what Doug is referring to. We do cutoff our subscriber reporting a little bit earlier than the actual calendar month end. So those April numbers are effectively in the bag and they reflect the full month.

As far as the FCC proceeding, Doug, obviously the FCC has been -- since the Verizon versus FCC decision, the FCC has been contemplating a new approach to what used to be the open Internet order. I think we will have to see exactly what ultimately is embedded in their proposal. I said on the last call in response to how we would react to the court decision that our business practice is to not discriminate, not block and content that's otherwise available in the internet. That will continue to be our operating policy. We will have to see whether there are new business models that turn out to be interesting resulting from anything the FCC might do, but I think it's premature to make a judgment.

And then also a question to answer given the comments you just made, but do you think there could be a point in time where everyone just dips their toe in the water or is there something that could be a seed change in the way broadband companies handle traffic?

I think at this stage it's difficult to speculate until we know exactly what's being contemplated.

Right. Thanks so much.

Thanks, Doug. Candy, next question, please.

Thank you. Next question, Richard Greenfield of BTIG. Brandon Ross – BTIG: Hi, guys. It's actually Brandon Ross in for Rich. Just wanted to ask one quick question, as your programming partners make an increasing amount of content available to Amazon and Netflix such as yesterday's HBO deal without the need for an MVPD subscription, how does that change your video strategy?

Brandon, I don't really think there is anything new here, the difference maybe simply in degree. We embrace video on the Internet in that, it highlight the value of our HSD offering. At the same time we know that in order to deliver a competitive video service we got to continue to improve our offering whether that means increased content, better navigation, more flexibility in terms of device access. And those are all things that we are committed to doing. I would argue that notwithstanding the increased availability of older VoD content through multiple platforms. There is still nothing that rivals the video experience that we deliver as an MVPD especially in terms of live content, especially things like sports and live news. Brandon Ross – BTIG: Great. Thank you.

Thanks, Brandon. Next question, please.

Thank you. Next question, Craig Moffett of MoffettNathanson. Craig Moffett – MoffettNathanson: Hi, good morning. Two questions if I could. First, a strategy question for Rob and Dinnie. Your gross margin dollars per video customer or I guess what I think of this transport margin has been coming down pretty sharply. How much of that is a strategy, the shift -- the focus to broadband, and how much of that do you think have to be rebalanced going forward, so that you take more moderate growth on the broadband side and shift some of it back to video? Then, just a quick second question, you guys may not even have seen that Verizon FIO's results in video were very weak this morning. I am just curious what you saw from Verizon FIOs in the New York City market in particular but in your FIOs markets whether they were doing anything different and had any different competitive impact than they have had in the past?

Let me take it in the reverse order, Craig. What I will point out on the FIO side is we actually -- the strength we saw in our subscriber performance was actually very broad based not only from a product perspective which Artie pointed out, but also from a geographic perspective, we actually saw improvement across out footprint, but what I think is very noteworthy is that the churn improvement we saw was most significant in FIO's markets, something we are very pleased about. So, I think that really responds to the direct head-to-head competition with FIOs that you described. In terms of the video margin, obviously this is not new news, video margin per video sub has been coming down for some time and we know that programming cost increases are the culprit. And that's really what's driving it as opposed to a conscious decision to shift revenue from the video bucket to the high speed data bucket. I agree with your general characterization of our video profit is being linked to transport as opposed to the aggregation and resale of video, but you are not seeing a conscious reflection of a strategy there. It's much more simply a product of the increase in programming cost. Craig Moffett – MoffettNathanson: Thanks, Rob.

Thanks, Craig. Candy, next question please.

Thank you. Next question is Tuna Amobi of S&P. Tuna Amobi - S&P: a color:

Yeah. I continue to stand by our original statement that this combination is the best way to maximize value for shareholders. We think of value on a long-term basis as opposed to looking at the spot price of any stock at a given moment in time. And the incremental value that can be created toward this combination, we think will ultimately accrue to the benefit of our shareholders by virtue of their more than 23% ownership in the combined company. And I don't think anything has changed about that. From our perspective we don't get terribly hung up by the fact that share prices move around from day to day. And I have full confidence in the decision we make. Tuna Amobi - S&P: That's helpful. Just to clarify, when is your board meeting coming up? And how does this whole divestiture potential divestitures, does that kind of factor into your thinking at this point?

I am not sure what board meeting you are referring to, Tuna, but I would take a step back and say that I don't really think we have much to add to the discussion of divestitures relative to what Comcast disclosed on its earnings call as part of the merger agreement for the most part Comcast is responsible and has the authority to effectuate those divestitures and as Angelakis said on their call, I have no doubt that they will be delivered and thoughtful about that process. Tuna Amobi - S&P: Okay, I will leave it there. Thank you.

Thanks, Tuna. Candy, next question please.

Thank you. Next question is Amy Yong of Macquarie Capital. Amy Yong – Macquarie Capital: Thank you. Can you just help us quantify or just quantify some of the growth coming in from HSD and how we think about volume versus pricing, and how you encourage upselling within your customer base versus providing free upgrades to higher speeds as a retention tool? And what's the right balance? And how do we think about going after the more value-oriented DSL subs? Thanks.

Sure. Amy, its Artie. If you look at the overall growth in HSD ARPU, for example, and try to split it into what was related to rate increases last year and what is people taking higher tiers of service? It breaks down that about 25% of that increase is coming from people taking higher tiers of service. So, given the rate increases we did last year that obviously had an impact on the overall ARPU. In terms of your question related to the everyday pricing offer and our overall offer strategy, I think what you are saying is more and more segmentation in the base, which I hit a little bit in my proactive remarks. What we are seeing there is the shared shift out of, for example, our standard tier. What we are seeing in that shared shift is it tends to be about 80% of the shared shift are people who are moving up into higher tiers of service. So we are doing a very good job of sort of getting people on to the platform and then successfully migrating them up. Amy Yong – Macquarie: Great, thank you.

Thanks, Amy. Next question please.

Thank you. Next question is Tom Egan of Telsey Advisors.

Super, thank you. I wanted to follow up on the rate increases. Could you just remind us where are you on the rate increases in terms of through the markets? And then, did they start in March or in April? Thank you.

Tom, with respect to the rate increases, there was minimal revenue impact of the rate increases in Q1, very minimal in March, and about I think it's about 83% of them will flow through in Q2. We have a little bit later in the year, but predominantly it will be a Q2 impact.

Great, thank you.

Next question, Candy.

Thank you. Next question, Vijay Jayant of International Strategy & Investment Group. Vijay Jayant - International Strategy & Investment Group: Hi. A couple of questions please. First on the fat broadband skinny video offering, I know you guys launched that. Can you talk about what traction that had in the quarter? Did it have really any impact on ARPU? And second, with the baseball season starting, can you talk about what's happening at the Dodgers RSM in terms of take up my other distributors? Thanks.

V.J., on the fat broadband skinny video, I'll tell you what, the uptake has not been significant at this point, but admittedly we haven't marketed it as aggressively as some of our other packages, at least not in Q1. So I still think it's an interesting potential opportunity for a particular segment to the marketplace, but thus far, it has not had an impact on our customer base or ARPUs for that matter. As far as the Dodgers go, I don't think there is any secret that at this point with the exception of Time Warner Cable and Bright House, we have not signed up any distributors to carry that network. I think the good news is the product is great and that we have a first place baseball team and the production quality is outstanding, and we will continue to work on gaming affiliation deals. In the meanwhile there is a whole lot of customers at Time Warner Cable who are very happy that they can view the service, and there are others who are moving to Time Warner Cable so that they can. Vijay Jayant - International Strategy & Investment Group: Okay, thank you.

Next question please, Candy.

Thank you. Next question, Frank Louthan of Raymond James.

Hi, thanks. This is Alex Sklar here for Frank. Following up on the last question, with the Starter TV with HBO bundle, do you foresee an impact on the premium channel segment with HBO striking a deal with Amazon? And then on your cash tax slide, you suggest you could see a 175 million decrease in cash flow from stimulus reversals. Do you have any early thoughts on what the proposed two-year bonus depreciation expansion could have on free cash flow this year and in 2015? Thanks.

I think the premium question is an interesting one, Alex, and I think that when premiums make a decision to make their product available through means other than traditional subscription to premium services through a multi-channel video provider. One of the things that could happen is that customers choose to access their products a different way. And I think that has a lot more to do with the health of the premium business than it does without multi-channel video business. I think we'd like to see how that plays out. Artie, you want to take the cash taxes question?

Sure. On cash taxes, to the extent there is an extension of bonus depreciation for the two years; our estimate is that would reduce the cash taxes guidance that we've given. So what would effectively -- it would be $150 million pick up in free cash flow or set another way cash taxes would be reduced by about 150 million if there was an extension.

Great, thank you.

All right, Candy, I think we have one last question, please.

Thank you. Our final question is James Ratcliffe of Buckingham Research.

Thanks. Two, if I could; first of all, with the starting rollout of HotSpot 2.0 on your WiFi infrastructure, how do you see this in the long-term? I mean can we move to a scenario where WiFi becomes the primary mode for not customers, not just at their workplace, not in their home, but actually when they are truly mobile on their devices? And secondly, as you are raising speeds the board, how do you look at the tradeoff of customers who might choose that they don't need a turbo or similar service, and is there any precedent from previous speed increases about what share of customers actually end up downgrading? Thanks.

So James, on the WiFi network, we've launched that -- we thought that the deployment of WiFi access points was a significant value add for our HSD customers and in particular our strategy has focused on public WiFi access points meaning not necessarily in the home or in a particular business. So it is a replacement to some extent for some elements of mobile network. And we think that continues to be a tremendous value-add and we are going to continue to rollout access points. I think our total access points at the end of the quarter were up close to 33,000 and we deployed something like 3000 plus in the quarter. So the pace of rollout continues. And is it a complete replacement for cellular contract? I think that probably is not the case, but I think it's a really complementary offering and something that makes our HSD product more valuable. As far as the speed increases question, we are always cognizant of the impact of increasing speeds on our various tiers of service and what kinds of downgrade and upgrade activity that might result in, and so I can say that what we are trying to do is deliver the great amount of value for the greatest -- for the best price at each tier, but certainly we are not anxious to create cannibalization. So we do those speed increases very thoughtfully.

Thank you.

Thanks, James. Rob, did you have a few comments?

Yes. So I guess I will just summarize by saying that we are off to a great start in 2014. We had the best residential subscriber performance we had in five years. Our business services revenue growth was close to 25%. Operating metrics are improving. We are differentiating our products further to improve the customer experience. TWC Max is up and running in New York City and L.A. And all of these results underscore our commitment to delivering on our financial and operating plan and making our company stronger than ever in advance to the merger with Comcast. So with that, we will close, and I'll thank you for joining us this morning.

Thanks, Rob, and thanks to everyone for joining us. And to give you a little advance notice, Time Warner Cable's next quarterly conference call, which will reflect our second quarter 2014 results will be on Thursday, July 31, 2014 at 8:30 a.m. Eastern time. Have a great day.

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