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Cablevision Systems Corporation (NYSE:CVC)

Q1 2006 Earnings Conference Call

May 9, 2006 10:00 a.m. EST

Executives

Bret Richter - SVP Financial Strategy & Development

Jim Dolan - Chairman & CEO

Tom Rutledge - COO

Josh Sapan - President of Cable & Communications

Mike Huseby - CFO

Hank Ratner - Vice Chairman

Analysts

Douglas Shapiro - Banc of America Securities

Craig Moffett - Sanford Bernstein

James Radcliffe - Lehman Brothers

Aryeh Bourkoff - UBS

Doug Mitchelson - Deutsche Bank

Jeff Wlodarczak - Wachovia Securities

Jessica Reif Cohen - Merrill Lynch

Bryan Kraft - Credit Suisse

Richard Greenfield - Pali Research

Kathy Styponias - Prudential

Presentation

Operator

At this time I would like to welcome everyone to the Cablevision first quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Bret Richter, Senior Vice President, Financial Strategy and Development. Sir, you may begin your conference.

Bret Richter

Thank you. Good morning and welcome to the Cablevision Systems Corporation's first quarter 2006 earnings conference call. Joining us this morning are members of the Cablevision executive team, including Jim Dolan, our President and CEO; Hank Ratner, Vice Chairman; Tom Rutledge, Chief Operating Officer; Mike Huseby, Chief Financial Officer; Josh Sapan, President and CEO Rainbow Media; John Bickham, President of Cable and Communications.

Following a discussion of the Company's first quarter 2006 results, we will open the call for questions. If you do not have a copy of today's earnings release, you may obtain one from our website at Cablevision.com. This call can also be accessed via our website.

Please take note of the following: this discussion of Cablevision's results and any discussion of the Company's 2006 outlook may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results, and involve risks and uncertainties that could cause actual results to differ.

Please refer to the Company's filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The Company disclaims any obligation to update the forward-looking statements that may be discussed during this call.

Let me point out that on page 6 of today's earnings release we provide consolidated operations data and a reconciliation of adjusted operating cash flow, or AOCF, to operating income.

I would now like to introduce Jim Dolan, President and CEO of Cablevision.

Jim Dolan

Good morning. I'm pleased to share with you today our results for the first quarter of 2006. Cablevision is off to an extremely strong start as we continue to experience the strong business momentum from 2005. Cablevision had its eighth consecutive quarter of basic video subscriber growth, as well as its largest quarterly RGU gain in the Company's history with the additions of nearly 450,000 new video, high-speed data and voice units.

For the first quarter, Cablevision's consolidated revenue grew more than 16% to $1.4 billion, and AOCF increased 12% to $396 million. Our cable television operations continue to be the most significant drivers of this growth.

Before we move on to telecommunications, let me touch upon a recent significant event for our Company and all of our shareholders. On April 7th, the Board of Directors approved a special cash dividend of $10 per share, payable to all shareholders of record on April 18th. The dividend was paid on April 24th. Going forward, we will continue to pursue operational excellence and business opportunities that unlock value for our shareholders.

Now I would like to turn the call over to our Chief Operating Officer, Tom Rutledge, who will discuss the results of our telecommunications segment.

Tom Rutledge

Thank you, Jim and good morning. Our cable television business continued to produce outstanding results in the first quarter of 2006. The Company's strong RGU growth and resulting growth in average revenue per subscriber contributed to cable television revenue growth of 17% and AOCF growth of 18% for the quarter, as compared to the prior-year period.

Our average monthly revenue per subscriber, or RPS, exceeded $104, an increase of $3.78 for the quarter and an increase of $13.06 or 14% as compared to the prior-year period. This represents our 12th consecutive quarter year-over-year double-digit percentage RPS growth. $3.78 quarterly increase was driven primarily by our record RGU growth, which as Jim said, included the addition of nearly 450,000 RGUs. We continue to see the positive effects of our product offers in our sales results and improving customer churn.

Cable television capital spending totaled $258 million for the quarter. Consumer premises equipment accounted for the majority of the capital expenditures, followed by scalable infrastructure and support capital. We continue to invest in infrastructure to improve our products and strengthen our competitive position.

The increase in scalable infrastructure expenditures for the quarter, as compared to the prior-year period, is primarily due to the investment relating to an increase in speed for the core Optimum Online service to 15 Mb and the introduction of the 30 Mb Optimum Online Boost premium service. Most of the anticipated expenditures related to these enhancements were incurred by March 31, 2006.

We have already rolled out Optimum Online Boost on Long Island and in Connecticut, as well as parts of Westchester, New York, and New Jersey. We are on track with our plans for full deployment across our entire service area by the end of next month.

Let me now touch briefly on the results and accomplishments of each of our services. As Jim noted, the first quarter marked our eighth consecutive quarter of basic subscriber gains as we added almost 39,000 video customers, a 1.3% increase from the fourth quarter of 2005. This is the Company's largest gain in basic video subscribers since 2000.

Our digital video service, iO, added more than 164,000 customers for the quarter. These net adds increased our digital penetration by 4.6 percentage points sequentially, resulting in an industry-leading 68.1% penetration of basic video subscribers.

In addition, as previously announced, we exceeded the 2 million digital subscriber milestone in January of this year. High-definition video subscribers continue to grow as well. At the end of the first quarter, we had more than 396,000 HD customers, up 22% from December and 125% from first quarter 2005. With the addition of the two new HD services in the first quarter of 2006, we now offer 20 HD services, the highest in the cable industry, at no additional cost to our digital cable customers.

At the end of March, we also announced the planned trial of our remote storage DVR service, which will allow customers to experience DVR functionality by storing recorded programming in dedicated space within Cablevision's head-in facilities and without replacing their existing digital set-top boxes. The trial will be conducted on Long Island during the second quarter this year, and we expect to follow the trial with a broader rollout later this year.

Optimum Online, our high-speed data service, experienced its most successful quarter ever with a net gain of more than 112,000 customers in the first three months of 2006. Our penetration of homes passed at the end of March was more than 40%, and now approximately 60% of our video customers are also Optimum Online customers.

Despite competitive offerings and discounted DSL offers, our high-speed data service continues to experience strong growth as Q1 2006 penetration increased by 7.8 points from Q1 2005 and 2.3 percentage points from Q4 2005. We believe that we can continue to grow these penetration rates as we roll out product enhancements such as Optimum Online Boost.

Our Optimum Voice service also realized its biggest quarterly subscriber gain since the service was launched in 2003. With the addition of nearly 134,000 subscribers, we have now passed the 865,000 customer mark. Nearly 50% of our high-speed data customers now take Optimum Voice as well. Optimum Voice penetration exceeded 19% at the end of March and has been growing at approximately 1% penetration growth per month.

Optimum Voice continues to be a principal driver of the success of our triple play offer. In fact, today more than half of new customers that sign up for video subscribe to the triple play.

Before we move on to Optimum Lightpath, I would like to point out that as of March 31st, we were approaching; and as of today Cablevision has reached the important milestone of becoming the first major cable company to achieve 70% digital penetration of video customers, 40% data customers to homes passed, and 20% Voice over IP customers to homes passed. We believe these results underscore the strength of our competitive position and they provide further evidence of the success Cablevision has had in marketing its suite of services.

Optimum Lightpath continues to market its Ethernet data services to medium and large-sized business customers who seek increased bandwidth capability and reliability at a lower cost. This commitment to providing advanced network services was rewarded at the end of April when Optimum Lightpath became the first and only commercial services division of a major North American cable provider to be certified as compliant with the carrier Ethernet services admissions set forth by the Metro Ethernet Forum, a global standards body.

In March 2006, Optimum Lightpath also received the New York State Public Service Commission commendation for excellent customer service for the eighth consecutive year. The award recognizes phone companies that consistently provide the highest levels of customer service to New York customers.

As compared to the prior-year period, Optimum Lightpath's first quarter revenue was up 13% to $54 million, and AOCF was relatively flat at $14 million. The increase in revenue is primarily attributable to revenue growth in Ethernet data services over Lightpath's fiber infrastructure, offset by a decline in traditional phone service usage. Revenue growth also reflects the fact that Lightpath's revenue also includes Optimum Voice call completion activity. Lightpath revenue, excluding Optimum Voice call activity, would have increased by 6.3%.

The AOCF results reflect revenue growth offset by increased quarterly expenses as compared to the prior-year period, including an increase in marketing spending relating to growth.

Looking ahead, we expect our solid performance to continue in 2006. Today we are revising upward our outlook for the 2006 annual metrics for cable television as follows: Basic video subscriber growth of 2.5% to 3%; RGU additions of 1.3 million to 1.5 million; and capital expenditures of approximately $700 million to $750 million.

In addition, we are confirming our outlook for the 2006 annual metrics for cable television as follows: total revenue and AOCF percentage growth rates in the mid-teens.

I would now like to turn the call over to Josh Sapan, who will discuss Rainbow's results.

Josh Sapan

Thank you, Tom. For the first quarter, revenue at our national programming networks -- AMC, IFC, and WE, Women's Entertainment -- increased 8% to $146 million, and AOCF for the quarter was $59 million, a decrease of 7% as compared to the prior year.

The quarterly increase in revenue includes a 17% increase in advertising revenue, driven by higher sell-out rates. In addition, revenue also benefited from a 4% increase in affiliate revenue compared to the prior-year period.

The AOCF decline stems primarily from planned increased contractual rights expense and marketing expenditures related to the premiere of new original programming, including the premiere of a series called Hustle on AMC and John Edwards Cross-Country on WE, Women's Entertainment. The increase in expense reflects our commitment to the strategy of investing the networks to develop new and original programming and provide unique content to drive ratings.

Our performance in first quarter 2006 was largely as anticipated, and looking ahead to full year 2006, we are confirming our expectation of revenue and AOCF percentage growth rates at AMC/IFC/WE in the high single-digit range.

Turning now to Rainbow's other programming businesses, which primarily include our Fox Sports Network regional sports networks, Fuse, our music service, News 12, IFC Entertainment, the VOOM HD networks, and our VOD services, Mag Rack and Sports School. For that group overall, first quarter net revenue declined 7% to $67 million, and the AOCF deficit increased from $24 million to $32 million.

The decline in net revenue was primarily driven by the closure of two Metro channels in the second quarter of 2005. This was offset by revenue growth in the regional sports and news networks and higher revenue at Fuse, which was driven by increased viewing subscribers and higher advertising revenue.

The increase in the AOCF deficit was primarily driven by the net revenue decline described above and higher expenses in the first quarter of 2006 associated with the launch of new regional news networks in late 2005.

I'd now like to turn it back over to Jim Dolan who will discuss the results for Madison Square Gardens.

Jim Dolan

Thank you, Josh. While we all wish they could have extended their playoff run, I would be remiss if I did not mention the Rangers and say how proud we are of their hard work and commitment for the season. They exceeded everyone's expectations and we look forward to building on their success next season.

Turning now to MSG's operating results, first quarter revenue increased 25% to $224 million compared to the first quarter of 2005. AOCF for the quarter rose to $7 million from $3 million in the prior-year period. These first-quarter results were primarily affected by an increase in revenue and expense relating to the impact of the 2005/2006 hockey season as compared to the NHL lockout in the prior year; higher network affiliate revenue for quarter one 2006 compared to quarter one 2005; MBA luxury tax expense in quarter one 2006 compared to no luxury tax in quarter one 2005; the loss of revenue and reduction in rights expense associated with the termination of the New York Mets carriage agreement. I would now like to turn the call over to Mike Huseby, who will briefly cover the Company's overall financial position.

Mike Huseby

Thank you, Jim. Before discussing the Company's overall financial position, I just wanted to take a moment to highlight some recent significant events that we've previously disclosed. On March 29th of this year, CSC Holdings, Inc. entered into an incremental term supplement to its credit agreement, providing for an additional $3.5 billion of commitments and loans.

CSC Holdings used $400 million of the proceeds to repay principal of the term loan A2 borrowings and also paid accrued interest under the credit agreement. CSC Holdings used just under $3 billion of the remaining proceeds to fund a special cash dividend of $10 per share, which was declared on April 7th, and as Jim mentioned was paid on April 24th.

For tax purposes, we expect the special cash dividend to qualify as a return of capital to shareholders to the extent of their individual basis in Cablevision's common stock. Because this tax treatment is based upon our expectation of a deficit incurred in accumulated earnings and profits through the end of 2006, it is subject to change. Shareholders are encouraged to consult with their own tax and financial advisors regarding the implications of the special dividend on their individual tax positions.

Turning to overall financial performance for the first quarter, while the first quarter operating performance translated into strong revenue and AOCF growth, it also resulted in a free cash flow deficit of $106 million. As compared the prior year period, this deficit is primarily attributable to an increase in telecommunications capital spending and the timing of certain working capital uses, primarily those related to the payment of certain programming and payroll-related expenses and the timing of the amortization of deferred revenue related to certain MSG concerts.

The capital spending increase relates primarily to RGU growth, and as discussed earlier by Tom, also reflects the execution of our planned infrastructure investments related to the increase of the speed of the core Optimum Online service to 15 Mb, and also the introduction of the 30 Mb Optimum Online Boost premium service. Again, most of the anticipated expenditures related to these enhancements were incurred by March 31, 2006.

Going forward, the level of consolidated free cash flow will continue to depend on a number of variables in addition to our operating performance, including the timing of certain working capital items, the level and timing of capital spending, our leverage and interest payments going forward, and the impact of any future transactions.

Turning to leverage and liquidity, the Company's consolidated cash position at the end of the first quarter was approximately $3.5 billion, including approximately $3 billion of cash that was held in anticipation of special declaration and payment which was made on April 24th of the special cash dividend.

As of March 31, the Company's consolidated leverage ratio net of collateralized indebtedness and cash on hand is 6.8X.CSC Holdings restricted group leverage ratio was 6.1X. These ratios both exclude the $3 billion of cash reflected on our balance sheet at March 31st. Currently, Rainbow National Services has no borrowings under its $350 million revolving credit facility, and the ratio under its bond leverage test as of March 31 was 5.1X.

Operator, we would now like to open the call for questions.

Question-and-Answer Session

Operator

Our first question comes from Douglas Shapiro, Banc of America Securities.

Douglas Shapiro - Banc of America Securities

Thanks. You are raising your RGU guide by between 250,000 and 300,000. Obviously this was a very strong quarter, but that reflects higher expectations for the remainder of the year too. Tom, could you talk about what you are seeing now that's so different than when you provided the full year guidance in February?

The second thing, I was just wondering if you could just specify the drivers of the margin expansion, whether that's lower churn or mix shift or what is going on there? Thank you.

Tom Rutledge

Well, the difference between now and February is our results for the first quarter, and obviously if you extrapolate those out for the full year, they are significantly greater than the guidance we gave in February. So we did better than we even thought we would do.

We have looked at our performance and decided to raise our guidance early in the year to do that, but the rate of growth that we had in the first quarter was good. It was a continuation of the kinds of trends that we saw all last year of the steadily increasing response to our products and offers throughout the marketplace. We have enough experience under our belts with our product strategy and offer strategy to make an increase in our forecasts.

With regard to margin -- and I am not quite sure I understood your question -- but the business continues to be successful in terms of bringing in significant increases in revenue and bringing that revenue to the bottom line without a margin deterioration, even though we are growing very rapidly.

That is for a variety of reasons. One is churn is steadily going down, as you can see in our reported numbers. Our quarter-over-quarter year-over-year churn rates are declining in all product categories. Our triple play customers churn at a significantly lower rate than video customers over the same period of time. The triple play churn is still 14% less than non triple play churn. So that is translating into lower transaction costs and allowing us to bring the revenue to the bottom line.

Douglas Shapiro - Banc of America Securities

That's great, thank you.

Operator

Our next question comes from Craig Moffett, Sanford Bernstein.

Craig Moffett - Sanford Bernstein

Good morning. Two questions, Tom, if I could. The first, you mentioned on the last call that you were starting to do so some switch broadcast video in Paterson. I'm wondering if you can update us on switch broadcast in the context of the overall discussion about capacity and the plant and how you're thinking about capacity management going forward.

Then secondly, can you update us a little bit on your business services initiative? I understand there is some shifting going on between what used to be Lightpath and is now part of the telecom group. If you could just illuminate that for us a bit and talk about the trends you're seeing, that would be helpful.

Tom Rutledge

Sure, Craig. With regard to switch broadcast, yes, we did do an experiment in Paterson. We are now ready to roll that out in terms of a product launch over the next several months, and through the remainder of the year we will be providing a 60-channel switch broadcast service, which will be primarily comprised of foreign language programming.

We currently sell these products in New York City where we have an 860 MHz plant as opposed to 750 MHz plant, and different demographics in New York City than we have throughout our whole service area.

So we are going to launch these products throughout our service area through the remainder of the year. That will offer 30 channels of Spanish language programming, for instance, for $4.95 a month if you are an existing expanded basic subscriber and $14.95 a month for adding it on to basic service. This is the price structure that we currently have in New York City.

The switch broadcast capability allows you to reuse spectrum in an efficient way, particularly for products that are not highly viewed. If you get foreign language programming, while it is highly valuable to consumers, it has limited appeal to a mass audience. As a result, you can add a tremendous amount of value to very specific consumers using switch video architecture which allows you to essentially reuse the same spectrum over and over and get an efficiency or a compression ratio that essentially allows you to have an unlimited channel capacity on your cable system.

We have the ability to offer every service on earth simultaneously to all of our customers using switch video, and the reason you use switch video for lower-viewed products is because of the way the algorithm works and how you get your maximum compression rate.

With regard to business services, we continue to roll out business class services. We launched it in October of last year. We think that the rollout of business class services will be very similar to our residential Optimum Voice service. We initially took that through a trial period where we learned how to market it, learned all of the provisioning systems. We have done the same with business class services for small-business on our HFC -- that means the cable architecture -- and we are now ready to step up our marketing.

We think with our pricing structure, which is about half of what is currently being charged by Verizon in the business marketplace, that we will be able to provide business class services at residential rates and we think that there will be significant market acceptance of that product.

We think too that as a result of having reached 20% of homes passed and almost 30% of our customers now are voice customers, that we have the credibility to take our voice product. Everyone knows it works well, that it's a great product, it's great value, and to move that into the business class arena. Business class customers say, why can't I get the products I get at home, which work better than my business class services that I'm currently getting from my telephone company in my business? We think that we can provide that and be successful.

The mix between Lightpath and business class services that we will offer on our cable network is not affecting Lightpath substantially at the moment, except that the Optimum Voice revenues are running through Lightpath. But Lightpath's current strategy is for larger businesses, and what we have done with Lightpath is we have revamped our product mix and gone to an all Ethernet strategy. We are actually doing quite well with our revenue growth in that area, and we are allowing what are called Type II services and other traditional circuit switch-based services to attrition out of the revenue mix as we move to a whole new product mix, which is really the very highest end of Ethernet IP voice services for large businesses.

So really at this moment, there are two different strategies in the small business marketplace. The cable company has offered a product that is very inexpensive and valuable, though, to small business. And in the Lightpath arena, we are offering state-of-the-art IP services with Ethernet products to medium and large-sized businesses.

Craig Moffett - Sanford Bernstein

Thank you.

Operator

Our next question comes from Vijay Jayant, Lehman Brothers.

James Radcliffe - Lehman Brothers

It is James Radcliffe for Vijay. I had a couple questions. You mentioned that higher RGU growth drove higher marketing expenses in the cable business in the quarter. Can you give us an idea of trends in marketing expense per net or gross RGU add? Is the triple play affecting that at all?

Secondly, for the growth and subscribers it is clearly faster than household formation in your area. Where are these subs coming from? Are these people who have not paid TV in the past, or are you mainly taking from satellite? Thank you.

Mike Huseby

I don't think I said that about marketing expenses in the cable business. Our margins in the cable business have been fairly constant as we have been able to achieve this growth. In terms of market share, though, it is true that we are growing our video penetration greater than household formation, and that is coming at the expense of satellite operators.

James Radcliffe - Lehman Brothers

All right, thank you.

Operator

Our next question comes from Aryeh Bourkoff.

Aryeh Bourkoff - UBS

You raised the RGU guidance by about 25%, but didn't raise the revenue or EBITDA guidance. I know that you have a mid teens number, but is there anything to look into in terms of whether or not you can actually move that revenue and EBITDA number up as you move the RGUs up throughout the year? Especially given the fact that you're already above that kind of mid teens level.

Secondly just wanted to get an update from you, Tom, on the rollover of your triple play customers. What is the ARPU as they come in versus what's the ARPU after the first year? Is that trending to the same kind of percentage uptake?

Lastly I was wondering if, Jim, maybe you could us a comment on your view of consolidation in the sector. Obviously, Time Warner Cable going public likely later this year. Your operating performance has been excellent, and could you spread that across different regions? Thanks.

Mike Huseby

I'll take the first one. It's Mike Huseby. In terms of the RGU and guidance being raised both with revenue and AOCF, as Tom said, it's early in the year. Also the range that we've provided for guidance, mid-teens growth, is a fairly broad range. So we would like to get another quarter under our belt before we even think about raising that guidance. That is a very, very strong performance where it is right now.

Tom Rutledge

With regard to RPS -- ARPU I think was what you said -- our revenue for a triple play customer has been about $115. It is actually a little higher than that now. It's about $117 when they come in, all in. And after a year they step up to a little over $140, a little over $140 after the first step-up, and they are staying on at that rate and churning at a lower rate than customers who didn't buy the triple play.

Jim Dolan

I'm not sure how to answer your question. Maybe you would like to restate it.

Aryeh Bourkoff - UBS

Well, obviously in the past the Company has talked about potentially expanding outside of New York region. Do you think that there is an opportunity to be involved with consolidating activity in the sector?

Jim Dolan

I see what you're saying. Well, I think that what Tom has accomplished with telecommunications, certainly you could import that to other areas. I think that is absolutely true. And if we see a strategic opportunity to do that either through consolidation or through acquisitions, we will study it. I think it is a possibility, but I think that is the best I could say about it; it's a possibility.

Aryeh Bourkoff - UBS

Thanks.

Operator

Our next question comes from Doug Mitchelson, Deutsche Bank Securities.

Doug Mitchelson - Deutsche Bank

Two quick ones for Tom and then one for Jim. Tom, with regard to the international channels being launched this fall you talked about, how many customers do you think the DBS operators have on international packages in your market? I know that those have been pretty profitable for them.

Then also Verizon claimed that in Massapequa Park it reached 6.5% video penetration in only three months, and I know they also said in Temple Terrace they reached 16%, which Bob Myron disputed as only being 2% to 3%. So is that Massapequa Park statistic accurate, and what is your overall concern level on FiOS at this time?

Lastly for Jim, we often talk when we're talking about Cablevision about the hidden value embedded in MSG in the sports team. There's been a lot in the press around Madison Square Garden and some deals that you might do there on the real estate side. What is the strategy there? If you'd just give us any kind of sense of what's happening there, that would be helpful.

Tom Rutledge

Doug, with regards to the number of satellite international customers in our service area, I actually don't know the answer to that. So I'll have to get back to you on that. With regard to Massapequa Park and Verizon's stated penetration, you know, we don't believe that number or understand how anyone could argue that they have that number. We did an analysis in April -- and you've got to understand that they are focusing their entire marketing effort on this little community of 8,200 homes, and the other communities where they have gotten franchises and where they have built FiOS -- there is hardly any activity whatsoever. So it looks like they are trying to market in very concentrated areas, so they can get a press release and indicate that they are being successful.

But in Massapequa Park over the first quarter we lost approximately 200 subscribers out of 8,200 passings, and of those 200 we were able to get 28 of them to come back to us. So the actual penetration effect that they have had is a little less than 2%, and that is consistent with what Bob Myron told you.

With regard to FiOS in general, they have accessed about 600,000 passings in our service area, and they have, we think, less than [10]% penetration of data. I think there is a big question about what they mean by a customer.

When we upgraded our cable system to HFC architecture and we moved our drops from the old architecture to the new, we did not count those as new customers. So taking a DSL customer and a voice customer and moving them over to FiOS, which is possible, I guess, I would not count as a customer. I'm not sure how they are counting their customers, but I think they have been very vague on how they define a customer.

The other thing to consider is that there is 3.6 million passings, according to their last call, that they have activated with FiOS, and I think on a national basis they have between 3,000 and 6,000 video customers. So they have between 1% and 2% penetration across their activated footprint, and they are trying to find very small areas where they can argue that they have got some traction going. But even in Massapequa Park, we think their number is false.

Doug Mitchelson - Deutsche Bank

Then Jim, on MSG?

Jim Dolan

Hank Ratner, our Vice Chairman, has been in charge of our real estate strategy, so I'm going to let him answer that one.

Hank Ratner

We have a wonderful renovation project that we have been working on for some time and our plans are most finalized. We are still pursuing that renovation plan. At the same time, we have been fortunate enough with the opportunity that may materialize that relates to building a new arena inside the Farley Post Office.

The Farley Post Office alternative is really one based in redoing transportation in New York City and an opportunity to redevelop that area in its entirety, and it is somewhat complicated but very exciting.

So we look at it at this point that there will either be a wonderful state-of-the-art renovation that will take place or there will be a move over to Farley. We don't know which one it will be at this point, but either one will be a wonderful thing for the City of New York and for the Company itself.

Doug Mitchelson - Deutsche Bank

Thank you.

Operator

Our next question comes from Jeff Wlodarczak, Wachovia Securities.

Jeff Wlodarczak - Wachovia Securities

I actually had two questions for Tom. Phone net additions have accelerated for nine straight quarters. Is it reasonable to assume you're going to continue to have that sort of quarterly acceleration through the balance of '06? Maybe it's a little early, but on Q1 net new data subs, is 100,000 run rate reasonable to think about? Last but not least, Tom, you mentioned that you may roll out network DVR across your footprint in '06. Is that captured in your capital expenditure forecast?

Tom Rutledge

Well, we don't break out the individual forecasts. We have been saying that voice has been growing about 1% of penetration a month, but we have not made an individual forecast for the rest of the year with regard to RGUs, and I am not going to do it on the call. All of the capital projects that we have planned for this year are in our guidance, including network DVR.

Jeff Wlodarczak - Wachovia Securities

Thanks.

Operator

Our next question comes from Jessica Reif Cohen, Merrill Lynch.

Jessica Reif Cohen - Merrill Lynch

Actually, I had a couple questions, but one on the network DVR. Tom, could you run through the network DVR costs and compare that to what the cost savings are relative to putting DVRs in homes?

Second, I hate to nit-pick with such great numbers, but I'm just wondering what's going on in advertising since it was down a bit, if you could talk a little bit about second quarter trends.

Then finally, could you break out the VOOM HD revenue and the operating loss or maybe walk through the VOOM cost?

Tom Rutledge

With regard to the network DVR, I don't have specific economics to give you except to say this: that storage per gigabit bought in large quantities will be less expensive than when you buy it in smaller hard drives. The other beauty of the network DVR is that you don't have to do a physical transaction. It is an electronic upgrade to an existing set-top box. So there is no truck roll; there is no appointment necessary. There is no labor associated with the upgrade.

So the transaction costs of network DVR are more efficient. They're virtually nil. It is an electronic upgrade. The actual cost of the storage will be less on a per unit basis. So it is not only cheaper, but it is actually much more consumer-friendly because the customer does not actually have to have an appointment or a transaction of any kind.

With regard to ad sales, they were down first quarter over first quarter. The trend is that our actual local sales are up, but our regional interconnect sales are down. Most of that is as a result of the auto industry and their change in ad sales purchasing, but we are relatively confident with regard to our plan anyway for the rest of the year.

Josh Sapan

As regards VOOM, Jessica, we do not break out the segment economics. I will say that EchoStar is deploying VOOM as part of their HD offering now. They moved to MPEG-4 over the past couple of months, and so we are experiencing that with them and we'll have results over the next few months.

Operator

Our next question comes from Bryan Kraft, CS.

Bryan Kraft - Credit Suisse

Can you talk about what percentage of your new broadband customers are coming from DSL versus dial-up versus, say, move or no Internet access at all? How you have seen those percentages of that mix change over the last year?

Tom Rutledge

I don't think I can answer your question the way you've asked it, but I can say that we think that about 70% of all new connections to the Internet in our service area, we are winning. So we are taking about 70% market share of net adds. But I don't know the breakout exactly where they are coming from.

Bryan Kraft - Credit Suisse

Okay, thanks.

Operator

Our next question comes from Richard Greenfield, Pali Research.

Richard Greenfield - Pali Research

Hi, a couple of questions. One for Tom, when we think about Optimum Online and how you raised the speeds from 10/1 to 32 or the potential for 32 with the Boost product, is that the way to think about the CapEx involved, the $70 million you spent in the quarter? Is that the type of CapEx to drive a 20 meg increase in speed, or have you actually built for greater than you are currently offering with the Boost product, just in terms of the implications for the future as you continue to raise speeds above your peers?

Two, in terms of VOOM, a question for Josh. Thoughts on whether you still believe in the strategy of offering as many HD networks as you are or condensing the VOOM HD offering to two or three, maybe trying to leverage all of your programming to two or three really high rating channels relative to the breadth of the offering that you currently have. Thanks.

Tom Rutledge

I'll answer your first question, Richard. With regard to our capital, we spent about $15 a passing, of homes passed, to make our plant capable of increased speeds in high-speed data. We did two things. We upped the speed of our existing network, and we went to a DOCSIS platform that allows for expansion to DOCSIS 2.0 and 3.0. We created another DOCSIS network inside of our existing network that we are using for Boost.

I was in our labs the other day, yesterday actually, looking at various components of that investment. In our lab we actually have 190 Mb service running on this same technology. So it is the core infrastructure necessary for continued expansion in speeds, and it is a one-time investment.

I think the most interesting part of that investment is compared to FiOS, which is costing about $2,000 a passing, our $15 a passing investment looks pretty attractive. That is because it fits on the existing HFC architecture that we built throughout our service area. This upgrade along with switch video indicates the flexibility that that core infrastructure investment gives us for very small increment capital expenditures, you get enormous performance out of that plant.

Bret Richter

Toni, we're going to take one more question.

Tom Rutledge

Josh has his HD.

Josh Sapan

EchoStar is currently carrying 15 VOOM channels during the early stages of deployment with MPEG-4. They are excited about it, and as you know, we have disclosed they own 20% of the business. We will continue to monitor how we do as people buy many, many more HD sets.

Bret Richter

Sorry about that; last question.

Operator

Our final question comes from Kathy Styponias, Prudential.

Kathy Styponias - Prudential

I wanted to ask a follow-up question on the network DVR. Tom, could you tell us from the customer standpoint, I know it's just a trial, but how many hours of time are they going to be allotted that they can store on your servers? Is this a product that is going to be priced the same as a regular DVR? Is there any latency issues that you are currently trying to work out, because assuming networks like VOD -- or at least like my VOD service, you've got a couple of seconds before you actually get the programming to pop up as opposed to the TiVo, which is pretty immediate? Thanks.

Tom Rutledge

With regard to how long you can store product, the test is an 80 GB service and it depends on whether you're using HD technology or standard definition technology on how many hours that is of programming. The basic notion is that the network DVR will have the same storage capacity as a standard DVR, and the purpose of the test is to make sure that all the functionality for consumers, including latency, are within acceptable limits and are perceived by the customer to be a high-quality product. The test is for us to learn how to make the plant work in such a way.

The pricing option is to price it the same since it is the exact same product, but because costs are lower it gives us an opportunity to have lower costs and the same kind of cash flows. So lower prices for consumers is the likelihood.

Kathy Styponias - Prudential

Can I ask a quick follow-up if I may? Do you see any potential implications from the verdict that came out of the TiVo EchoStar case?

Tom Rutledge

I don't know. I'm not familiar with the case, so no, I don't.

Kathy Styponias - Prudential

Thank you.

Jim Dolan

We'd like to thank you all for joining us this morning. The conference call will be available on Cablevision's website and on StreetEvents.com through May 16th.

Operator

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.

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Source: Cablevision Systems Corporation Q1 2006 Earnings Conference Call Transcript (CVC)
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