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Time Warner Cable Inc. (NYSE:TWC)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 05, 2013 10:20 am ET

Executives

Robert D. Marcus - President and Chief Operating Officer

Analysts

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

We're going to start with the next presentation. Thanks, everyone, for coming. And Rob Marcus, President and Chief Operating Officer of Time Warner Cable, thank you very much for being here today.

Robert D. Marcus

My pleasure.

Question-and-Answer Session

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So we just had earnings conference calls over the last -- conferences over the last 6 weeks or so. You made some comments about short- and medium-term. Why don't we start off, if you can give us a sense of longer-term prospects of the business as you sit here today?

Robert D. Marcus

Yes, I'm glad you asked the question, Doug, because I think coming out of earnings last quarter, there was this general perception that somehow management's perspective on the longer-term prospects of the business had changed. And really, nothing could be farther from the truth. We remain very confident in the long-term prospects for the business. As I look out into the future, I see continued top line growth fueled by a really strong business services piece of the business, as well as continued growth in both subscribers and ARPU on the residential ISP data side. And I actually see real opportunity for improvement in the overall residential business, and hopefully we'll come back to that in a little bit. The other piece of this is, I think, the margin story is actually pretty good as well. There's no doubt that we'll continue to see some pressure on video gross margin from increased programming costs. But when we look at the overall revenue mix, and we've been saying this for quite some time, I think we'll continue to see more of our revenue coming from higher-margin businesses and away from lower-margin businesses. So specifically, what I'm talking about there is that we're going to get more of our revenue from business services, which has higher margins than residential, and we're going to see more of our residential revenue coming from HSD as opposed to lower-margin video and voice. So that's a good dynamic. And then when you layer on top of that our overall efforts to improve the efficiency of the business, to take costs out where we can and run the business more tightly, I think the overall margin picture is pretty good. So the short answer there is that I feel very good about the long-term prospects for the business. And I think that confidence is really reflected in our overall capital allocation strategy. We wouldn't feel comfortable continually increasing our dividend, as we have, or committing to buy back shares, as we have, if it were not for the overall view we have for the long-term prospects of the business.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So why don't we dial back to 2013. You certainly gave a fair amount of guidance in the fourth quarter conference call. Why don't you walk us through the guidance and sort of the execution as you look at 2013?

Robert D. Marcus

So let me start with the top line guidance. We said that organic revenue growth would be generally in the same zone as it was last year. I think last year, organic growth was about 3.5%. We said 3% to 4% this year. Now the piece of the guidance that I think got most of the attention, caused the most angst among all of you was our reference to some element of margin pressure on the business for 2013. From my perspective, the key point here is that most of the things driving that margin compression are really specific to 2013 and oughtn't repeat themselves in '14 and beyond. So let's walk through the pieces and we'll see where we go. The first thing we've called out in terms of impact on margins was programming cost. And the programming cost story is really not a new one, but the extent to which 2013 programming cost growth is higher than what it was last year is the thing that kind of jumps out at you. I think if you look over the last 5, 6 years or so, programming cost per sub growth was kind of in the 7% or 8% zone. Last year was kind of anomalously low at about 5%. And in 2013, we forecast growth of about 10%, so big jump in there. So I think we've got to examine what's causing that delta to determine whether or not we've got a new normal growth rate or it's kind of a one-off. Couple of things happened in both 2012 and, actually, in the early part of 2013 which have an impact on programming cost growth. First is that we launched a bunch of new networks. Probably the most highest publicity one was NFL Network, along with RedZone, which we did in, I guess, it was late Q2 -- late Q3, excuse me. Then we added Pac-12 Networks. And then, early this year, we actually added beIN SPORT, which carries quite a bit of soccer, which is appealing to a certain segment of our customer base. Those obviously had only partial year or maybe not even any impact at all on 2012 costs, will have full year impact in 2013. The next element on programming costs relates to some contract renewals that really drove what I would describe as step function changes in the rates we were paying. I think we called out last year the FOX News renewal, but there were others that had similar kinds of impact.

And then the third piece is that we had some onetime items that actually had the effect of lowering programming costs in 2012 naturally because that didn't affect the run rate programming costs. It had the effect of making the 2013 to 2012 comparison more difficult. So I think the net-net of this is that I see most of these programming cost jumps that are occurring as being specific to the 2012-2013 relationship. It's not to say that things can't change. We always have deals in negotiation that can affect the programming cost in any one year. It's not going to be a perfect straight line. But there's nothing that leads me to believe that we should declare 10% the new normal, at least not at this point. It feels premature. Let me just keep ticking through the items that affected margins or are affecting margins this year. We called out pension costs. Everybody is aware of the current interest rate environment, the declines in interest rates to these historically low levels that actually have the effect of increasing our pension liability and driving increased pension costs. I'm not going to sit here today and make a prediction about when that's going to turn around, but it's almost inconceivable to me that at some point we're not going to see this issue go away. And in fact, it's conceivable that we may actually see some program -- some pension income at some point along the way. But I don't see this as a continuing pressure on our margin profile. The other item we called out is advertising. And advertising's a little bit confusing in that it's a very small part of our overall revenue base. But because it is as profitable as it is, whether it's up or down, it tends to have an outsized impact on our overall margins. So 2012 was actually our all-time record ad sales year. We crossed $1 billion for the first time ever, and that was driven by $115 million, $114 million of political spend associated with the 2012 elections. That revenue has very high margins. And needless to say, in 2013, we're not going to see that kind of political spend, nowhere near it. So as a result, it's going to have an impact on our 2013 margin profile. I guess the good news is that we're already getting galvanized to make the most of the midterm elections next year, and we'll see a return to maybe not presidential year kind of spend, but a robust improvement in political. And the last piece of the margin story that we've talked about is really the pace at which we get the benefit from our migration of phone customers away from Sprint and onto our own platform. And the reality is we didn't migrate very many customers in 2012. And that's not an execution issue, it's purely a contractual issue. We roll customers off as our contract with Sprint expires, and that is a function of when we originally launched the phone in a given market. So we didn't do much in '12, and as a result, we're not going to see as much impact in 2013 as we've seen in other years in terms of improvement. We are going to migrate pretty much the remainder of our subs, that's about 1/2 our sub base, to our platform this year, but it mostly happens late in the year. So the good news story there is that's a tailwind in 2014. So I think that pretty much covers the nature of what was going on in 2013. And I think that 2014 should be a very different story.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I was going to follow up with that question, but I think it's sort of self-evident in the discussion, right? And I think as long as we're sort of going through '13 in this level of detail, it may be helpful for the audience if you talk a little bit at just how that flows throughout the year when you think about sort of the margins and EBITDA?

Robert D. Marcus

Yes, good point. The margin pressures that I'm describing really are felt most acutely in Q1, and then it gets better during the course of the year as we lapped the launch of the LA Lakers network. As we start to see some of the savings from many of our costs, our efficiency initiatives, those start to kick into high gear as we move through the year. We also get some of the benefit from that phone migration that I was describing. And then also, while the political comp gets tougher in the back half the year, our subscription businesses, residential and commercial, actually ramp revenues. At least that's what we anticipate, that they'll ramp revenues as we pace through the year. And that covers more of the impact of programming cost. So I think what we end up with is Q1 of this year having OIBDA that's pretty much flat versus Q1 of 2012, but then we improve over the course of the year. And I think Irene said this last week, but we're still comfortable with the overall guidance that we gave on earnings.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

That's okay. You can say where she was.

Robert D. Marcus

I was going to say it, and then I said, why should I do that to you?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So business services, obviously, an area of sort of huge opportunity for the sector, I think one of the biggest sort of value-creation areas for cable, but it's been a big driver already and the pace of growth has been pretty robust. How do you plan to continue to -- can you sustain that growth phase, and how do you do that?

Robert D. Marcus

Yes, I've been saying this for some time. The business services part of our operation is becoming a bigger and bigger part of the overall Time Warner Cable story. I think we've now had something like 11 consecutive quarters of more than 20% organic revenue growth out of business services. And maybe most significantly, in Q4, roughly 40% of our total organic revenue growth came from business services, even though it's less than 10% of the base. So it really is becoming a big part of our overall growth story. As we look to 2000 and -- to this year, we again have guided to 20% to 25% revenue growth. So you say, how do we accomplish it? There's really 3 main dimensions to this strategy. One is we're striving to continue to take share in the small and very small business realm, and that's really been our bread and butter since we got into this business. The second piece is we are increasingly moving upmarket, selling telecom services to larger businesses that have more sophisticated needs and tend to spend more on telecom services than the smaller businesses, no surprise. And then the last piece is to really exploit the wholesale opportunity. And in particular, we're focused on delivering wholesale telecoms connectivity to carriers, and even more specifically, we're really focused on cell backhaul at this point. It's been a great business for us. I think we did more than $150 million in cell backhaul last year. So those are really the 3 targets areas. So how are we going about making the most of those? We've talked about it before, but we're investing in our people, our plant and our products. So on the people side, last year, we increased our business services sales force by almost 50%, so I think we're up to something like 1,500 salespeople. That doesn't include all the sales support people that are operating behind the scenes. We'll continue to add salespeople during the course of this year. On the plant side, we invested, I think, more than -- somewhere in the order of $350 million last year to connect new buildings to our network and add cell towers to our plant. So I think we added 100,000 -- we put 100,000 buildings on net last year. Of those, 20% were connected with fiber, which is relevant because it dictates what types of services we can deliver to the customers in the connected buildings. We added something on the order of 2,000 cell towers to our network. So we'll continue to spend on putting buildings on net, connecting additional towers this year. The nice thing is, while we're up to somewhere close to 9,500 active cell towers, we've got a very big backlog on the contract, so there's a lot more to come on that front. And then the last piece is products. And on the product side, we're really focused on continuing to build out our product portfolio so that we have all the product that these larger customers, really medium-sized customers, may need from us. We've had great success with a broad array of wide area network products, WAN-based products, that really connect multiple locations of a given customer to one another. Metro Ethernet is one example of that kind of a product. It's really become one of our fastest-growing data products and is really contributing nicely to the top line now. We also have a really robust, dedicated Internet access product for larger customers with speeds that go as high as 10 gigabits a second. So really robust Internet access. And we're making good headway on delivering more sophisticated phone products as well. And that's really the hardest area to crack. It's the most complicated piece of the business-class telecom pie, but we're making good strides there. So those are really the places where we're investing. And add to that, and I didn't mention it, but add to that the capability that we've now got as a result of our NaviSite acquisition to deliver not just connectivity-type services but also value-added, cloud-based services. And I couldn't be more excited about the business services opportunity.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Can you just remind us of the size of each of the pieces in your market and where you think you are in terms of penetrations?

Robert D. Marcus

Yes, the overall opportunity, we've sized it somewhere around $20 billion, so -- and that's the small- and medium-sized businesses. So probably businesses up to about 500 employees. And that's not a perfect proxy for size of business, but it's good enough. And I think last year, our total business services revenues were just about $1.9 billion. So with those 2 numbers in mind, we're still less than 10% penetrated versus the opportunity.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any sort of target penetration longer-term that this audience should think about?

Robert D. Marcus

I still feel like we've got so much room in front of us that our mantra is just grow, grow, grow.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So how about the residential side? So growth there has slowed down a bit. Should -- I think investors are nervous that growth on the residential side's going to be challenged. Looking forward, what do you see?

Robert D. Marcus

Yes, I think there's opportunity to really improve the performance of our residential business. It has -- the growth has certainly slowed. We've faced some challenges. But I think there's a real opportunity to execute better and improve. And this is actually where the recent change to our organization actually comes into play. For the very first time, we have a single unified management team that's responsible for the company-wide residential operations. And that may sound like kind of so what? But I will tell you that it creates an opportunity that we didn't have up until now to really focus on certain elements of our strategy and execution that I think will have very positive results in terms of our residential operations going forward. So let me give you a little bit of color on what I'm referring to. So Bill Goetz is now our executive in charge of the entire residential services organization. And under his leadership, we are aggressively implementing a multipronged plan to improve the overall performance of residential. There's really 4 components to the plan, and let me walk you through. They will not sound ground-breaking, but I think they're critical to actually improving performance. The first piece relates to doing a better job getting, growing and keeping subscribers at higher ARPUs and higher profitability. The second piece relates to improving overall reliability, customer service and, in turn, customer experience. The third piece is focused on products. We've got to ensure that we have absolutely world-class products. And then the fourth piece is a focus on really improving the overall efficiency of the residential operation, taking costs out where we can to mitigate some of the impact that we're seeing in -- from programming cost growth. I think the reality is that given that programming cost dynamic, given the top line trajectory of this business, we've got to make sure that we've rightsized the cost structure, so that's part of the overall plan. So if you look at each piece of that, let's talk about really what drives the top line. On our earnings call, I pointed out that 2012 was actually a really good year in terms of driving connect volume, but a not-so-good year in terms of managing the back end and controlling churn. And in effect, what happened is that we were, to some extent, a victim of the success we had in late 2011, early 2012. We went out with fairly aggressive Triple Play- and HSD-only promotions starting in really November, December 2011 through the better part of 2012. And it had the desired effect. We drove a ton of connect volume. What we found, though, was that the subscribers we were connecting were coming in at ARPUs that were less than our -- what we felt was the optimal level; two, the customers were somewhat less stable than we would have liked. In other words, they were, by their nature, price shoppers who were -- found the promotions pretty appealing. So they were more likely to churn out when their introductory offers expired. So I mentioned this at earnings, but starting in January of this year, we've actually revamped our overall pricing and packaging architecture in a manner that's designed to, one, increase connect ARPU, but maybe as importantly, decrease the likelihood that the customers we attract will be kind of churning on the back end. I think what we're driving towards is a more profitable, more stable subscriber base. In a sense, we're making an array volume choice here. At least that's part of the mix. There's no question that we're selling more doubles than triples under this structure. There were some customers who were attracted to take phone because it was the only way they could get the overall deal. We've revamped our pricing structure so that we've got some attractive Double Plays out there. The good news is that, and it's still early days on this given that we only launched it back in January, but connect ARPUs are up. And as long as connect ARPUs are up, my view on whether or not a customer takes a Triple or a Double is that maybe it's just as well that we sell them a Double, in that if the revenue we're generating from the customer is higher but I don't have the phone cost, even the lower phone cost of providing it on our platform, I think net-net, more likely to drive more profitable subscribers. So I think we've got a very good structure in place. The impact that, that's going to have on churn will probably take some time to flow in because we're still working through promotions that existed before these promotions. But we're working hard to manage those promotional roll-offs more effectively than we have, and I think we're doing a good job of it. We're routing the retention calls to retention specialists who are retrained and who are given better tools, better processes to ensure that we do a better job keeping customers. So I think that's all very important, and I feel good about the progress we're making there. Let's turn to customer service for a second. So on customer service, we've talked about it again many times before, but we're working hard to ensure that doing business with Time Warner Cable is very easy. So that means we're facilitating more self-installs, which are good for customers. They prefer it if they can actually do it. Close to 1/3 of our total connects in December were actually self-installations, a big increase over prior periods. We're facilitating through a revamping of our web presence, the ability of customers to troubleshoot and resolve their own problems. We're doing a better job on customer education. Interestingly, one of the big issues we've got is that customers don't know everything we deliver them and don't know how to work the stuff that we do deliver them. So customer education is actually a very worthwhile investment for us. We're continually reducing the time of our appointment windows, our service windows. We're at an hour, 1-hour service windows throughout our entire footprint now, and we're actually trying to improve on that in some markets where we're actually offering half-hour windows at the beginning of a shift or the beginning of the day. And we're even experimenting with what we call real-time appointments. The joke we always make is if the Chinese restaurant can come exactly when you call them, why can't we? So that's sort of what we use as the bar we're setting for ourselves. And I think that's a realistic possibility. And then we're focused on overall reliability. We want to make sure that both the network and the equipment we put in people's homes is working at the highest levels. So let me move on to products. So I'm particularly excited on the products side about some of the enhancements that are imminent in our video product. We've talked about this, but I just -- on Friday, I just met with our cloud guide team. And the new cloud-based guide is really spectacular. Not only does it have very rich box art, it's got a lot of value-added metadata with respect to each show that's available. It's got great search. But one of the things that was exciting to me is we're going to offer some new navigation paradigms that, I think, are pretty cool and different from anything I've seen before. And then we've also got a recommendation engine component, which just I think it really has the prospect of enhancing our video product in a way that we haven't in I don't know how many years. So very excited about that. We're still on schedule to launch it in the second half of the year. A little early for me to give you specifics around the actual rollout schedule or the pricing and packaging approach, but we're very much on track for later this year. The other thing I'm very pumped about is what we're doing on the TWC TV app site. We've had great success with the in-home version of the TWC TV app. Early next quarter, we're going to be in the position to start to bring that functionality outside the home. So we've got 300 linear channels and 4,000 VOD assets on the in-home version of the app. A subset of that will be available for customers outside the home. These are rights we've had for some time. And in fact, when you go to programmers' websites, based on authenticating as a customer of Time Warner Cable, you could access that content. We're putting them together within our TWC TV app, I think, is going to make it a much more compelling experience. So in January, we actually had a new record in terms of usage of the app. We had 900,000 unique customers using the app. And I think they used it something like 4.25 million times. But when we add the out-of-home capability, I think we're just making the whole experience that much more compelling. So very exciting on that front. And on efficiency, I'm not going to get into too much detail, but we're really examining every process that goes into the delivery of our residential service and looking for opportunities to do it better. And in particular, we're looking for places where we can take activity out of the system, whether that means reducing truck rolls that are unnecessary or handling calls that otherwise would have been handled by a live CSR via our web or via chat or online. And those are things that will not only reduce costs, but I think lead to our ability to deliver better service to the customer. So I feel very good that we've got the right team in place, the right strategy in place and we're executing well. Some of the benefits are going to take a little while to flow in, but I feel good about it.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I think a lot of that's straightforward. I think the one thing that jumps out in terms of you teasing us is new navigation paradigms is a pretty strong language.

Robert D. Marcus

Yes. Look, I don't want to -- we're not reinventing the world, but we've lived in a world where the primary guide experience has been a grid guide with channels down one side and time across the top. Browsing has largely been achieved by channel up, channel down. And the capability of this new guide allows you to sort of break away from those traditional models. And we'll see if customers actually like it. I think there's going to be a lot of personal taste involved. But I'm intrigued by the fact that they were able to come up with something that I hadn't seen before.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay, sounds good. We'll look forward to seeing that.

Robert D. Marcus

I guess I'll just give you the tease.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay. So why don't we shift around to sort of mix of questions. We had a pretty thorough walk-through on a lot of the operations. There's still a lot of confusions, I think, at least I hear back from investors, on the RSN strategy, both the Lakers and the Dodgers. So are there any numbers you can put behind those initiatives or any sense of timing as to when those deals would go from sort of dilutive to accretive?

Robert D. Marcus

Yes, you know that we don't really disclose the specific terms of any of our programming deals, and these deals are really, in essence, programming deals, although with somewhat more complicated structures, but they are in effect the same as our programming deals. So I'm not going to give you specific numbers. But I will walk you through the thinking that drove the deals that informs the strategy. We view those deals purely from the perspective of Time Warner Cable as distributor. There's been a lot of questions, "Oh, are you guys now in the content business?" These deals were a way for us to acquire key programming on terms that we thought were economically preferable to the alternative. We could've allowed a third-party RSN, you pick it, to go out and acquire the rights from the team, and then we'd be in a position where we'd have to do some sort of an affiliate deal with the RSN, pay the fees that the RSN demanded, and periodically we'd get hijacked with some sort of unappealing renewal process, have very little control over our destiny. What this alternative presented us with was an ability to have a much greater degree of control over this particular cost item. And in the Lakers case, the theory was as simple as this: if the rights fees that we paid for the Lakers plus the cost of producing the games, of otherwise running the network, less the affiliate fees we could generate from third-party distributors, less the advertising revenue we could generate by selling ads on the network, divided by the number of subs to whom we were going to deliver Lakers games, if that number was less than the per sub fee that we would pay to a third-party RSN, then we thought that was a win. And now having launched the network, having done our affiliation deals with the other major distributors, having begun the process of selling ads on the network, I can comfortably say mission accomplished. The price -- the net price that we're paying for the Lakers is lower than what we think we would have otherwise paid to a third-party RSN and significantly lower than what we pay for what I would call comparable RSNs elsewhere. So I'm very pleased with the way the strategy has worked out. And the approach with the Dodgers is going to be to take a page out of the same playbook. We haven't yet done the affiliation deals. We haven't launched the network. We haven't sold any ads. But the experience with the Lakers gives me a lot of confidence that we can do it again, understanding that the structure is a little bit different. I want to go back to the pacing point because you said when did it become -- when does it go from being dilutive to becoming accretive? From our perspective, this deal makes sense now. Now some of this is a little bit theoretical because you never know exactly what your negotiations with a third-party RSN would have yielded. But our view is that this is better than the alternative now. There are some timing nuances that cause the impact of the Lakers deal to be more difficult for us in the first quarter than, say, the remainder of the year. On a year-over-year basis, though, this year is better than last year in terms of the impact of the Lakers on overall costs. So -- and there's really no impact to speak of from the Dodgers, which we launch next year.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So how do you characterize the promotional environment today? Changed at all the last few months?

Robert D. Marcus

Residential promotional?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Residential promotional environment.

Robert D. Marcus

I don't really have much to add from what we've said in the past. It's a highly competitive, highly promotional environment, a lot of beacon pricing. And we're all grappling with that environment, and it has an impact on both how you go about connecting subs and then, as I mentioned, how you go about keeping subs. But we're all in the same boat. We're managing through it.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

As you've got to. So looking at the residential side, you mentioned both subs and ARPUs. Where do you think penetrations for high-speed data can end up, and how do you think about how much value that product still has relative to where you're pricing it today?

Robert D. Marcus

It's been a fabulous product. Even -- I mean, last year we added another 0.5 million HSD subs. And I think the story has really been a terrific one. We've added broadband share in every one of the last 5 years versus the telcos. And if you look at the last 2 years, we actually added more broadband subs than the 2 telcos combined in each of those 2 years. So this has been a really good story. And it's all about the increasing utility of the product. Customers use more and more of it, they demand higher speeds, so our mix improves. And with higher utility and customers placing a higher value on the product comes an ability to generate more price. So I feel great about the opportunity. How high does penetration go? I think, overall, broadband penetration is still kind of in the 70%-ish zone. We have more than 1/2 of it. But as I said, we're continuing to get more and more of that share, and I don't anticipate that changing.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any reaction from your customers on the modem lease fee, though?

Robert D. Marcus

Any time you increase prices -- and the modem fee was really only unique in that we increased prices on virtually every HSD customer. Typically, there's a bunch of customers, a lot of customers, who are in promotions and don't get touched by a typical rate increase. So it was very broad-based. And if you think about it, at $3.95 versus an ARPU in the low 40s, that's a meaningful increase. There was nothing unexpected about the reaction. We did have a little bit of elevated churn immediately following the increase. It's to be expected. Overall revenue generation from the increase remained high. So I think the execution was good and worked well.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Similar question on the voice side. Your penetrations for the industry on the cable side still seem low, but you talked about switching promotions that wouldn't necessarily over-incent customers to take voice?

Robert D. Marcus

Yes.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So in a way, not driving the voice penetrations, but -- for healthy reasons. How do you think about the voice product [indiscernible]?

Robert D. Marcus

I think my point there is we just need to be responsive to demand and not create artificial demand. I think there's continued opportunity to grow the voice business. We're still at less than 20% penetration. I think we're hovering around 19%. Now there is this base of customers, I think, we're starting to move in on 40% of households that are actually wireless voice only. So we're -- the total universe of potential customers we can get here may be shrinking a bit. But at our penetration, there's still an opportunity. We're primarily going to do that through continuing to sell Triple Plays. But we're also actually trying to sell into existing singles and doubles the voice product. And I think the customers that take that are more likely to be what I would call natural voice customers who are likely to be less churn-y down the road. The key point, though, on not over-subsidizing is we're going to make sure that for those customers who are natural phone rejectors, we're offering a really compelling Double Play offer because I think that's likely to drive better profitability for those particular customers.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So I'm required by analyst law to ask you about CapEx since you're a cable company. CapEx is up a little bit in 2013 you...

Robert D. Marcus

In absolute dollars.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

In absolute dollars.

Robert D. Marcus

That's still down as a percentage of revenue.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

As a percentage of revenue. Any sort of interesting commentary around what's driving a little bit of an increase?

Robert D. Marcus

I think it's more of the same. Residential CapEx continues to moderate and we continue to spend on business services, which is not surprising given the growth trajectory of that business. I think I highlighted the things we're spending on. It's primarily about connecting new buildings to the network and additional cell towers.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

One thing that I still get questions on, it's a fair question, is network capacity over time. Obviously, broadband usage is going through the roof. You've got -- after HD, there'll be ultra-HD and other technologies coming. You've got a hybrid fiber/coax network in place. When you sort of manage network capacity from year-to-year but also look over the next 5 to 10 years, is the network that's in place...

Robert D. Marcus

Yes, I feel very good about where we stand on capacity, and we're a little bit different from some other MSOs on this front. But starting about 6 years ago, we implemented switched digital video. That gave us the ability to triple the number of SD channels, digital SD channels that we could deliver in the space of a single 6-megahertz channel. That freed up a whole lot of bandwidth so that we could be ahead of the curve on offering HD channels. And I think even today, where everybody's offering a lot of HD, we still compare favorably to our peers and competitors. Of course, our footprint, I think we're somewhere around 170 HD channels. We've gone all digital, as you know, in New York City and in a couple of other pieces of markets. And in those markets, we're well above 200 HD channels. The -- actually, as an aside on the digital channel front, in New York City, the FCC at the end of last year relaxed the restriction on delivery of Broadcast Basic channels in analog. So in New York City, we're actually taking going All Digital to the next level. Even Broadcast Basic will be no longer in analog, 100% digital, so it creates even more capacity. So as we need more bandwidth for high-speed data to accommodate incremental traffic, and we know that traffic continues to grow at an incredibly fast pace, and to offer higher speeds, what we're doing is we're gradually reclaiming bandwidth that's currently consumed by the delivery of analog video and we're rededicating that bandwidth to high-speed data, just adding channels that we're bonding for our high-speed data product. We like the idea of this gradual approach to going All Digital, as opposed to doing the flash-cut like some others have done, in that it's sort of the best of all worlds. It gives us the bandwidth, the capacity we need while minimizing the disruption to customers. We don't have to put a D-to-A on every single TV in every single customer's home. And it also, we think, is the best way to prudently manage CapEx. And in particular, we're focused on the longer-term migration to IP delivery and the desire to not deploy an unnecessary number of non-IP devices to sort of deal with this gap, period. So we think the gradual migration to All Digital where we periodically take back 5, 6 channels in analog and rededicate that to HSD makes the most sense for us. So I feel very good about the plan and how we continue to mine the existing network for more capacity.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Makes sense. I've got a couple more, but we could take a couple from the audience before time runs out. We've got one all the way up front.

Unknown Analyst

You said that the relatively elevated levels of churn in your residential customer base were stemming from unusually aggressive Triple Play promotions or HDTV promotions starting last...

Robert D. Marcus

HSD.

Unknown Analyst

Oh, at high-speed data, okay, starting, I believe you said, November of '11?

Robert D. Marcus

Give or take.

Unknown Analyst

When did those promotions cease, or when did those unusually aggressive promotions cease and what is the -- like have most of the anniversaries or the cessation of that promotional period already occurred when we get to the end of Q1?

Robert D. Marcus

No, no. I think that's -- we're going to be managing the promotional roll-offs from those earlier promotions probably for a good portion of this year. But the extent of the churn, I think, is no longer a surprise to us. And we've got a very structured program in place to better manage that churn effect. So I don't expect it to be -- to have quite the effect that it did in late 2012, early 2013 later this year.

Unknown Analyst

Got it. And then my other question relates to the price -- effectively, the price increase in high-speed Internet, which it sounds like it's been quite beneficial, although causing some people to disconnect because of your price increase.

Robert D. Marcus

No more than normal price increases.

Unknown Analyst

So going forward, what sort of rate or ARPU increase ought we assume in future years for Internet?

Robert D. Marcus

Yes, I'm not going to do much beyond saying that I think that there is continual -- there is remaining upside in high-speed data. I think the price value equation suggests that we can continue to raise prices there.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Any other quick ones? Yes?

Unknown Analyst

Could you just address some -- are you satisfied with the shape of your balance sheet right now?

Robert D. Marcus

Yes, I really am. The question gives me a good opportunity to reiterate our commitment to the balance sheet strategy that we adopted really at the time we separated from Time Warner, which is getting close to 5 years ago, I guess, already. The philosophy is solid investment grade rating, 3.25x leverage ratio. As we continue to grow OIBDA, continue to generate free cash flow, naturally we're creating financial capacity. We use that to cover our dividend, which incidentally, we increased to $2.60 on an annualized basis earlier this year. And then for the most part, we're using remaining financial capacity to buy back shares unless there are M&A opportunities that we think generate an even greater return for shareholders than buying back our shares, and I think our past behavior kind of speaks volumes here. We're going to continue to be very disciplined around M&A. So assuming that no such M&A opportunities arise, we're thinking that we're going to buy back at least $2.5 billion worth of stock this year. So overall, I feel very good with the strategy. It's still as appropriate today as it was when we adopted it. And I feel good about the shape of the balance sheet.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Someone take the last question? There's been some speculation out there that at the end of the year, when Glenn's contract up, he might retire? Any...

Robert D. Marcus

I thought we'd get through it without hitting that.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Yes, any comments you want to make on that?

Robert D. Marcus

No, there's really not. There were some rumors in the press about the prospect of Glenn retiring. We quickly put out a statement that no such decisions had been made by Glenn or by the board or otherwise. And what I can tell you is that Glenn is still very much engaged and very much in charge of Time Warner Cable. And that's good for all of us.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Thank you very much for being here.

Robert D. Marcus

Thank you.

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