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Charter Communications, Inc. (NASDAQ:CHTR)

February 26, 2013 11:45 am ET

Executives

Christopher L. Winfrey - Chief Financial Officer and Executive Vice President

Thomas M. Rutledge - Chief Executive Officer, President and Director

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

All right. Good morning. We on? Okay. We're going to get started. Good morning, everybody. My name is Ben Swinburne, Morgan Stanley's Media Analyst. I'll get through my legal obligation note, important disclosure, including my personal holdings disclosures and Morgan Stanley disclosures all appear in a handout available in registration area and on the Morgan Stanley public website. We're thrilled to have with us this morning from Charter Communications, Chris Winfrey, who's been CFO since November 2010. Prior to that, Chris was over in Europe, at Unitymedia in Germany, and also at Cablecom in Switzerland. Chris, thanks for joining us again today.

Christopher L. Winfrey

A pleasure, as always.

Question-and-Answer Session

Benjamin Swinburne - Morgan Stanley, Research Division

So let's get started. You've reported earnings last week, last Friday. Obviously, the market reacted very well to the results and then the call. Can you give us sort of the main takeaways that you'd like us to get from the earnings outlook from here and sort of what are the big opportunities you guys see in front of you in 2013?

Christopher L. Winfrey

Well, look, I think the Q4 earnings showed that Charter is at an early stage, still, of the turnaround that's being put in place. Some of the positive points where we can see that impact already coming through are our four-fold increase in our customer relationship acquisition in terms of net adds on a year-over-year basis. So that was positive. We also saw an improvement across our video subscriber base, a significant improvement in terms of video net losses. I think the more important point there really is when you take a look at the full year for 2012, we did still have a 155,000 video losses inside of 2012, but it was a big improvement on 2011. But more fundamental is inside that 155,000, only 12,000 of those were expanded basic video losses, which means the more digital, higher quality product customer set really has started to stabilize and we've started to see that come through. So I think those are some of the early signs that we saw. Another big one is we introduced our new pricing and packaging in late June, so it's still relatively early in terms of how that's saturating the market, and the way that we're learning to sell it. But already 30% of our customer base at the end of 2012 was inside that new pricing and packaging, which means that our customer base is increasingly sitting in a very competitive product set which positions us well in the future in terms of lowering the cost to service those customers and reducing the likelihood that they would turn because of the more competitive product that they have in the household. So those are kind of the big operating things that I think we can start to see early stages of the development. On the financial side, we did grow revenue, and it was accelerated at the front end Q4 relative to Q3 as well as on the year-over-year basis. So that was positive despite some of the promotions that we've been putting in place and removing some install fees and one-time charges. So we're pleased with that as well. And then on the EBITDA growth, the fact that we had EBITDA growth at a point in time where we were making some dramatic change inside the business, retooling virtually all of our sales channels, changing the recording lines and the responsibilities, and who's accountable for what inside the business, introducing new product pricing and packaging all at the same time. And I think it was comforting for us to see that we're actually able to grow EBITDA in that amount of change taking place. So we were pleased. It's early on, but we are pleased with the results from Q4 and what it bodes for us going forward.

Benjamin Swinburne - Morgan Stanley, Research Division

One of the things on the call you talked about was the fact that you're still ramping the organization towards this new selling tactics, and you gave a little bit of color around Q1 trends, around selling -- bundled selling and stuff. Can you sort of talk about what -- as we move through Q4 into Q1, what were the changes still going on and how that's playing out here in January?

Christopher L. Winfrey

If you look back to Q3, we effectively gutted a large portion of our sales channels. And we needed to rebuild that from scratch and we're still doing that. So some of what's going on is continued hiring and training and making sure that you have the right set of tactics and customers going out to the market and for the strategies to saturate into our own people in terms of how we're going to market and selling both in the call centers as well as direct sales, so that's all taking place. And we're not at our full stride. Tom mentioned that on the call as well, we're not at full stride yet, but we're getting better day after day.

Benjamin Swinburne - Morgan Stanley, Research Division

One of the things that always comes up with investors on the stock is sort of the inflection point -- the anticipation and the inflection point on revenue. You did have a good Q4 revenue results already, but I know everyone's looking for more as we move through '13. Can you talk a little bit about the timing as you bring more customers onto the new packaging in home and pricing structure and also the roll-off of promotions from prior periods and how that sort of plays out through '13?

Christopher L. Winfrey

Sure. Look, obviously, selling volume net gains is a big metric. I think it's actually deeper than that because when you take a look at customers, it's not just the net gains, it's the ARPU that we're getting from those customers, it's the amount of product we're putting into those homes so that they are in a more competitive situation relative to our competitors, and what that does for us in terms of churn. So that's a big factor and it may not always come through the results in just a simple net gain number, it's rather binary. And so I think the quality of the type of product that we're putting into homes matters and you can see that flowing from the triple-play penetration. From a rate standpoint, we've been able to maintain the $106 of ARPU despite the heavy amount of promotional activity to get people into a more bundled offering, so we're pleased with that. We will be taking a small rate increase, 2.3% across the 5 million customer base, that'll go into effect effectively late Q1, early Q2. And so we should see some benefit from that. The step-up that you had mentioned is really when you get into Q3 -- on Q3 when we first rolled out the new pricing and packaging in Q3 2012, and the ability to move some of those early customers who came into the new pricing and packaging into a year 2 rate, which we would look to start seeing that take place inside of Q3 this year.

Benjamin Swinburne - Morgan Stanley, Research Division

Right. One of the things that we were speaking about on the ARPU front is you did make a lot of changes that actually sort of self-inflicted pain in Q3 and Q4, on installs, you mentioned some other fees on voice. Why is the ARPU so strong despite all that? Is it upselling that you're doing and additional outlets [indiscernible]?

Christopher L. Winfrey

Well, you're right, it's not only the ARPU, which goes a little bit to my earlier point. So ARPU has been able to be stable, that's a positive, I'll come back to that as to why. But if you look at the residential revenue growth, so excluding commercial, excluding advertising and excluding other revenues, it actually doubled on -- not so dissimilar PSU growth. And so what we're seeing is the quality of what's put in place. And that answers your question. So we're selling more product and offsetting some of that one-time impact of lower install fees and one-time charges. We're actually putting more product into the home. We're putting more PSUs into the home and we're putting more digital boxes and more premium services into the home. All of which is not only good for revenue, obviously, but what I'm really saying is that we have a much more competitive product increasingly inside those homes. And again, 30% of our customer base is now inside the new pricing and packaging.

Benjamin Swinburne - Morgan Stanley, Research Division

The next thing I wanted to ask you about also sort of coming out of the call, was the deal you did this year. You're in the process in, with Bresnan. And I think that what maybe surprised some folks is how you and Tom talked about what that asset is doing today and what that could mean for Charter going forward since it's a lot of same strategy, if not the same strategy, and a lot of the same people. Can you talk a little bit about that transaction, why it was attractive? And how we should think about that business versus Charter? I mean, it's a much bigger business Charter than Bresnan, but it's interesting.

Christopher L. Winfrey

It is. I do think it's an interesting comparison, not only to think about it conceptually, but to see the plan in action, so to speak. It also means that given its history, it is an attractive acquisition for us because it is implementing the same strategy -- it has implemented the same strategy that we're only implementing in Charter today. It's effectively been acquired and integrated and run by a similar group of people. So the risk, I think, is fairly low in terms of how it fits into Charter. Even Charter markets, very similar to Charter markets that we have today. They have similarly low competition, in fact Bresnan has virtually no high-speed real competition at what I would call the traditional broadband speeds. All of which makes it attractive. And we were able to acquire a business that is now growing at a double-digit growth rate from what we believe is under 8x. And so I think it was a good transaction for everybody all around. I don't know if that answers it.

Benjamin Swinburne - Morgan Stanley, Research Division

Yes. Is there anything that...

Christopher L. Winfrey

The correlation that you had asked. It's an...

Benjamin Swinburne - Morgan Stanley, Research Division

Should we plug in 9% revenue growth?

Christopher L. Winfrey

It's an interesting data point. It's a very interesting data point, and I think there's a lot of relevance to it. But it is not a one-for-one comparison. And the reason is not a one-for-one comparison, it's a twofold. The fact is that there -- Charter's a much larger operation. We have 17,000 employees. It's a large ship, it's hard work, and getting everybody to move in the right direction, we're at the early stages of that and we're in more geographies, which makes it even that much more challenging. So that's a big distinction. I think the other one, frankly, is that Bresnan had not gone through a prolonged period of financial distress where decisions were forced to be taken to manage towards covenants as opposed to always doing the right thing from an operating perspective. Bresnan was always a -- or Optimum West as it is now. It was a well managed business. It had, when Tom and the team first got in there, increased the amount of HD channels, put in the new pricing and packaging, upped the internet speed, rolled out the DOCSIS 3.0. A lot of the same things that we're doing right now at Charter. So there's a ton of similarities in that respect. I think there's the size of Charter, it's different. And I think there's the history of those networks and how it came together, which we both argues that we have a similar objective and goal. The question is how long does it take to get there?

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. I don't know if you want to add any specificity to that last point based on, relative to what you said on the earnings call.

Christopher L. Winfrey

Nothing in addition.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. Nothing in addition, got it. One more sort of big picture question, I guess a little more on the detail side. One of the things we've heard a lot coming out of earnings has been programming costs are painful and you guys are -- seem to be in a different position, we'll talk a little about that. Or, maybe less painful. And then on the CapEx where we're seeing capital intensity rise, it was relative to expectations across the sector, and this seems to be somewhat global, not just U.S. And we just had AT&T present the floor, this presentation downstairs. And I wonder about the scale factor in this industry, particularly with U.S. cable business, Charter is sort of a mid-sized cable company. Do you feel like you have a lack of scale issue with either your capital intensity going forward or your programming costs [indiscernible], rate cards you pay and TV Everywhere and sort of cloud-based UI, all the things we hear a lot about from the larger cable companies, as Charter goes forward?

Christopher L. Winfrey

Look, from a capital intensity, I don't believe so, nothing material and nothing fundamental. There is no reason from a Charter perspective that once we get through a growth phase, that we can't bid at similar level of capital expenditures and percentage of revenue. I do think it makes a difference in programming. And Charter has, given its history, may have slightly less rate increase over time as compared to what we've heard from some other people. I think that's more a function of how high it already is today, and some of that has to do with Charter's history and some of that has to do with Charter's size. So unfortunately today, size is a determinant in the both programming cost and so far that hasn't changed. Some of the other comments I'd make around both of those topics in the programming and capital expenditure, capital -- people run from capital expenditure. And I'm not sure if that's really the right answer. I think if it's spent in the right way and if it's spent for positive ROI projects, and if it's spent for growth, people should actually run towards capital expenditure. It means that there is a positive ROI place to invest inside the business. And if we're growing faster, we should be spending more on capital expenditure and I think we should all be embracing that. And similar for other operators to the extent that it reflects a better growth profile, I wouldn't necessarily take that as a negative. And programming is, as I mentioned, is a challenge for everybody. I think it's less of a challenge to some respect from a competitive standpoint for cable operators because we do have a bundled offering, we have a triple-play offering and so we can have very large margins inside some of these other businesses that offset -- you can have a video and margin that's declining, but it's kind of irrelevant because you're selling a bundled service. And we can still, particularly as Charter, be in an environment where you position yourself for margin growth, despite one of your products having a substantially declining gross margin.

Benjamin Swinburne - Morgan Stanley, Research Division

Since you mentioned the programming cost outlook for Charter, what is it about the history of Charter that has led you to this place, where you now believe you're going to see less growth than your peers?

Christopher L. Winfrey

Look, I wasn't here. So I'd be careful to go into too much detail. But I can only theorize, and that is if you are in an environment where the company is in a position of financial hardship for a prolonged period of time, which Charter was, your leverage in negotiations is actually quite low. And Charter's in a different position today and it can take a more market-based approach. And I think that puts us in a different position. So I don't think it's any reflection on what the company was doing at the time other than trying to survive and do the right thing by their shareholders at the time. But those are the past.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Let's talk a little bit of what's happening at the customer level. Tom likes to say Charter was an abused asset over time.

Christopher L. Winfrey

I've heard that before.

Benjamin Swinburne - Morgan Stanley, Research Division

I'm sure, a favorite phrase of yours.

Christopher L. Winfrey

And look, it's part of what we're just talking about, it relates that. And it's not abuse for abuse sake, with somebody wanting to be abusive or somebody being negligent. And in some respect, the company was forced to do its fiduciary responsibility. And usually, that's a 1- or 2-year period and it's not usually such a long period of time that the company was facing what ultimately turned out to be the resolution for Charter.

Benjamin Swinburne - Morgan Stanley, Research Division

I was going to ask about what's happening at the customer level in terms of growth connects and churn and sort of your net promoter scores and things that you've made a lot of changes into. Despite the big move in the stock after the results, there certainly have been people asking about the, some numbers in the fourth quarter being less than some people expected. So can you take us through what's happening on the ground at the customer level in the fourth quarter? And as we move into '13, help us think about the impact of your changes?

Christopher L. Winfrey

The subtle point that you're making is that net adds may not tell you everything that's happening inside the business, in my sense. And I think that's right. If you look at Q4, video improvement is strong and it's good. We had lower amount of -- slightly lower amount of Internet net adds inside of the fourth quarter in 2012 as compared to fourth quarter 2011, but I would argue that the quality of the customers that we acquired was significantly higher. The ARPU was higher, we've already made some note to that, despite the promotional prices. And so I would look to the quality of the customer base that we're acquiring. We were acquiring increasingly triple-play customers, bundled customers, as opposed to net gains that were coming in at a 1999 rate, which was certainly the case inside of Q4 2011. We also publicly said on the call that we've seen improved levels of churn and bad debt, the non-pay rates, and that is by design. That is by putting more product into a customer's home, making sure that we're sitting in a competitive position as we go to market. And all of that's taking place. And part of the reason that we're pleased with the results inside Q4 is we're under the hood and we're taking a look and we like what we see.

Benjamin Swinburne - Morgan Stanley, Research Division

In the business, despite your best efforts, you're trying to tell me not to try to model what you're doing.

Christopher L. Winfrey

You should. You should just use the right metric.

Benjamin Swinburne - Morgan Stanley, Research Division

Right, exactly. We do -- and I think the consensus view is it would be sort of RGU subtrends followed by sort of margin pressure, then ARPU growth then EBITDA growth. Is there more nuance to what you guys are focused on delivering over the next kind of 4 or 6 quarters than that trajectory? Like you mentioned discipline on ARPU and your margin, it actually was solid in the fourth quarter. I mean there was just more of a balanced than what [indiscernible].

Christopher L. Winfrey

We did with some of those low-priced promotional offers that we've done in 2011, as they started to roll, that had 2 impacts. Those that stayed had a higher rate and when you had rate discipline, some of the other ones were no longer with Charter and hopefully they'll be back. So the sequence that you outlined in terms of net gain growth translating into revenue, translating into EBITDA and ultimately into a higher amount of free cash flow, that's the right sequence there, if we're thinking about it. But net gain is not from just net gain's sake. And we've introduced the concept of ARPU and how that's relevant, not only the ARPU that you have today but where that ARPU is going to trend. And then similar -- so that's the nuance on how you get from just net gains to revenue. But then also when you think about the EBITDA, it's not just the revenue side of the equation but the quality of the customer base will drive the operating cost that you have for that customer base. The more product they have inside the home, the less transactions they're going to drive. The less transactions they drive, the less likely they are to churn. And all of which has a significant operating margin impact from an EBITDA standpoint as well as, ultimately, a larger free cash flow impact and the utilization and return on the capital that you're deploying into these homes. So we can be in a position which is what we're doing, where we are spending a lot more by putting product to acquire the customers and put product into the home. So we're spending more upfront at the time of acquisition for a similar amount of ARPU which is designed to increase and have a longer customer life and have a lower operating cost to service that customer over time. And even though you're spending more upfront to acquire the customer, being in a position to have a significantly better net present value of that relationship and accumulative cash flow over the customer life.

Benjamin Swinburne - Morgan Stanley, Research Division

And when you and the team deliberated, putting in price increases this year, given all the things that are changing in the business, what led you to the price hike in the beginning of Q2, end of Q1? And how do you feel about that in addition to the promotional roll-offs we're expecting to see in the back half?

Christopher L. Winfrey

Well, we didn't take a peanut butter spread. So we -- for purpose of simplification, I articulated it as the average 2.3% over the 5 million customer base. Not every customer will receive a price increase. Where they do, there's a number -- I'm sorry, I won't go into all the detail. They've been fairly targeted. They've been strategic in areas where we think it is appropriate to take a price increase. There's a logic behind those price increases.

Benjamin Swinburne - Morgan Stanley, Research Division

Promotional roll-offs been a big topic also with earnings good. And you've been dealing with some of that from the old deals, from the old offers last year. How is that going internally as you manage that process? And where do you -- why are you confident that when you have this, what seems to be a fairly significant promotional loss incoming the second half of the year, you're not going to have the same issues, other offers to talk about.

Christopher L. Winfrey

Well, it's a lot of work. And it's a lot of work in training internally and making sure that you're set up to have the appropriate conversation with a customer. And it's also a lot of retraining of the customer base. In terms of the past few years, there's been a tendency to negotiate a deal at every customer roll-off. And ultimately, those are the technical things that need to happen. But really what needs to happen is you need to have confidence in the quality of the product that you're putting into the home, the service that you're providing and confidence in the competitiveness of what that customer now has inside the home, and their inability to fundamentally replicate that in a competitive offer elsewhere over a medium term. And if you know that when you've put together a triple-play offer that's at $90 promotional and on average it's coming in at $120 because of DVRs and digital boxes and premium services. And even when they roll off to a higher price point, that you're at a discount compared to where they would be if they selected those 3 products elsewhere, then you can take confidence in knowing that not only are you delivering a better product and a deeper penetration of those services in the home, but in a way that they can't replicate for that price elsewhere. And I think that's the key, particularly as we get to Q3 2013, of how we'll be able to do a better job of hitting the line on step-ups.

Benjamin Swinburne - Morgan Stanley, Research Division

Cable industry has really shied away from contracts. Is that something you guys ever think about doing?

Christopher L. Winfrey

Contracts?

Benjamin Swinburne - Morgan Stanley, Research Division

Yes, I mean the satellite guys have used it forever.

Christopher L. Winfrey

Well, this goes to the confidence. I do remember a conversation with Tom at the beginning, and he told it to me in a similar way, which is you need to have confidence in the product that you're offering and the competitiveness of what you're doing and make sure people understand that we're going to stand behind what we offer and we think it's that competitive, promotional or not. That we're offering a superior service inside of these customer's homes and that we're not going to insist on contract because of confidence that we have there.

Benjamin Swinburne - Morgan Stanley, Research Division

Well let's talk -- that's a good segue to products, which is what I want to talk about next. If you're a Charter customer today, what is the difference in your product experience and what you're getting in the triple-play than 18 months ago?

Christopher L. Winfrey

Reliability. I think we're starting to see that come through. I think by the -- by having lower transactions through a function of the reorganization that we've done and through the reducing the incentive for customers to call in, upgrade and downgrade and create transactions, I think they can see a better quality that's taking place there. It's less about -- there was a significant improvement in products when we went out with the new pricing and packaging in Q3 of '12 in the form of higher HD channels, 30 megabits per second being the lowest speed that you can buy from Charter today, a fully featured value priced phone in that bundled offer. But really at the end of the day, what you're asking is the improvement that they'll see on a day-to-day basis, vis-a-vis on that product improvement. And it's on operational execution, and that remains above and beyond what will be exciting times in terms of product development, lots of thing that we can talk about. The biggest opportunity for Charter is operational execution and two, regain our service reputation.

Benjamin Swinburne - Morgan Stanley, Research Division

So when you say reliability, you're talking about the Internet doesn't go down, the picture's quality is consistent, and all those things?

Christopher L. Winfrey

Those type of things, new product -- and look, the Internet quality has always been extremely high. And video for the most part, has as well, with the exception of not being able to get all of your signals on the digital box, on the digital set, and getting them in HD where you have an HD site.

Benjamin Swinburne - Morgan Stanley, Research Division

Sir, you guys had usually been at one of the Netflix top ISPs quarter-after-quarter?

Christopher L. Winfrey

Yes.

Benjamin Swinburne - Morgan Stanley, Research Division

Even before Tom?

Christopher L. Winfrey

Yes.

Benjamin Swinburne - Morgan Stanley, Research Division

You guys talked on the call about a move towards more cloud-based user interface, it's been one of the big themes in the industry. What's going on, on that? Sort of what's the timing and how will that impact the customer?

Thomas M. Rutledge

I think the first place you'll see it is through the tablet applications and through the companion app. Tom spoke a little bit about that on the call, it's the rollout of a truly IP-based version that gives customers access to content on multiple devices inside and outside the home. But it also allows those devices to control the television set in the home with an enhanced user guide, instruction and discovery capabilities. I think the deeper discussion on cloud-based user interface is the way that you actually get it on to the television set inside the home. And our key objective is really to not recapitalize our entire set-top box investment that we've made. Today, we have a lot of boxes out in the market. And our goal is to take same quality of an IP-based user interface, put it in the cloud, and deliver it. Not only these IP-based devices, but be able to deliver the same type of product on the television set through legacy set-top boxes, and avoid recapitalizing on our entire base of set-top boxes. That also puts us in a position to be able to buy world class boxes at commodity prices on a go forward basis, and have those boxes have a similar look and feel as the legacy ones that we have today.

Benjamin Swinburne - Morgan Stanley, Research Division

Is that realistic? Do you think you can roll out a cloud-based guide that looks like what we see on the tablet on your legacy set-top in the field?

Christopher L. Winfrey

That's the goal. And I think we have a pretty good team of people who know what they're doing there.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Shifting over to competition, I mentioned that AT&T just presented. There's been a lot of questions about the impact potentially on Charter from what they're doing with -- I can't remember -- I think it's project -- I think it's VIP. Infinity -- I think it's VIP. What -- can you size up your footprint for your audience in terms of who you compete with and sort of how significant it is, and what you think about their plans, over time, impacting you guys?

Christopher L. Winfrey

I think -- the answer is I don't know. I think everybody's been trying to figure out exactly what the depth of their announcement was, and if somebody who can translate it for me, I'd be grateful. I've read all the materials. I've taken a look at it and tried to understand it, so is our product and marketing team. It's a little bit unclear. Today, we're not seeing incremental activity in terms of increased rollouts inside of our footprint. That doesn't mean it couldn't happen. And if you go down that similar line of thought, I think even if they did, we know how to compete against AT&T. I think we're offering a superior product in terms of the triple-play and the quality of our Internet product in particular, but also saw increasingly on the video side. So I think we're in a good position irrespective.

Benjamin Swinburne - Morgan Stanley, Research Division

Is the satellite competition primarily where you guys are focused in [indiscernible]...

Christopher L. Winfrey

It's the biggest opportunity. In Charter's footprint, satellite, from everything that I've looked at in terms of market penetration, satellite's the incumbent. That may be one of the few places where that's the case. I think it's the big opportunity. I think we have real competitive advantage by the fact that we're offering a full triple-play. A very fast, high-quality Internet service, bidirectionality on the video product and interactive service that we have and a very deep library of video on demand, and the ability to cascade that on multiple devices inside and outside the home over time. I think we're in a great position as it relates to satellite competition and I do think that's the bigger opportunity.

Benjamin Swinburne - Morgan Stanley, Research Division

Is the move towards -- both satellite companies have been pushing new products, the Hopper and the Genie in particular. Are those having any impact in your view of how you compete with satellite?

Christopher L. Winfrey

Look, I think you'd have to ask them in terms of how they see that impacting their results. We have a DVR in place today that is a -- up to 4 DVRs for $20 inside the home. You get 500 gigabytes on each one of those. That's 2 terabits of storage inside of a Charter home for DVR. So we don't feel that we have a lack of competition there. You're able to record 2 programs on those, each one of those boxes, so you're talking about 8 recording capabilities simultaneously with 2 terabits of storage. I don't think we're disadvantaged there.

Benjamin Swinburne - Morgan Stanley, Research Division

And you haven't been sued by any of the broadcasters?

Christopher L. Winfrey

We haven't been sued by anybody for that. And we're relatively underpenetrated, which puts us in a little different spot. This is an area of focus for us now because it doesn't have a high level of penetration today.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. I'm going to ask one more and then we'll ask the audience if they have any questions. And please wait for a microphone. So on the capital spending front, you went from a pretty wide range in '12 to a pretty specific target for '13. What's in the $1.7 billion, and how should we think about the all-digital projects as you move through, I think, in the year end '14 target?

Christopher L. Winfrey

Yes. So we're having year end '14 on all digital. Certainly, some of the elements related to that digitization are captured inside the $1.7 billion. I know everybody would like to think about all-digital as a single number and say what is it? The reality is it depends on where you are in a particular point in time, as you go market-by-market to take down the entire analog lineup. The way that we're doing it today is we stop selling analog, which means by nature, your digital is going to be increased. We've taken down analog channels along the way to increase our HD lineup and to further get bandwidth to DOCSIS 3.0 to improve -- to further improve our competitive advantage on Internet. We'll continue to do that. And then, as we sell in, placing more boxes on each of the television sets, both for existing customers and new customers, what you're doing by taking each one of these steps is you're organically going all digital without having the big bang type of approach. Now we will have to take the big bang approach. And as we get into certain markets and we achieve certain levels of penetration where it becomes less of a disruption in the market, we will then, at that point, take off the analog signal and go all-digital. And that's the "all-digital" spend that most people like to think of. The reality is it's all-digital spend. And that it will continue to take place through, as we get to 2014. So there's an element of that certainly captured inside the $1.7 billion estimate for 2013 CapEx. And we're going to continue to spend on CPE. And every single one of those boxes has revenue attached to it, so nobody should be afraid of that capital expenditure. There are 2 areas that started -- and commercial, before I get into that, commercial we'll also continue to spend because we see that as a business that is growing very nicely and is, continues to grow for 20%. And 2 areas that I mentioned in our earnings call that have also picked up the second half of last year, the first being upgrade and rebuild. That is as we've accelerated the amount of preventive maintenance that we do and increase the frequency with which we do it and we've identified issues in very regionally isolated areas of the network, when we identify those issues that need to be replaced or fixed, that generates capital. And as we get through a catch-up phase, I'd expect that to continue. So that's also baked into the numbers. The final one is on support, and we've been fairly open about talking about increasingly re-insourcing some of our outsourced labor activities. And when you do that, this is fairly new use [ph] stuff, but it's driving some capital in the support line. You have to buy tools, test equipment, and real estate and vehicles to house those people, and you were paying for that before; you were just paying an outsourcer and it was going through a different line item. It's just being in-sourced and taking the one-time capital to be able to make those changes to the operating practices. So that will, I expect will continue through this year as well, and all of that is designed to be captured in the $1.7 billion. What's not is the pending, the closing of Bresnan's -- the capital expenditure that the Bresnan assets or Optimum West is not captured into that. And what's not captured into that is if we're more successful in terms of net gains or customer acquisition, better said, than you could see variances one way or the other just based on growth.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Why don't we see if we have any questions from the audience, go back to Simon [ph] over there?

Unknown Analyst

Can you talk a little bit about what you're seeing in terms of traffic on your Internet networks and then sort of the speeds that people are going to? In particular, what you're detecting in terms of Netflix and other kind of video traffic and how your -- how any more data you have on sort of heavy Netflix users also being high users of HBO or other services?

Christopher L. Winfrey

Yes. So we haven't publicly disclosed what our 2012 growth rate in traffic was. I think other operators have come out and said they were in the 50% to 60% range. We're not at all dissimilar to that. So I think that's a very good proxy. And we embrace it. I think there are some that get concerned about that. It does cost us money when we have increasing traffic plus on the OpEx line more so on and infrastructure capacity. And that's actually capital spend that sits in our scalable infrastructure line. We're very happy to spend that because the more that we have to spend in that category, it means because the usage is getting high and the throughput is high and the demand for speed inside that throughput is high. And the more distant we become from DSL, which has been predominantly our competition, if you go inside of the vast majority of our footprint. So it distance us from a competitive standpoint. And today, it's still very much a land-grab environment in Internet. I think there'll be pricing power there over time. And I think it's good for us. So we don't run away from the additional traffic coming on our networks. It means that our product is appreciated, enjoyed and is competitively superior to the vast majority of our footprint. Really all, with the exception of perhaps the 4% FiOS that were left that we have today. We have a question over here to the right.

Unknown Analyst

In the past, you've talked about -- past quarters you talked about the relationship you have with TiVo regarding DVR and sort of the software. Is the new sort of set-top box plan, has that changed that strategy any way or in that relationship in any significant way that you want to talk about?

Christopher L. Winfrey

No, nothing from what we have previously talked about, which is we like the TiVo user interface, both pre- and post-Tom's arrival. And I think the key difference is that we didn't feel the need that we needed to be buying a box from them but we like the user interface and the ability to potentially use that in ways that -- in conjunction with what I was describing on cloud-based user interface is certainly there. And we are working with them.

Unknown Analyst

You asked a question -- sorry, you made a comment in response to one of the questions earlier about how -- the difference between Bresnan and the Charter assets. And I think one of your comments was Charter had been under financial distress for a longer period of time and there were some, I guess, bad decisions that were made, which -- I guess you can interpret that as -- that doesn't mean you can't still get to the same place as Bresnan, it might actually take longer.

Christopher L. Winfrey

Well, I think it's a question of time. Look, I don't think that they were bad decisions necessarily. I think they were necessary decisions for -- given where the company was at that point in time. But my understanding of those properties is that there was a real service reputation that had always existed there. And that they may have been slightly behind the curve in terms of product and pricing and packaging and the way they were organized all of which has been addressed over the past 2 years and that's where we see the success that you're seeing. But it's no secret that Charter had one of the lesser service reputations in the market for the longest period of time. We're winning that back, we feel like we're doing all the right things there. Some of things that I just talked about on the capital expenditure side of in-sourcing labor, the escalated amount of -- or the accelerated amount of preventive maintenance and the capital associated to making some isolated regional fixes along the way, means that those things need to take place so that we can be in a similar starting point from that. But all the other organizational, operational product pricing, packaging, marketing strategies are being implemented today at Charter. And I think it's a good data point as to what Charter would like to become. But to your point, there are -- it's a different company, it's a different network, and the timing could be different.

Benjamin Swinburne - Morgan Stanley, Research Division

Given the fact that Charter was further behind where Bresnan was, is it possible to say that there's actually more upside in the Charter assets than in Bresnan assets?

Christopher L. Winfrey

That's a baited question. Yes, I do. Because of where we're coming from and being relatively lower on penetration. And if we were able to make some of the changes that I just described and have that be recognized by the customer base, I think there's a real opportunity in that.

Benjamin Swinburne - Morgan Stanley, Research Division

All right, that sounds great. Chris, thanks so much for your time.

Christopher L. Winfrey

Thank you very much.

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Source: Charter Communications' CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)

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