Time Warner Cable, Inc. Q1 2009 Earnings Call Transcript

 |  About: Time Warner Cable Inc. (TWC)
by: SA Transcripts


Welcome to the Time Warner Cable first quarter 2009 earnings. (Operator Instructions) Now I will turn the call over to Mr. Tom Robey, Senior Vice President of Time Warner Cable Investor Relations. Thank you. You may begin.

Tom Robey

Good morning everyone. Welcome to Time Warner Cable's 2009 first quarter earnings conference call. This morning we issued a press release detailing our 2009 first quarter results.

Before we begin, there are several items I need to cover. First, we refer to certain non-GAAP measures, including operating income or loss before depreciation and amortization (OIBDA) and adjusted OIBDA and adjusted OIBDA less capital expenditures. Definitions and schedules setting out reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our trending schedules.

Second, I want to note that this quarter you will see included in our press release, trending schedules and throughout the call a new subscriber metric called Primary Service Units (PSU’s) which we define as the total of all video, high speed data and voice subscribers. For those of you still attached to RGU’s we will continue to report them as well.

Third, today’s announcement includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on management’s current expectations and beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to various factors including economic, business, competitive, technological, strategic and/or regulatory changes that could affect our business. These factors are discussed in detail in Time Warner Cable's SEC filings, including its most recent annual report on Form 10K and quarterly reports on Form 10Q.

Time Warner Cable is under no obligation to, and in fact expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

Finally, today’s press release, trending schedules, presentation slides and related reconciliation schedules are available on our company’s website at www.timewarnercable.com/investors. A replay of today’s call will be available today beginning approximately two hours after the call has ended and will run through midnight ET May 1.

With all of that covered, I’ll thank you and turn the call over to Glenn. Glenn?

Glenn Britt

Thanks Tom. Good morning everyone. This is our first earnings announcement as a fully independent company and though our separation from Time Warner doesn’t change the products and services we provide to our customers we are excited about our future as a stand alone cable company.

We have become an independent company in particularly challenging times. Times like this reinforce my conviction that cable is a great business. We have built a very strong company and we are demonstrating it has substantial recession-resistant characteristics. We are growing at a time when many companies in many industries are shrinking and we are generating a lot of free cash flow which we will use to pay down debt and create value for our equity holders.

We grew first quarter revenues by 5%. This stands in stark contrast to the double digit revenue declines reported by many other S&P 500 companies. On our last earnings call we promised we would aggressively manage our operating and capital costs and we delivered on that in the first quarter as evidenced by the strong growth of adjusted OIBDA and adjusted OIBDA with CapEx. We are performing well and we are right on track to deliver full year results consistent with the expectations we outlined last quarter.

As always, there were a lot of drivers of our first quarter results and I would like to single out a couple for mentioning. First, local advertising remains very weak and our advertising revenues declined 26% year-over-year in the first quarter. This industry-wide weakness will probably continue to represent a headwind for some quarters to come.

Second, the over the air DTV transition enabled us to gain significant numbers of video subscribers in the first quarter. It is hard to know but we may well see another wave of video subscriber net additions as we approach the completion of the DTV transition in mid-June.

The environment we face in the second quarter is similar to that we described on our last phone call. Economic indicators relevant to our business such as foreclosure rates, unemployment levels and consumer confidence just to name a few certainly haven’t improved and the telephone companies continue to expand the footprints of their fiber based offerings. We will continue to be candid in our assessment of the environment, sharing the facts with you as we get them.

We are fortunate to have opportunities to further improve our business by adding new products and services, by improving the service we provide to our customers and by improving the efficiency of our operations. Our biggest near-term opportunity is commercial services. We grew commercial revenues 17% year-over-year in the first quarter. Now that is not bad in a tough economy but frankly I’m not satisfied with our performance in this area. I think we can and should do even better.

This is a very large market in which we currently have just a tiny penetration. In addition, we are increasingly excited by the opportunity to introduce an element of mobility into our services through our relationship with Clearwire. We are planning to launch introductory products in a few markets late this year or early next year.

In summary, Time Warner Cable continues to grow and continues to generate very healthy free cash flow. I feel very good about the strength of both operations and our balance sheet.

Now Rob will go into some more detail about our financial performance. Rob?

Robert Marcus

Thanks Glen. Good morning everyone. Let me jump right into the first quarter highlights on slide three. Subscriber performance in the first quarter improved meaningfully from the lows we experienced in the fourth quarter of last year. We added 81,000 customer relationships and 556,000 RGU’s in the quarter. First quarter financial performance was also strong with revenues growing 5% year-over-year and adjusted OIBDA increasing 7% reflecting our aggressive focus on expense management.

Adjusted OIBDA less CapEx grew 32% year-over-year and free cash flow rose 11% despite an increase in the cash interest payments related to our 2008 bond offerings. Once again this quarter our commercial operations were the fastest growing part of our business with year-over-year revenue growth of 17%. With one quarter of the year now on our books we are on track to achieve our full-year outlook. We continue to expect that adjusted OIBDA less CapEx will grow at least as fast in 2009 as it did in 2008. In other words at least 15% and that EPS will be around $3.00 per share.

Turning to the next slide, let’s review our subscriber metrics. As I mentioned, first quarter subscriber results were significantly better than what we experienced in the fourth quarter. In fact, in every subscriber category our net adds were better than Q4 on an absolute basis and more significantly as a percentage of prior period net adds. First quarter RGU net adds were down 38% versus Q1 2008 RGU net adds, much better than the fourth quarter’s 71% year-over-year drop off in RGU net adds.

We ended the quarter with 34.8 million RGU’s. We added 36,000 basic video subscribers in Q1 in part driven by the digital TV transition which partially occurred on February 17. Landel will talk more about what we have experienced so far from the DTV transition and what we are likely to see going forward.

High speed data continues to be our most resilient product line with net additions of 225,000 in the first quarter versus 304,000 in Q1 2008. Total company wide HSD penetration exceeded 33% at quarter end and about 1/3 of our systems had penetrated at over 40%. Digital phone net adds were 174,000 in the first quarter compared to 285,000 in Q1 2008. We ended the quarter with total digital phone penetration of over 15% of service ready passings.

First quarter digital video net additions were 121,000 and at quarter end 67% of our video customers had digital video services. It is worth noting that we increasingly do digital video as an add on video product as opposed to a separate subscriber category. As a result while we will continue to report RGU’s, we will place greater emphasis on what we call our Primary Service Units (PSU’s) which is the sum of our video, data and voice subscriptions, not separately counting digital video.

We added 435,000 PSU’s during the first quarter for a total of 26 million. Growth in HD capable customers continued with 386,000 net adds, down less than 8% versus last year’s first quarter. 55% of our digital video customers are now HD capable. DVR subs increased by 130,000. That is much better than Q4 but only about half the number of DVR customers we added in last year’s first quarter. We ended the quarter with over 47% of our digital video subs taking at least one DVR.

We also added 81,000 net customer relationships in the quarter. That is about 45,000 more than our video net adds. Over the last two years we have averaged about 45,000 non-video customer relationship net additions in the quarter. At the end of the first quarter almost 11% of our 14.7 million customer relationships were non-video. That is mostly HSD only and voice data double-plays.

We also continued to add large numbers of bundled customers. This quarter we added 146,000 Triple Play customers and 60,000 Double Play customers. As a result, over 55% of our total customer relationships, or 8.1 million customers were in either Double or Triple Play packages. As you know, our bundled customers tend to have higher ARPU’s and lower churn.

Before we move to our financial results I do want to mention while our Q1 subscriber results marked a significant improvement over what we experienced in the fourth quarter of last year, subscriber net additions over the last few weeks have been much weaker and in fact look more like what we saw in the fourth quarter. It is a bit early to say what this will mean for second quarter subscriber performance, but needless to say we are very focused.

Moving onto our financial results on the next slide. First quarter revenues of $4.4 billion grew $204 million or 5% over the first quarter of 2008. Subscription revenues increased 6% while ad revenues declined 26% during the quarter. On the subscription revenue side the 6% increase was driven by 5% year-over-year growth in primary service units and a slight improvement in subscription revenue per PSU.

Breaking down our revenues by product line, video grew 2%, HSD increased 11% and voice grew 23%. On the video side growth was negatively impacted by a decline in premium channel subscriptions and a decline in transactional VOD revenue. Excluding these two items, video revenue would have grown 4%. Residential subscription revenues grew 6% while commercial revenues grew 17%. I will come back to our commercial operations in a moment.

The significant decline in our advertising revenues reflected continued overall weakness in the ad market place and in particular in the auto and media and entertainment segments which are two of our largest advertising categories. Given the ongoing weakness in the ad market which is heavily influenced by the weak economy and the lack of political advertising this year we anticipate advertising will continue to be a drag on our revenue growth during the rest of 2009.

Monthly ARPU per customer relationship increased 5% year-over-year to approximately $100 and monthly subscription ARPU per customer relationship improved 7% to approximately $96. Given that we now have over 1.5 million non-video customer relationships, we think ARPU per customer relationship is a more relevant metric than ARPU per basic video sub. You will see us place greater emphasis on that going forward.

Looking at year-over-year ARPU by product line for the quarter, video ARPU increased 4% driven primarily by price increases and higher penetration of digital video services including DVR’s. HSD ARPU increased 1% driven by increases in HSD pricing. Importantly, we have stabilized our residential HSD ARPU trends with ARPU essentially flat year-over-year and up sequentially.

Finally, voice ARPU declined 3% year-over-year and was roughly flat sequentially.

Turning now to our commercial operations on the next slide. Year-over-year commercial revenue growth remains robust. First quarter commercial revenues grew 17% over last year’s first quarter to $213 million. Commercial video revenues grew 2%. Commercial data which includes [inaudible] grew 17% and business class phone revenues more than quadrupled year-over-year.

Although the commercial business continues to represent a relatively small portion of our overall company, less than 5% of total revenues, it accounted for an increasing portion of about 15% of our total revenue growth in the first quarter. We added 8,000 business class phone customers during the quarter, a 27% increase in our total commercial digital phone subscriber base which at quarter end stood at 38,000.

Commercial HSD revenues continue to grow strongly in the quarter. However, our commercial HSD subs remained essentially flat at 283,000. Landel will talk about some of the organizational steps we are taking to improve growth in our HSD subs and our commercial business overall.

Turning to adjusted OIBDA on slide eight. First quarter adjusted OIBDA of $1.5 billion grew 7% year-over-year. Remember our advertising revenue which is a relatively high margin business declined 26% in the quarter which materially impacted our overall adjusted OIBDA growth. In other words, adjusted OIBDA growth would have been substantially higher X advertising.

Our adjusted OIBDA margin for the quarter improved 70 basis points year-over-year to 34.5%. This reflects our aggressive cost management. Total expense grew just 4% year-over-year. Direct costs were up 6% despite an 8% increase in programming costs and SG&A expenses were actually down 3% year-over-year including an 11% decrease in marketing expense which Landel will discuss.

Our employee costs which represent roughly 1/3 of our total OpEx grew just 4% due to our management of both headcount and salaries. As a reminder, first quarter adjusted OIBDA excluded $43 million of restructuring charges. As we discussed at the beginning of the year we continue to streamline our operations and expect our full-year restructuring charges will be approximately $75 million with most of the balance coming in the second and third quarters.

As we talk about adjusted OIBDA for the remainder of 2009 remember that it will exclude not only these restructuring charges but also roughly $10 million of costs associated with granting make-up TWC equity awards to Time Warner Cable employees to replace Time Warner, Inc. options and RGU's that went away or reduced in value as a result of the separation.

As we look forward, we expect year-over-year adjusted OIBDA growth in the second quarter to be somewhat slower than what we experienced in the first quarter. That is a product of multiple factors but most notably higher programming cost growth and a seasonal increase in bad debt caused by an internal accounting policy change that will reverse later in the year.

Turning to capital spending on the next slide, our first quarter capital spending was $769 million, a $77 million decrease from the first quarter 2008. Total capital expenditures as a percent of revenues declined to 17.6% from 20.3% last year. While overall capital spending was down we actually spent more on commercial CapEx than in last year’s first quarter but the increase was more than offset by the lower residential CapEx.

Not surprisingly, given lower net adds, our residential CPE spending was down meaningfully, declining 20% year-over-year. Even with the decline in CPE capital spending we actually increased our HD box inventory levels further in Q1. Most of the other capital expenditure categories declined as well with the principle exception being scalable infrastructure which was up $43 million as we continued investing in our HSD and VOD infrastructure.

Looking forward we continue to expect full-year 2009 capital spending to decline both in absolute dollars and as a percentage of revenues compared to last year.

Moving to slide 10, during the first quarter we grew adjusted OIBDA less CapEx 32% from Q1 2008 and we continue to expect our adjusted OIBDA less capital expenditures will grow at least as fast this year as it did last year. For the quarter we generated a very healthy $367 million of free cash flow. That is over $1.00 per share. The bottom line here is that we are generating more adjusted OIBDA and we are converting a greater portion of it into free cash flow.

The 11% year-over-year free cash flow growth was driven by higher adjusted OIBDA and lower CapEx offset in part by significantly higher interest payments. We also benefited on the cash tax line from a payment from Time Warner under our tax sharing agreement related to pre-separation periods.

Before I leave free cash flow I want to remind you that full-year 2008 and 2009 free cash flow benefit from bonus depreciation provisions from the Federal Economic Stimulus Act. We expect 2009 benefit will more than offset the first year reversal amount for the 2008 benefit keeping our cash taxes low throughout the year.

Remember, this savings will reverse over the next 5-7 years.

Moving to earnings per share, as a reminder our EPS numbers reflect the one for three reverse stock split we completed in March. We had basic and diluted earnings per share of $0.48 compared with $0.74 in last year’s first quarter. However, this quarter’s earnings per share included a number of items affecting comparability that in the aggregate reduced EPS by approximately $0.27. These items are highlighted on the slide and are detailed in our press release. If you exclude these items, EPS would have increased year-over-year.

Looking forward to full-year 2009, we continue to expect the full year diluted EPS will be around $3.00 despite the higher interest costs and the restructuring and equity compensation replacement costs I mentioned earlier.

Moving to the last slide, let’s cover our balance sheet. After giving effect for the payment of our $10.9 billion special dividend, our March 31 net debt and mandatorily redeemable preferred equity totaled $23.1 billion which put our leverage ratio at 3.66 times. During the quarter we enhanced our liquidity with a $3 billion bond offering. The net proceeds were used to retire our bridge loan and reduce outstanding borrowings on our revolver, leaving us $3.7 billion of unused committed capacity with no additional maturities until February 2011.

We expect our free cash flow and adjusted OIBDA growth to enable us to de-lever quickly and we still expect our leverage ratio to be back down to around 3.25 times within a year of separation. That means by next March.

With that I will turn it over to Landel.

Landel Hobbs

Thanks Rob. Good morning everyone. In this difficult economic climate we are continuing to make investments to grow even stronger and at the same time we are fine tuning our execution.

Let me start with an update of the competitive landscape. In the first quarter there wasn’t much change in satellite competition. Our internal models indicate we gained a small number of video subscribers from satellite operators on a net basis. Similar to the last several quarters we feel very good about our competitive position here.

In recent quarters telco competition has expanded to a more significant fraction of our footprint. Although that rate seems to have slowed slightly for the first quarter of 2009. We estimate at quarter end telco video offerings were available to around 22% of our footprint. AT&T’s U-verse product continued to be available to roughly twice as many of our homes passed as Verizon’s video offer. As Glenn indicated, the DTV transition helped us this quarter. Our analysis suggests that approximately 5% of over-the-air (OTA) households transitioned to us in the first quarter, when taking into consideration the percent of stations that actually switched in February.

This is similar to the effect we saw in Wilmington, North Carolina last September. To capture this opportunity, we have been offering a low price, basic only service as well as packages that include free basic video service if a customer takes Roadrunner or digital phone service. I think it the relatively high number of basic video net additions in Q1 demonstrate our success. In addition, we estimate that as many as 1/3 of these new subscribers took a Double or Triple Play offer.

It is important to note that we may see a similar impact in mid-June when the final DTV transition occurs.

At the core of our competitiveness versus either satellite or telco providers is our continuing commitment to make aggressive investments in our network. These investments enable us to offer the services that our customers demand right now and others they will expect in the future. We are not compromising our commitment in this area during the economic downturn.

Instead, we continue to press forward with significant investments which we think will make us even stronger and better able to serve our customers. Here are a few quick updates.

First, we are continuing to invest in the capacity of our fiber rich network. Our primary strategy here is to optimize bandwidth efficiency through implementation of switch digital video (SDV). Now installed in all of our SA systems, switch digital video is enabling us to augment our video offerings. We are making progress in switching in Motorola based systems as well. In fact, this month we launched SDV in a couple of small Moto based systems. When these solutions prove to be scalable, we expect to deploy switching in the remaining large systems, L.A., Dallas and Cleveland, towards and end of this year. Remember, in a couple of areas where it made economic sense we have invested in all digital conversion and capacity upgrades.

As a result, most of our big cities have more than 60 HD channels. LA has more than 70 and New York City has more than 100. We are not standing still. By the end of the year we are planning to increase the average number of HD channels available on our systems by another 50%. These efforts to expand and more efficiently use our capacity have paid off in our ability to compete much more effectively with our competitors.

Second, we are continuing to make investments in our On-Demand capabilities. So let’s give a quick update on start over which we are rapidly deploying. It is now available to more than 5 million digital video subscribers in 26 Time Warner Cable cities, up from 22 cities last quarter. We are in the home stretch in our SA systems. Customers love it and satellite and telephone companies don’t have it.

Third, I want to highlight our efforts in high speed data. We expect to launch DOCSIS 3.0 services in New York City soon. In fact, we will start the roll out this summer with the plan completed by year-end. In advance of our launch of DOCSIS 3.0 we have installed new CMTS equipment in Manhattan. To date, we have been testing at speeds as high as 138 down and 18 up. The system works great. We don’t expect to offer speeds this fast initially but this demonstrates we will be fully capable of meeting our customer’s need for speed for the foreseeable future.

In addition, we have enhanced our customer’s experience with Roadrunner by deploying Power Boost to turbo subscribers across our footprint providing first speed of up to 16 down. We are also now making it available at no extra charge to Roadrunner standard subs. In the first quarter we launched it in five of our six regions with the remaining regions expected to be completed in the second quarter.

In addition to investments in the network we are surgically deploying our marketing resources during the downturn to provide solutions to price conscious consumers and to specific demographics. First, we are focused on Hispanic households. Los Angeles, for example, Hispanic subs grew 7% sequentially in the first quarter to more than 200,000 attracted by packages like El Pachatazo. We are planning to launch El Pachatazo in New York next month and in Texas later this year.

In addition, we are enthusiastic about our new agreement with Univision whose content is important to Hispanic households. Second, customer demand for price certainly continues to be very strong. We added nearly ¼ million new POV subs this quarter, raising the total of 1.3 million or more than 80% of customer relationships.

As you have seen, we have increased our marketing spend in the first quarter on a sequential basis. Although Q1 spending remains below the year-ago level. The year-over-year decline was driven by several factors. First, we achieved improved cost efficiency due to current economic conditions in the ad market where we are benefiting from year-over-year savings on media purchases in the mid-teen’s percent range.

Second, we are more effectively using our purchasing power, primarily by centralizing media purchases in each region. Third, we are implementing a marketing plan this year that is more balanced throughout the year and more surgically targeted to specific customer segments compared to the front-end loaded and broad-based spending in recent years.

Now let’s turn to operating efficiency. As I mentioned last quarter we have undertaken a fundamental restructuring of our regional operations to create a more effective, yet leaner organization. The new leadership teams are largely in place and we expect to fill the two remaining key positions shortly. This is particularly important to our commercial services business. This business has continued to grow rapidly even in the uncertain economic conditions in the past couple of quarters. However, we think it can and should grow even faster. We are focused on every aspect of the commercial business so in addition to a new management structure, upgrading our sales capabilities in terms of the number and experience levels of our sales professionals and in terms of more effective sales execution.

We are also more focused on our business processes, standardizing and streamlining the business to be more efficient. There is a very big market to address and today we have only touched a small fraction of it. So there is no single silver bullet. Turbo Charge is our commercial business. It is a lot of blocking and tackling. It is stuff we know how to do and we are on it. By taking these steps we believe that we can create a very large and very profitable commercial business as we move forward.

In terms of company-wide efficiency, we are continuing to trim non-customer facing positions. We mentioned last quarter that we plan to eliminate approximately 1,250 positions this year. About half of these reductions were completed in the first quarter and we expect the remaining reductions to take place in the second and third quarters and the total number now is closer to 1,200.

So in conclusion, we are focused on making the right investments and on executing during these tough times so we can work both stronger and leaner and be even better at meeting our customer’s needs.

Thank you. With that I will turn it over to Tom for the Q&A portion of the call.

Tom Robey

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

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Vijay Jayant – Barclay’s Capital.

Vijay Jayant – Barclay’s Capital

I really want to focus on the usage based pricing strategy. It seems to have hit a political wall. Can you sort of talk about what you are going to do going forward? Also, it seems to have been tied in with your DOCSIS 3.0 roll out and given what has happened there is there any change in the roll out timeline?

Glenn Britt

Let me address those two things separately because they really are separate issues. First of all DOCSIS 3.0 we think is a great technology and our plan is to gradually roll that out over the next couple of years. At the moment we don’t see a huge enormous demand for that extra speed but we think over time there will be a demand. That is all in our capital planning. We will announce market by market as we decide to actually deploy that.

On the meter billing or consumption based billing, whatever you want to call that, I think the contents of that is that we are in a dynamic business sector. We are always trying, thinking about and talking about new products and services and new ways to create business models. In fact, if you go back to about the mid-90’s we were basically a television company in a television industry and doing broadband, which didn’t really exist at that point, was an innovative and pretty radical thing and hard to believe in hindsight but a lot of people thought it was a really stupid idea and it wouldn’t work.

I raise that because I think in our business we are always going to keep trying things. In this case, we got a lot of push back so we backed off that trial plan but again this was just going to be a market trial. So I think you would expect us to keep trying things in the future in the spirit of this.


The next question comes from Craig Moffett - Sanford C. Bernstein.

Craig Moffett - Sanford C. Bernstein

Rob you mentioned managing to revenue per customer relationship and in the past we talked about also revenue per home passed. Maybe Landel can you give us a little insight into the way you manage your own regional general managers? Sort of what is it that you charge them with in their objectives and in their incentive comp, for example? Is it revenue per customer relationship? Is it revenue per home passed? Does it include a capital charge? I wonder if you could just elaborate on that a little bit.

Landel Hobbs

A couple of things. First of all, similar to the guidance we have given with what is happening in the economic environment this year in particular, we still charge our guys with less CapEx. Now, having said that let’s talk about, and I think you have heard me talk about this before, in my monthly meetings I do with all operating executives I am focusing more and more attention and this is the reason we went to this concept of PSU’s. I look at revenue and yield per primary service unit. I look at revenue and yield per customer relationship and I look at bundled migration. Those are some of the key metrics that I am holding my guys accountable for and that is what we spend a majority of the time each month looking at what has happened with those particular metrics and why.

Craig Moffett - Sanford C. Bernstein

Can you talk about some of the differences you see? In the past we have talked about some of the most economically hard hit markets like say Ohio or South Carolina. What kind of differences do you see in those very economically stressed markets versus the rest of the country overall?

Landel Hobbs

That is also pretty interesting because of what is happening in the economy today. It is almost an inverse of what you would think. Some of our historically most economically challenged markets like upstate New York or Ohio are faring what is happening today a little bit better. Now a lot of that is because of in some of our other markets like Texas, the Carolinas and even in L.A. we had tremendous home passed growth. In this downturn that has slowed dramatically. Yes, you do see differences in ARPU’s or yields per CR and per product line but historically those markets that were troubled economically have actually been faring quite well in this economic downturn because of the homes passed change.


The next question comes from Rich Greenfield – Pali Capital.

Rich Greenfield – Pali Capital

A question as you think about wireless, at the cable show there was a lot of discussion about Clearwire from both yourselves and Comcast. I am wondering as you look at the rest of the year how do you think about the costs starting to impact the business, because obviously I think you are responsible from the marketing side and the actual roll out. How will that actually translate and how do we think about the size of those numbers? Is there any kind of view of how much you might charge for a service like this? Just a housekeeping point relating to your comments about the early part of Q2. Does Easter holiday play a big role in that given the kind of length of the holiday period this year or are you seeing getting away from the holiday period in terms of what you are experiencing versus what you saw in Q1?

Glenn Britt

I will deal with the first one and Rob can answer the second one. On wireless, essentially we are in the early days with Clearwire. They have a build out plan and they are also a public company so I can’t say stuff I shouldn’t say about them. They have a build out plan they have shared with us. We plan to begin launching products in a few markets late this year or early next year. I don’t think at this point there is a material economic impact on us one way or another.

Robert Marcus

With respect to the early Q2 results, it is really very early days and I am hesitant to draw any significant conclusions from what we have seen so far. I will go through what I think is not going on and sort of what remains is probably what is going on. We haven’t seen any material changes in the competitive dynamics in early Q2. We haven’t done anything meaningfully different on the marketing side in Q2. What is still the case is that we are living in a pretty uncertain economic environment and all of the indicators we look at to determine the health of the economy are still kind of lousy. More likely than not we still have a little bit of a hangover effect from that.

As to whether or not it is specific to the Easter holidays I will tell you it is really hard to ascertain that. Whether or not it is Easter itself or school holidays that have the biggest impact on our activity is hard to know. I wouldn’t draw that conclusion.

Rich Greenfield – Pali Capital

Historically your business hasn’t been terribly volatile quarter-to-quarter. When you look at the RGU performance in Q4, Q1 and now the early part of Q2 is there any way to explain the pretty substantial volatility?

Robert Marcus

All I would say is I would sort of stick to the comments we made going into the year which is we are living in pretty uncertain times and I don’t think you can use the past as a terrific guide of what we are going to see this year.


The next question comes from John Hodulik – UBS.

John Hodulik – UBS

Rob is there any way you can help us quantify the effect of the digital transition? You said it is 5% growth in terms of the over the air household converting to your service. Can you give us a sense for how large the areas were that underwent the transition during the quarter?

Robert Marcus

It is kind of a funny process that is station by station as opposed to market by market. Roughly, and this is more art than science, we think we picked up somewhere in the order of 80,000 basic video customers as a result of the DTV transition.

Landel Hobbs

We think also that the 5% I gave in my up front comments, we saw that down in Wilmington. We saw that again when it is adjusted for the stations that actually moved in February because of the partial transition. We think we have probably seen half of the opportunity thus far with the remaining 50% of the opportunity happening in June. That transition date is June 12. We will probably see, if there is an impact, the majority of that in the second quarter and some of it will roll into the third.

John Hodulik – UBS

Another 80,000 split between the second and third quarter?

Landel Hobbs

The math is close.


The next question comes from Jason Bazinet – Citi.

Jason Bazinet – Citi

I guess going back to this RGU question between the fourth quarter and the first quarter there was about a 300,000 swing in RGU’s and about half of that was on the video side and it sounds like based on your comments you thought about half of that was based on the digital transition. Do you have any sense that you got any other pull through from data and phone because of this transition or do you think it was pretty straight forward? Just free to air people going to pay TV?

Glenn Britt

Basically we think about 1/3 of those customers took additional products. Doubles or Triples. There was some pull through. There was some halo effect from this transition.


The next question comes from Ben Swinburne - Morgan Stanley.

Ben Swinburne - Morgan Stanley

Along those lines a little bit I wanted to ask about the ARPU and I think Landel you said up front you stabilized the data ARPU trends. Can you give us a little bit of color on what is happening there? I would have thought with the addition of the over-the-air subs which might be taking lighter tiered products that might have skewed that lower. Are you doing something with the installed base in terms of upgrades to help offset that? Any color would be helpful.

Landel Hobbs

In terms of HSD ARPU a couple of things are going on. One is that we did have some price increases on the HSD product. We have also got the benefit of some additional commercial HSD ARPU so it is a combination of price increases and mix. One other thing that is worth mentioning is we continue to have pretty strong results from our Turbo products on the residential HSD side offset to some extent by more of light and basic HSD sell in. It is a combination of price and mix.

Ben Swinburne - Morgan Stanley

The commercial ARPU pick up, you would see that? You have disclosed the commercial rev’s right? We see it in those numbers?

Landel Hobbs



The next question comes from Tuna Amobi – Standard and Poor’s Equity Group.

Tuna Amobi – Standard and Poor’s Equity Group

If I can ask two quick questions. The first one is on your strategy for your post-spin off. Can you perhaps reiterate your commitment to staying as a pure play cable company particularly given the reports speculating that you might be interested in acquiring some online content, video, advertising sites? That is the first question. Secondly, on the phone deceleration that is kind of the warning trends we saw this quarter. I know wireless substation has been mentioned as a possible cause. Do you see digital phone now reaching some kind of plateau or is it kind of a one-time trend where you see people reverting back to the normalized trend? I would like to understand better what is going on with the digital phone. Any comment in that context along the lines of Adelphia markets would be helpful just to kind of get a better handle on that product.

Glenn Britt

Let me start with the first one. I think there is always going to be a lot of speculation about M&A. Who knows where that all comes from? As most companies we are not going to comment on rumors or any specific items somebody might raise. I would reiterate that our immediate focus is to remain an investment grade company and to use our free cash flow to pay down debt to the level that the rating agencies have indicated would make that comfortable. So that is our focus right now.

Tuna Amobi – Standard and Poor’s Equity Group

Can you comment at least to stay in pure play, [kibble] without commenting on deals? Are you going to be open to diversifying your portfolio or just stay in pure play in the long-term is what I am trying to understand.

Glenn Britt

I understand that. I think I am better off not commenting.

Landel Hobbs

I will start and I think the other guys will probably chime in. A couple of comments. One, I would counsel against drawing broad trend conclusions from the last couple of quarters of results. There is just so much going on in there. I think if you look at the year-over-year first quarter results for phone I don’t think the decline in phone is really materially different from the average of all the RGU’s. There is a lot of noise in the system I would argue. In terms of reaching a phone cap, I think I have mentioned before to you that we have average penetration of 15% but we have some markets that are in the 30% zone. Those markets are growing nicely still. I continue to believe it is early to call the top or the end of the phone growth cycle.

Robert Marcus

The only thing I would add to that is if you look at our various product lines phone probably has been more impacted by the economy than others. I would say that we have been testing a bunch of different offers in the market place which seem to be improving some of the phone net adds. Other things I would note is that cord cutting absolutely is having an impact which I think we indicated in the fourth quarter but more I would say a larger impact on us is we are coming out of kind of a launch phase in some of those larger Adelphia markets. So you are seeing that impact as you move out of that launch phase in those large markets you are kind of now BAU and so you are also seeing that variable impact on phone growth.


The next question comes from Jessica Reif-Cohen - Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Your programming costs were up 8% in the first quarter and it sounds like it may even be higher in the second. I was wondering if you could talk about your relationship to the program and how you expect the relationship to evolve given the backdrop of friction from content being free online. If you could address it from a cable network as well as a broadcast network perspective that would be helpful.

Robert Marcus

Let me give you the facts first. Yes, programming costs were up about 8% in the quarter. That is higher than we experienced last year where for the full year we were up about 6% and I think it is consistent with what we articulated on the fourth quarter call. I do expect that over the course of the year our programming costs will be higher. I think you know the things that are driving that. It is a combination of new networks in particular, a full year of big ten and MLB network. There are some resets in there. A couple of the Fox services in particular that sort of have a step up function impact. Then we have more re-trend costs certainly this year than we did in the past. You couple that with normal contractual rate increases and that drives the cost growth higher than last year and higher than the first quarter.

I don’t actually see a material change to the relationship with programmers that is going to affect this year’s numbers. The dye to some extent is cast. We are always negotiating but this year’s programming costs are kind of taking shape. In the fullness of time, however, the over-the-top video concept or frankly free over the air video certainly has an impact on the nature of our negotiations and relationship with programmers.

Glenn Britt

Let me just try to give a few sentences because it could be a long conversation and more time than we probably have. I think timeframe is important. Clearly if you go out long enough in the future and if all of the same content that is sold for subscription were to become available for free then consumers would migrate to the free. That is pretty straight forward as a concept. We are seeing a little of that now but I would say that is so little it is almost not measurable. So the conversations we are having are really more about what is going to happen down the road which may be way down the road. I think it is just as straight forward in the programming community has to decide what their business model is and if they want to be just supported by advertising then that is where they are going to go. If they like having subscription revenue, which I think most of them say they do, then we can make available technology that essentially would say if the consumer buys a subscription they could get access to programming from a lot of different sources on a lot of difference devices. So the technology is available. We are going to be doing some trials with some programmers later this year on that.

How it all evolves I think remains to be seen and largely is up to the programmers.


The next question comes from Doug Mitchelson – Deutsche Bank.

Doug Mitchelson – Deutsche Bank

Can you talk a bit about video subscription ARPU trends as you look into 2Q and the rest of the year? I think it held up pretty well in the first quarter at about 4% year-over-year for video subscription ARPU. Is that the right level? I’m just thinking about a couple of things. One, customers calling in for discounts or customers tiering down services. Is there a delayed impact from that activity due to the billing cycles? If people do that in 1Q it might have a greater impact on 2Q? Then just thinking about the basic subs you are adding from the digital transition maybe being lower ARPU subs is that 4% rate going to hold up or any context you could give us would be helpful.

Landel Hobbs

On video ARPU it was 4% growth year-over-year. I think it was up a couple of points sequentially. I don’t think there is anything that should suggest a meaningfully different trend line.

Doug Mitchelson – Deutsche Bank

So you are not necessarily seeing enough customers calling up looking for discounts or tiering down that it is having an impact on your ARPU’s?

Landel Hobbs

Nothing material.

Robert Marcus

Looking at the migration analysis every month we are seeing a little more of that but nothing material at this point in terms of downgrades from Triples to Doubles or Doubles to singles. On the DTV transition remember 1/3 of those took multiple products. The other ones did come in at lower price promo offers so there was some impact but that is pretty well embedded in the results you saw in the first quarter.


The next question comes from Spencer Wang - Credit Suisse.

Spencer Wang - Credit Suisse

I guess the first question is for Rob. The CapEx decline you saw in the first quarter both in dollar terms and as a percentage of revenues is that roughly how we should be thinking about the full-year decline or is there some lumpiness through the rest of the three quarters? I was just curious if you could just give us a little color on data as you increased prices can you just talk a little bit about the impact on churn if it has been material at all or different than your expectations?

Robert Marcus

I am not going to really expand too much on what we have said about CapEx in the past which is it is going to be down in absolute dollars over the year and down as a percentage of revenue. There is always some lumpiness and there is always some net add driven elements to CapEx spend in any given quarter. So I don’t want to call sort of that it will be 769 each quarter in the remainder of the year. I will say that the fact that we actually increased our HD set top box inventory in Q1 positions us pretty well for the remainder of the year as we continue to add subs. That is about all I’m going to say on CapEx.

Landel Hobbs

On the data pricing I think as Rob indicated we did focus on our data prices moving into 2009. We took price increases but we have seen virtually no impact on churn. Churn has held in there. It is fairly stable.

Robert Marcus

I actually missed the second part of the question but churn is really a good story across the board and on a sequential basis churn is down in every product category and on a year-over-year basis it is down on all products except for basic video and digital it has worked up a smidge. So a really good story on churn.


The next question comes from Tom Eagan – Collins Stewart.

Tom Eagan – Collins Stewart

Just a question on a margin, I may have missed it but I know you talked about programming costs kind of accelerating or rising higher in the back part of the year. On the Q4 call you mentioned you thought margin would be flat to down for 2009 versus 2008. Is that still what you are thinking?

Robert Marcus

I think I actually, you may be right about the specific words we used but we were just thinking kind of flattish margins coming into the year. Obviously Q1 was due to our very aggressive expense management was a better margin quarter than was last year’s first quarter. It is hard to say at this point. Again, it is still hard to exactly read this uncertain environment but we are feeling very good having now completed one quarter with margins that were materially better than the last year’s.


The next question comes from Marci Ryvicker – Wachovia.

Marci Ryvicker – Wachovia

How did the month trend in the first quarter in terms of subscribers? Was February significantly stronger than January and March?

Robert Marcus

I think the simple answer is that February was the best month in the quarter and that is probably as far as I am going to go on that one.

Marci Ryvicker – Wachovia

You mentioned that fiber competition slowed since the first quarter. Is that more U-Verse or FiOS or both?

Landel Hobbs

Looking at the composition of that roughly 22% at the end of the first quarter was 15% U-verse and 7% FiOS. What activity we saw was primarily U-verse in the quarter versus any expansion for FiOS.

Tom Robey

Thank you. That concludes today’s conference call. A replay will be available on our website shortly. Thanks for joining us.

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